A marriage made in heaven: how the humble QR code met the small merchant
Can you remember the last time a shopkeeper handed you a toffee from a jar because they did not have small change? For decades, this was the norm at kirana stores and pharmacies across India. Today, that jar has all but disappeared. Some say an unintended consequence of the UPI revolution has been a secular decline in candy sales. That is partly because, over the past ten years, UPI has rewritten the payment experience for customers and merchants alike.
The controversy over the return of the Merchant Discount Rate, or MDR, on UPI payments frames it as a consequential pricing question. But before arguing over who should pay for digital payments, it is worth revisiting how arduous person-to-merchant (P2M) payments once were, and how far India has come since UPI.
In the toffee-jar era, small and micro-merchants operated in a cash-dominated world: managing change, maintaining handwritten accounts and making periodic bank visits. Customers without exact change altered their purchasing behaviour, sought store credit or accepted candies instead.
To accept card-based electronic payments, merchants had to grapple with paperwork, point-of-sale machines, rental charges, connectivity issues and transaction fees. For large retailers, these costs were manageable. For tea sellers, vegetable vendors and tyre shops, however, digital payments were rarely worth the overheads.
The QR breakthrough
The technology to liberate small merchants arrived in India around 2015. The unsung hero of this story is surely Masahiro Hara, a Japanese engineer at Denso Wave, who invented the QR code in 1994. Hara was preoccupied with industrial parts tracking, and digital payments were farthest from his mind. Nevertheless, by the early 2010s, Chinese fintech companies such as WeChat Pay and Alipay had transformed QR codes into an ultra-frugal replacement for expensive merchant-side technology. All of a sudden, an inexpensive printed sticker could perform the core function of a costly point-of-sale terminal. Customers could scan QR codes with their phone cameras, enter the exact amount and pay with a gentle tap.
The advent of QR codes made digital payment acceptance widely affordable for merchants of all stripes, but it also unleashed a world of fragmentation. Between 2015 and 2018, India was awash with proprietary QR codes. Merchants with Paytm QR codes could accept payments from customers using Paytm apps; the same story unfolded with many other closed-loop apps. Before long, merchants had to display a veritable garland of QR codes on their counters, one for each popular payment app.
One code, many apps
To counter the complexity of proprietary QR codes, two interoperable QR codes, UPI QR and Bharat QR, were launched in 2016 and 2017. Interoperable QR codes had the advantage of allowing merchants to accept payments from different payment apps using a common QR code. And yet, over the next three years, proprietary and interoperable QR codes lived cheek by jowl, competing to take market share from each other.
In the end, an RBI expert committee led by Prof. Deepak Phatak of IIT Bombay recommended ending proprietary QR codes in 2020. Thanks to that intervention, most small merchants today receive payments from different UPI apps via a common UPI QR code designed by the National Payments Corporation of India, or NPCI. Chaos has made way for order.
Today, the ubiquitous soundbox sits unobtrusively in most small stores, translating payment notifications into audible confirmations and allowing a street-side tea seller to serve her gaggle of customers without repeatedly checking her phone.
Furthermore, digital collections are creating verifiable sales trails that lenders use to rate merchants and extend microcredit for working capital. Thanks to such merchant-focused innovations, India now has over 65 million merchants that accept UPI payments from over 500 million users. Contrast that with the decades it took India to install barely 10 million point-of-sale terminals.
The MDR dilemma
To MDR or not to MDR is a dilemma of Shakespearean proportions. As India debates a selective MDR regime, a 0.4% charge on eligible merchant payments above ₹2,000, capped at ₹300, which NPCI has just elected to postpone until after Diwali, the real question is whether this carefully designed fee corridor can pay for UPI’s future innovations and cyber resilience, while also enabling the system to encompass a billion citizens and 100 million merchants by 2030.
Three decades after revealing the magic of the QR code and offering it to the world royalty-free, Masahiro Hara continues his work at Denso Wave. “I never thought it would be used as a form of money,” he said not long ago. “We do not receive a commission each time it is used.”
Santanu Paul and B. Sambamurthy are the authors of Cashless Nation: How UPI Changed Everything, published by Penguin Random House. More on the book at cashlessnationbook.com