RBI Sets Up Payments Infrastructure Development Fund

The Reserve Bank of India will put in seed capital to set up a Payments Infrastructure Development Fund to encourage the adoption and deployment of Point-Of-Sale devices.

In a press release on June 5, the central bank said that the PIDF would be designed to encourage adoption of PoS infrastructure, both physical and digital, in Tier-3 to Tier-6 centres and north-eastern states. “Over the years, payments ecosystem in the country has evolved with a wide range of options such as bank accounts, mobile phones, cards, etc. To provide further fillip to digitisation of payment systems, it is necessary to give impetus to acceptance infrastructure across the country, more so in underserved areas,” the RBI said.

The PIDF will have an initial corpus of Rs 500 crore, half of which will be contributed by the RBI. The remaining will come from card issuing banks and card network companies. The fund will receive contributions from both banks and card network companies to cover operational expenses. The RBI may contribute if there are yearly shortfalls, it said.

The PIDF will be governed through an advisory council and managed and administered by the Reserve Bank.

As of March 2020, according to data from the RBI, there were close to 5.14 million active PoS devices deployed across the country.

A senior executive at a card network company said that this is welcome move as such funds help in increasing the penetration of payments infrastructure. Similar initiatives have worked in many South East Asian countries.

The whole premise of this fund is to make it easier for small merchants to accept digital payments across the country. This fund will subsidise the cost of a PoS device, this person said on the condition of anonymity.

According to Deepak Chandnani, managing director of Worldline South Asia and Middle East, due to the high cost of merchant acquisition and installation the majority of POS terminals in the country are concentrated in Tier-1 and 2 cities and towns, leaving other regions behind.

“This move will make the economics more favourable and will significantly increase the merchant base accepting digital payments,” he said.

Evolution Of An Idea

The idea of a PIDF or an Acceptance Development Fund was first proposed in March 2016, when the RBI published a concept paper aimed at expanding the card acceptance infrastructure in the country.

“The main objective of the ADF program is to subsidise the cost of acceptance infrastructure such that it enables banks to speed up their merchant acquiring activities and increase penetration in both existing market segments as well as new markets,” the paper said.

Such a fund would help address the thin margins that payments companies earn in certain areas of the country where the adoption and usage of digital modes of payments is weak. An ADF also helps in reducing the payback period of investment for acquirers, it said.

While details of the funds’ functions are yet to be released by the central bank, the paper had recommended that companies can contribute capital to the PIDF or ADF based on card usage/spends at PoS devices.

Further, a report by the High Level Committee on Deepening of Digital Payments in May last year said that an ADF would ensure optimum utilisation of the millions of cards issued to customers in Tier-4, Tier-5 and Tier-6 areas. The same was articulated in the RBI’s Vision Document for the Payments and Settlements System released in May 2019.

In October 2019, the RBI finally announced that it would create an Acceptance Development Fund to increase the penetration of digital payments in specific areas of the country.

“For POS companies the cost of setting up a terminal and the operational costs such as on-boarding, training and maintenance is significantly higher in these areas compared to the Tier-1 and Tier-2 areas, while the device cost is the same,”said Kush Mehra, chief business officer at Pine Labs.

While the cost of POS devices has fallen over time, adoption in these areas by consumers has been low, he said.

“The PIDF can also adopt a data and location-centric model that identifies specific areas and merchants that banks or POS device companies are on-boarding,” Mehra said. “This will incentivise companies to target and expand to small-medium sized merchants in these areas in return for compensation from the fund.”

Over the past few years, POS device manufacturers have been rolling out mobile-based devices and smaller low-cost terminals that were more affordable to small retailers and merchants.

However, despite such devices being launched in the market and gaining traction among small merchants issues with the underlying technology infrastructure like telecommunications still prevail amid tight or even negative margins for the operating companies.

This is a good initiative to increase POS device penetration in tier-3 cities and towns, since merchant transactions below turnover of Rs 10,000 aren’t sustainable there as the monthly maintenance cost itself would be a few hundred rupees, Naveen Surya, chairman of fintech convergence council and chairman emeritus of Payments Council of India, said.

“As a result when a company deploys a device they wouldn’t recover their operating costs, so this is an attempt to support increased penetration,” he told BloombergQuint. “Since the current policy hasn’t differentiated between physical or mobile-based POS devices, it’s a retailer focused policy. Hopefully, it will drive the acquiring side of the business.”