Strategy Note: How Banks Can Reclaim the QR and Soundbox Markets for Small and Medium Merchants in India

Fintech companies like PhonePe and PayTm have revolutionised the digital payments landscape in India, particularly for small and medium merchants, by dominating the QR code and soundbox markets. These technologies—QR codes for quick, scannable payments and soundboxes for audio transaction confirmations—have become essential tools for merchants, offering convenience and efficiency. While fintechs have surged ahead with innovative, agile, and customer-focused solutions, banks have lagged, relying on traditional banking services and slower adoption of digital tools. To win back this space, banks must leverage their strengths, address their weaknesses, and counter the current competence of fintechs with a comprehensive, merchant-centric strategy. How banks can compete effectively, let's explore.

Understanding the Current Landscape

Fintechs have captured the market by:

• Deploying User-Friendly Technology: They offer simple, accessible apps with QR codes and soundboxes that cater to merchants’ needs in busy retail environments.

• Rapid Innovation: They continuously introduce new features, such as instant settlements and merchant analytics, to stay ahead.

• Aggressive Distribution: Widespread availability of QR codes and affordable soundboxes can make adoption easy for merchants.

• Customer-Centric Approach: Excellent support and low-cost offerings have built loyalty among small and medium merchants.

Banks, despite their trusted reputation and extensive merchant relationships, have been slower to innovate, often prioritising traditional banking over digital payment solutions. To reclaim their position, banks must adopt a multi-pronged strategy that combines technological investment, strategic partnerships, and a focus on merchant needs.

Strategic Recommendations for Banks

1. Develop Competitive Digital Payment Solutions

Banks must invest in creating their own QR code and soundbox offerings that match or exceed fintech capabilities.

• QR Codes: Develop QR systems integrated into banking apps, supporting multiple payment methods (UPI, cards, wallets) for flexibility. Ensure ease of use with minimal setup requirements and compatibility across devices.

• Soundboxes: Offer affordable, durable soundboxes with instant audio confirmation in multiple languages, tailored to India’s diverse merchant base. Include features like battery life suited for long hours and integration with transaction analytics.

2. Leverage Existing Merchant Relationships

Banks already serve many small and medium merchants through accounts, loans, and other services. They can use this foundation to promote digital tools.

• Incentives for Adoption: Offer reduced or zero transaction fees for merchants switching to bank-provided QR codes or soundboxes. Provide cashback or loyalty rewards based on transaction volumes.

• Bundled Services: Combine digital payment tools with free or discounted banking products (e.g., overdrafts, insurance) to increase value.

3. Integrate Payments with Broader Banking Services

Unlike fintechs, which focus primarily on payments, banks can offer a holistic financial ecosystem.

• Loans and Credit: Use transaction data from QR codes and soundboxes to assess creditworthiness and provide tailored loan products.

• Merchant Tools: Develop apps that integrate payments with inventory management, invoicing, and financial reporting, creating a one-stop solution.

• Insurance and Savings: Offer business insurance or savings options linked to payment activity, appealing to merchants’ long-term needs.

4. Emphasise Security and Trust

Banks’ reputation for reliability is a key advantage over fintechs, which some merchants may view as less stable.

• Marketing Focus: Highlight robust fraud prevention, secure protocols, and compliance with Reserve Bank of India (RBI) guidelines.

• Support Systems: Provide dedicated dispute resolution and fraud support, ensuring merchants feel secure using bank solutions.

5. Pursue Strategic Partnerships with Fintechs

Rather than competing head-on, banks can collaborate with fintechs to accelerate their digital transformation.

• White-Label Solutions: Use fintech-developed soundboxes or payment gateways under the bank’s brand for quick market entry.

• Co-Branding: Launch co-branded products combining bank reliability with fintech innovation.

• Data Collaboration: Leverage fintech analytics to better understand merchant behaviour and refine offerings.

However, such initiatives have met with limited success

6. Enhance Customer Support and Merchant Experience

Fintechs have set a high standard for service, and banks must match or exceed it.

• Real-Time Support: Offer 24/7 assistance via chatbots, apps, or helplines for transaction issues.

• Simplified Onboarding: Streamline the process for merchants to adopt digital tools, reducing friction.

• Relationship Managers: Assign dedicated staff to high-value merchants for personalised support.

7. Offer Competitive Pricing and Incentives

Cost is a major factor for small and medium merchants, and banks must align pricing with fintech offerings.

• Low or Zero Fees: Introduce promotional periods with no/ low merchant discount rates (MDR) to attract users.

• Flexible Models: Provide soundbox rental options or pay-per-use pricing to suit small merchants.

• Volume Discounts: Reward merchants with rebates for high transaction volumes, fostering loyalty.

Countering Fintech Competence

Fintechs have thrived due to their agility, innovation, and customer focus. Banks must adopt similar strengths to compete:

• Agility: Shorten product development cycles by creating dedicated digital innovation teams or partnering with tech firms. This allows banks to roll out updates and features faster.

• Innovation: Invest in R&D to pioneer new features, such as AI-driven merchant insights, blockchain-based payments, or multi-language soundbox confirmations, staying ahead of fintechs.

• Customer Focus: Conduct merchant surveys and pilot programs to identify pain points (e.g., settlement delays, language barriers) and tailor solutions accordingly.

The Path Ahead

The future of UPI and QR codes is poised for significant growth, with innovations aimed at expanding accessibility, enhancing security, and integrating with global financial systems.

 Based on recent trends and developments, here’s a breakdown of expected advancements and strategies for banks to capitalise on these opportunities.

For UPI, expect deeper global expansion. UPI is already operational in countries like Singapore, UAE, and Qatar, with interoperability agreements like the UPI-PayNow linkage enabling seamless cross-border payments. More countries, such as Namibia and Peru, are exploring UPI-like systems, which could lead to broader interoperability, allowing Indian merchants to accept payments from foreign tourists. Another innovation is the integration of conversational AI, enabling voice-based UPI payments in multiple Indian languages, like Hindi and Tamil, to include feature phone users, potentially 400 million more users.

NFC-based Tap & Pay UPI payments are also emerging, offering a card-like experience without QR codes. Additionally, UPI is likely to expand into credit offerings, with Buy Now, Pay Later (BNPL) and pre-approved credit lines gaining traction, as seen with RuPay credit card integration since 2022.

Transaction volumes are projected to grow at a 42% CAGR, driven by person-to-merchant (P2M) payments, which now dominate over person-to-person (P2P). For QR codes, the focus is on standardization and versatility. Over 340 million QR codes are deployed at merchant locations in India, and their use is expanding beyond metro areas.

Future QR codes may become dynamic, updating in real-time to include transaction-specific details like amount or loyalty discounts, reducing errors. Enhanced security features, such as encrypted or time-sensitive QR codes, could combat fraud. Globally, QR codes are expected to integrate with UPI-like systems, making them a universal payment interface, especially in travel and hospitality sectors, as seen in Qatar’s QNB merchant network.

Banks can adopt several strategies to capitalise.

First, invest in open banking APIs to enable fintechs and third-party apps (like PhonePe or Google Pay) to build innovative UPI-based services, increasing transaction volumes.

Second, focus on merchant onboarding, offering low-cost QR code solutions and zero-MDR incentives to capture the 230 million-plus shops using QR-based UPI payments.

Third, enhance customer education on secure UPI practices to reduce fraud, build trust and usage.

Fourth, develop cross-border UPI solutions, partnering with international banks to facilitate remittances and tourism-related payments. Finally, explore credit-based UPI products, like BNPL, to tap into the growing digital lending market, ensuring interoperability with existing UPI infrastructure.

These advancements hinge on collaboration between NPCI, RBI, and fintechs, with banks playing a central role in scaling infrastructure and driving financial inclusion.

To Conclude......

Banks in India have a unique opportunity to reclaim the QR and soundbox markets by leveraging their established merchant relationships, integrating payments with comprehensive financial services, and emphasising their trusted reputation. By developing competitive products, enhancing customer support, and adopting an agile, innovative mindset—potentially also through fintech partnerships—banks can counter the dominance of fintechs. Success will depend on understanding and addressing the specific needs of small and medium merchants, offering cost-effective solutions, and delivering a seamless, secure experience. With this strategy, banks can compete and redefine their role in India’s digital payments ecosystem.