The entrance of almost every kirana or small retail store in India, is decorated with a series of cultural artefacts. This could be anything from a lemon, to a monster warding off the evil eye. The newest addition to this proudly-displayed collection is a set of UPI QR codes. They come in all shapes, sizes and colours – some even have photos of Bollywood stars on them!

The Government-imposed demonetisation in 2016 was the tipping point for the widespread adoption of QR codes and digital payments. However, our research shows that small merchants continue to face a long list of challenges with QR codes.

The question no one is asking:  What is the small merchant’s incentive to continue using digital payments in 2020, given cash’s many advantages for this segment?

Accepting Payments Via QR Codes

Let’s start by answering the fundamental question:Why does the small merchant accept payments via QR codes in the first place?

  • In retail stores, everything from supply chain to pricing is standardised. In this scenario, QR codes offer an avenue for innovation and differentiation to the merchant. The store can offer additional convenience, with zero cost of adoption.
  • Customers now want to pay through their desired payments apps for convenience, as well as cash-back and rewards.
  • Onboarding is fairly painless, requiring only a few business details and a bank account number. Payment apps also provide incentives like cash-back, to merchants

“Sometimes customers come and ask — “Paytm jatha hai kya?” ( Is Paytm accepted here?) Then we think customers are asking for Paytm, maybe if we get it our business will improve.”

Manjunath, owner, condiments store

We have a 50% student customer base who are given a debit card or their parents transfer money to them on Paytm. Either way, more than 70% of customers pay through digital payment apps.

Niranjan, Cafe owner

Small wonder then, that UPI recently exceeded 1 billion monthly transactions, surpassing total debit and credit card transactions in India.

Challenges with QR Code Payments

Our research shows that small merchants face an array of challenges in accepting QR code payments. 

Kiranas prefer cash to QR codes

1. The vendor acceptance challenge

A small retail store will have multiple vendors, from whom goods are purchased in bulk, on a daily or weekly basis. Vendors continue to expect payment in cash and will not accept payments via apps. This means that the merchant must make multiple visits to the ATM or bank, to withdraw cash for vendor payments.

“Vendors don’t accept payments through the app. If we get more cash here (at the store), it is easy for us. There is no need to go to the bank or the ATM.” 

Manjunath, owner, condiments store

 2. The savings bank a/c challenge

Most small retailers have a savings bank account to which QR code payments are directed. When banks observe a surge in transactions,  they ask the business owner to convert it into a current account. Opening a current account in India comes with its own set of challenges, like providing proof and documentation of business registrations.

“We have a savings account. We have not gotten a current account yet.  Only if the business clicks, we will get a current account.

Seetha & Harish, owners, grocery store

3The misinformation challenge

Merchants are often not aware that UPI is interoperable and a single QR code accepts payment from all apps. Because they manage multiple apps, merchants continually check their phones for a confirmation message from their bank, to confirm the transaction.  

4. The crowd challenge

Every business either has peak hours or a peak season where business surges. Customers flock to make payments through QR codes, and it becomes a challenge to individually verify each transaction.

“Sometimes in the evening when it’s crowded this will be a headache for me. If we keep many QR codes, we’ll have to sit and check all of them. ” 

Ishwar, owner, juice shop

5. The downtime challenge

A UPI transaction involves multiple touch-points like the originating bank, NPCI, payment app and destination bank. A downtime in any of these means the transaction will fail.  When a customer tries paying the merchant and sees a processing transaction screen for longer than expected, it makes both parties uncomfortable. A regular customer is asked to check later, but an unknown customer is expected to wait till the transaction is complete. 

“Sometimes money does not come into my account, it gets delayed. If there is no proper network, it does not come only. Sometimes our usual customers say we’ll come and pay later. But in case we don’t know the customer we insist on them paying through some other means, maybe cash.”

Bhaskar, owner, condiments store

6. Lack of accountability

Our research found a widespread belief that UPI payments are not reliable on a long-term basis, because of a perceived lack of accountability.

Lack of a proper redressal mechanism for payment failures is a major challenge. Most payment apps lack a proper customer support number. Banks can be unhelpful in addressing payment issues originating with third-party payment apps.

This sentiment is exacerbated by the merchant’s network.  In one case, the merchant showed us a WhatsApp forward from one of his lawyer friends advocating against using QR code payment apps.

“See, already we got one WhatsApp message – you should not use PhonePe and all. Some problems have happened with 30 people. This message was sent to me by one of the criminal lawyers.”

Ganesh, owner, stationery store


Exhibit A: A WhatsApp message shared by a merchant
Translation: GooglePay and PhonePe do not have voice(calling) customer care services. The numbers that are available on the internet are fake numbers. In case you call the customer care number, all the amount in your bank account will disappear in minutes. While some companies do have customer care numbers, GooglePay and PhonePe do not have it.

7. Fear of UPI Frauds

Merchants are worried about payment frauds either through phishing, or a customer duping them through fake payment apps. A single instance of fraud seems to be enough for the merchant to lose faith in the digital payments landscape.

“Actually there was a fraud of Rs.40,000 from my brother’s account through Paytm. It has been 3 months. We have filed a complaint at the cyber cell, but there has been no response from their end.” 

Shivram, owner, condiments store

What Does the Future Hold?

As expected, the payment app players are in constant play to address the challenges listed above.  The initiatives range from high-decibel advertising with Bollywood stars to an innovative solution like a physical soundbox that notifies the merchant through a speaker when a payment is received.

Will the obstacles with QR codes allow a slide back to cash? Or will they pave the way for access to formal finances for small merchants?  This is something only time will tell. Either way, it has serious implications for the many fin-tech businesses that are counting on digitisation to upsell more products and services. 

The big question that we must answer collectively as a community is “How might we design better trustworthy and reliable payments systems that aren’t primarily driven by cash-backs?”

The insights documented in this article are an outcome of a research series called Kirana Chronicles. We conducted 22 in-person user interviews with small merchants in 3 cities in India. All merchant identities have been masked.

Thanks to Apoorva Shetty and Puranjay Mahapatra for helping us conduct field interviews. This research series was executed in collaboration with our partners BharatPeFlexiloans and AU Small Finance bank. Do follow our ongoing series Kirana Chronicles for in-depth research around small businesses.

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