PoS-based financing for merchants offers lots of potential — but mind the gaps

Point of Sale (PoS) payment companies and fintech firms are using transaction data to create lending programmes aimed at financing merchants who use swipe machines to accept money.

PoS-based financing, also called Merchant Cash Advance, is a perfect mix of data and technology

to solve the funding problems that merchants face. There are many merits of this concept as India moves towards a digital payments ecosystem and there are a number of emerging fintech lenders who offer digitally-led products against card swipes.

The Indian market for PoS terminals is estimated to grow at an annual rate of 11% in terms of value between 2017 and 2022, primarily owing to the government’s increasing focus and initiatives aimed at digitising the country’s economy.

A report by Global Market Insights Inc has estimated the PoS terminals industry in India will cross a valuation of $3 billion by 2024.

The opportunity is huge. According to Reserve Bank of India data, there were around 15 lakh PoS machines before demonetisation. This number doubled by the end of the exercise. But while demonetisation has increased the pace of digital transactions across the country, there is still a long way to go.

While there are around 30 lakh PoS devices in use, there are more than five crore registered businesses across the country. This huge gap underscores the untapped opportunity for the PoS market.

Below are some of the benefits of combining lending with payments: 

Increased machine adoption, stickiness and usage: It acts as an incentive and a value-added service to increase usage of PoS terminals. As merchants discover their ability to borrow against their transactions, they tend to execute more transactions. Many PoS providers and fintech companies have reported a clear increase in customer loyalty and adoption because of the combined proposition of lending with payments.

Reduced EMI burden: Most cash advance programmes allow merchants to opt for a daily deduction from their swipes in order to repay their interest fees. This means that the merchant can pay in daily installments instead of monthly and this helps them manage money better.

Ability to create a credit bureau footprint: Once the merchant successfully borrows and repays, their bureau score goes up and they are then able to borrow at better rates as their risk profile becomes more evident to other lenders.

PoS data that can be used for lending

Every machine installation and card transaction on a swipe machine leaves a digital footprint. These are broadly classified into three categories:

Merchant profile: At the time of onboarding, the merchant provides personal and business KYC information which includes address, business category and vintage information. This information can easily replace or ease the tedious onboarding and KYC processes that are to be followed during the lending process.

Transaction data: Every transaction record contains date, time, value, debit/credit of the transaction along with downstream information like chargebacks. These data points are highly indicative of the merchant’s business flow and other trends. 

Used with the right business knowledge and trained algorithms, they can predict a customer’s ability to repay debt.

Post-disbursement data: As merchants continue to use the swipe machines for transactions, it can be used to track the health of the business. If the business is trending upwards, the data can be used to increase the credit line and in case of any variables or unintended movements, it can be captured fairly early in the life cycle and corrective actions can be taken. This type of early warning signal is rarely available in most other lending instruments.

The challenges

Firstly, if the lender is too dependent on the repayments via swipes only, then in the event of borrower discontinuing the use of the machine or moving to a different PoS provider, it would mean risk of defaults. Lenders must deploy their own risk control mechanisms to proactively or reactively manage such events.

Secondly, the majority of these merchants are not internet-savvy. This segment needs financial and technical education or awareness drives before this concept sees its true potential.

Also, not every PoS provider follows onboarding and KYC norms at the time of machine deployment or cannot share it with third parties in the absence of a reliable consent layer, which results in duplication of the KYC process while sanctioning loans.

The verdict

Digital payments are projected to grow manifold over the next decade leading to billions of financial footprints which can be used effectively to provide easy credit. The Merchant Cash Advance programme is a great financing option for merchants who accept card payments and can be used to incentivise payment adoption and reduce EMI burden. 

Aggregated merchant base, transaction data and continuously advancing technology will be key propellers for this industry and a merchant-friendly fee structure with paperless/branchless execution can result into exponential growth.

Abhishek Kothari co-founded digital lending platform FlexiLoans.com. The views expressed are personal.

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