SMBs look to digital payments as banks falter with legacy infra

The lack of flexibility and adaptability in legacy banking infrastructure is pushing small and medium businesses (SMBs) around the world to adopt newer banking and finance tools and platforms. According to French IT services firm Capgemini's 2022 World Payments Report published on Thursday, the use of 'new' payment tools and services — such as QR-based instant payments and digital wallets — accounted for 17% of all business-to-business non-cash transactions around the world in CY21. By 2026, these tools can account for nearly 25% of all cashless business transactions.

While banking platforms and services, such as card-based transactions and online account management services, have so far been the primary non-cash business transaction tool, the rise of tools such as the National Payments Corporation of India (NPCI)'s Unified Payments Interface (UPI) has had a significant impact on helping businesses migrate to digital platforms and services.

Ranadurjay Talukdar, partner and payments advisory leader at consultancy firm EY LLP India, said that in India, roughly 25% of all payments are non-cash transactions. While this still leaves a massive cash transaction market in India, UPI has grown to account for over 80% of all non-cash transactions in India — or 20% of all payments and transactions.

However, the adoption has been faster for personal payments than businesses — both globally and in India. An October 4 report by US-based digital payment services firm Worldline said that as of the June quarter this year, only 20% of all UPI-based digital payments made in India were towards businesses — while the rest accounted for individual transactions.

Capgemini’s World Payments Report, 2022 also underlines this. According to the report, one of the key factors that has held the adoption of new digital payment tools in businesses is the lack of innovation from banks — with nearly 75% of all surveyed bank executives in the survey prioritizing cost benefits of continuing to use legacy infrastructure over investing to present new age tools to businesses.

EY’s Talukdar concurred, adding, “Legacy non-cash banking infrastructure imposed merchant discount rates (MDR) as transaction fees — for which businesses operating on slimmer margins of around 6-8% often had to pay a quarter of their profits just as transaction fees. For most businesses, this did not make sense.”

He further said that alongside transaction fees, longer settlement times mean that companies often had to wait for days to get cash in hand — something that new payment tools have bypassed.

According to NPCI data, UPI saw 17.4 billion transactions made in the June quarter, amassing ₹30.4 lakh crore in value — growing at 118% in transaction volumes and 98% in value. Capgemini, however, pegs the global growth pace to be significantly slower than India — between FY21 and FY26, global non-cash transactions may grow at 16.5% compound annual growth rate (CAGR), growing to an industry worth ₹173.6 lakh crore over the next four years.