RBI's Digital Payments Index (RBI-DPI) stood at 418.77 at the end of September 2023 compared to 377.46 in September 2022 and 395.57 in March 2023. This means that digital payments have risen 10.94% annually since September 2023. While a significant chunk of it is attributable to the pandemic, the rise of FinTech, along with most merchants going digital, has also had a pivotal role in the shift. Now that we have achieved the required digital traction, banks and other financial institutions must shift their focus to developing their digital merchant payment ecosystems. Additionally, they must ensure it extends beyond merely accepting digital money as their future growth is likely to happen here. This article discusses how banks can digitally empower their merchants’ ecosystems beyond payments.

As banks and other merchant-services providers start offering their expansion initiatives and begin offering software and services focused on commerce enablement, they need to remember the lack of funds and that the perceived value of services is significantly higher. A PhonePe-BCG report suggests that non-cash payments would account for 65% of all transactions by 2026 compared to the 40% it currently holds. The report further states that it will propel the merchant payment valuation to reach USD 2.5-2.7 trillion in the same period, registering a staggering 7x growth. However, for that to happen, banks have to shift their focus on SMEs and collaborate with them for holistic growth.

If global numbers are quoted, SMEs generate around US$ 850 billion in annual revenues for banks according to McKinsey Report 2019 through deposits, overdrafts, payments, and lending. However their paltry ROI has made them relatively unattractive to the central banking players. The reason is that they believe SMEs are usually costly and generate lower ROI than commercial clients. Further, tracking business profiles and credit repayment abilities is complex, dissuading bankers from making sizable investments. But SMEs and MSMEs clearly need more funds and support from other ends than merely facilitating digital payments in more ways than one. While banks had steered clear of helping SMEs, it led to a rise in Fintechs and other tech giants, such as Amazon, trying to encash the SME opportunity. But with P&L and regulatory pressures creeping in, the banking sector is forced to rethink its revenue generation abilities and figure out possible new streams for improved monetary inflow. Low margins and tighter capital requirements have been the catalyst for the sector, whose valuations remain significantly lower than other industries.

While banks favour paving the way for empowering merchant bases, focusing on a broader spectrum than P2M payments and reconciliation is required. The availability of data, trust-based customer relationships, and a plethora of data banks help them to be competitively advantageous. Undoubtedly, other players, such as tech giants and telcos, have access to similar data, but the vast transactional history with banks gives them a significant advantage. If banks can harvest the customer data available, they could drive digital loyalty that can enable them and SMEs to grow together and give stiff competition to the tech giants. Today, customer loyalty is no longer merely about campaigns and badges or loyalty points but the personalization they seek. If banks can understand the data available contextually, they would be able to create loyalty, contributing to higher sales and profits for SMEs. But if loyalty endeavours go kaput, they can result in significant losses for the SMEs. With banks by their side, merchants have a better chance of tracking their customer transactions. In addition, it would enable them to develop personalized offers and feedback questionnaires that would help them gain digital loyalty. In addition, it would open them to find innovative ways to upsell and cross-sell, enabling them to stand against top giants rather than letting them take away the more significant chunk of the pie. But for that to happen, banks need to focus on going beyond payments and find genuine ways of collaborating and empowering their merchants.