The Problem Statement that PineLabs Solved || Payment Arch. - POS Backend Design ||DhandaSamajh.com presents Problem Statements of Dhanda

A. Introduction:

Have you recently grabbed a burger at Burger King / McDonalds, or relished a pizza at Pizza Hut? Incase you have: while checking out at the billing counter did you notice the POS (point of sales) machine? It must have looked like the one in the picture below.

It's of Pine Labs. Visit any D2C Store: Spencer's, Big Bazar or Bata, the installed POS Machine at the Billing desk would be of Pine Labs.

Here are some of the top Pine Labs Clients. Observe it includes almost all retail Brands that you can think of !

POS segment in Indian retail as of 2022 is valued at 42,266 Crore. Of this huge market, Pine Labs own 75-80% of the "large enterprise merchant" (lem) chains segment and has acquired more than 1million Indian Merchants of the 6 million merchants with POS touch points; that's 1/6th of the merchant POS market!

Now, the question is " How did Pine Labs become this POS market Giant ? "

The answer to this lies in understanding the

"Problem Statement that Pine Lab's solved"        

In this article you shall learn this Problem Statement in details, but in simple - #NoJargon language :)

"the trick to disrution, is in finding & defining the RIGHT PROBLEM STATEMENT"        

Let's get started!

B. Prerequisite:

To get a good grip of the Pine Lab's Problem statement, be sure to read my last article in the #CreditwithT series, called - "POS Payment Architecture".

Please note: understanding the POS pay-architecture is of vital importance. Without it, your understanding of this article shall be half baked.

Focus specifically on the commissions of the 4 main players in POS Architecture:

>> 1 >> Issuer's Cut = f ( transaction Risk ) : The bank issuing the money, after doing risk analysis || Eg HDFC Bank issuing money for a HDFC Card Holder.        

>> 2 >> Network's Cut : eg Visa, RuPay, Master Card, Amex : The network that takes the encrypted data from the card, partially decrypts it to identify & channel the transaction to the correct Issuer's Account before encrypting the data again.        

>> 3 >> Aquirer's Cut : the commission the merchant's bank charge on accepting the payment from acquirer, through ACH rail        

<< 4 >> POS's Cut = variable = Merchant's deduction - (Issuer + Network + Acquirer)'s cut        

C. The Problem Statement: Part 1 - Understanding the Merchant's Pain Point

Before Pine Lab's coming into the picture, banks would send their sales representatives (SDR) at Merchant's store, with their POS's machine. The proposal can be understood with the following case study.

Case1: Amar Akbar Anthony Vs Moonchand Lal

• Amar: SDR for Axis POS
• Akbar: SDR for ICICI POS
• Anthony: SDR for HDFC POS

• Merchant Name: Moonchand Lal

1. Amar's Proposal to Moolchand Lal:

" Hi Moonchand, we generally charge a commission of 4% per transaction on POS, along with a rent of 500 Rs / month for the machine. But for you we have a special offer.

If you keep our Axis POS at your store, we shall reduce the rent at 300 Rs / month and for every customer with Axis Mastercard Credit Card, who swipes their Axis Mastercard card on the POS, we shall charge a commission as low as 2 % instead of 4% per transaction. For every other bank's card we shall charge you 3.5% commission per transaction. Make sure your customers pay with Axis Card for you to get a 50% discount per transaction on our commission. "

Let's understand Amar's Sales Pitch to Moolchand in parts:

Part1: Fixed Rent = 300 Rs / month i.e. 300*12 Rs / an = 3600 Rs / an

Part2 (a): If Customer uses Axis Credit Card on Axis POS to pay her Bill (100 Rs), commission = 2 % . For a Bill of 100 Rs, Moonchand Lal gets paid 98 Rs.

Part2 (b): If Customer uses ICICI Credit Card on Axis POS to pay her Bill (100 Rs), commission = 3.5 % . For a Bill of 100 Rs, Moonchand Lal gets paid 96.5 Rs. Follow the blue line.

Part2 (c): If Customer uses HDFC Credit Card on Axis POS to pay her Bill (100 Rs), commission = 3.5 % . For a Bill of 100 Rs, Moonchand Lal gets paid 96.5 Rs. Follow the green line.

Thus if Moonchand uses the POS machine for Axis, then he can optimize on his earning by saving the 1.5 added commission, for customers using Axis Card.

2. Akbar & Anthony's Proposal to Moonchand Lal:

Akbar (SDR- ICICI Bank) & Anthony (SDR-HDFC Bank) proposed exactly the same for POS machines of their respective companies. i.e. 300Rs/ month rent + for every Credit Card swiped of the same bank as that of the POS machine, the commission is 2% and for any other bank's credit card the commission is 3.5% / transaction. The diagram below summarizes the entire proposal, and the cost optimization for Moonchand, for a bill of Rs 100 (solid lines are the best optimized utility ).

3. Moonchand's (Merchant's) Pain Point:

1. Moonchand has customers using all types of cards, thus if he has to optimize the deductions by POS, then he need to have POS stationed of each banks.
2. Let's assume for a moment he has installed POS of Axis, ICICI & HDFC, he is met with the following challenges:

• A net rent expense of Rs 3600*3 / an (Axis+ICICI+HDFC) = Rs 10,800 / an. That's a big cost!
• If the bank gives Moonchand a Network Specific POS, for example: Axis MasterCard only Architecture POS, then only Mastercard card transactions will pass, rest (VISA, RuPay, etc) will fail. Thus lowering POS utility for Moonchand and his customers.
• Asset management: It's not easy to manage POS machines. They are electronic devises and requires charging. Charging multiple POS, for a merchant is a headache and more than often, they fail to do it systematically, thus ending up paying 3-4% commission either ways. Added with this is maintenance of more hardware, against breakage, theft or damage of any kind.
• Loosing avg. of 3 -4 % of Moonchand's income to Banks: Let's assume over a month there are 10,000 credit card transaction of 100Rs, then Moolchand looses somewhere around 3% of this money, i.e. approx. 30,000 of rupees / month; i,e, 3.6 lakhs per year!

These are also the reason why most merchant after hectic maintenance of POS, stopped accepting payments using POS. Thus lowering bank's earning out of Credit Card payment (Issuer's Cut). This is a pain point for the Bank!

So in summary let's try and build a preliminary problem statement out of our understanding of the merchant's pain points.

Constructing & Detailing the Problem Statement :

Construct-1

" How to reduce the count of POS assets for a merchant to lower the summed POS rent and maintenance & charging cost for multiple POS systems along side lowering the POS cut of 3-4% of merchant's actual revenue ?"

Construct-2

"If a single POS can be built; where on any card transaction, irrespective of network (VISA / Mastercard / RuPay, etc.), acquirer bank & credit card company ; the commission charged to merchant can be fixed and lower than 3-4%, then merchant's pain point can be resolved, at the same time acceptance of POS would increase, thereby growing the Issuer's Cut Business of the Credit Card Company."

Construct-3

Before we build construct-3 let's ask a pertinent question here

QUESTION: "Why did Amar's POS Bank (Axis), charge a commission of 3.5-4% on customers swiping Non-Axis Credit Card on Axis's POS Machine, against a charge of 2% for swiping? Axis Credit Cards on Axis POS Machine ?"        

Answer1. To increase more transactions of a user through Axis Credit Card, thus increasing revenue out of Issuer Bank's (Axis's) commission. Thus for every transaction that Axis POS facilitates, Axis Bank on issuing the transaction makes more money as a commission. If the card is of HDFC, then for every transaction of HDFC Credit Card on Axis's POS, it is HDFC Bank that makes money as Issuer's Cut and not Axis!        

Answer2. To block competition from other banks like HDFC & ICICI.         

Answer3. (the most important one) Issuer's Cut is a f(Transaction Risk) || Risk of transaction: Axis_Credit_Card--Axis_Pos--Axis's_Chosen_Netwok--Axis_Issuer_bank >> HDFC_Credit_Card--Axis_Pos--Axis's_Chosen_Netwok--HDFC_Issuer_bank || Thus Axis POS machine will make lower money for a transaction of HDFC Bank Credit Card on Axis POS, as HDFC Bank being the issuer will charge a larger issuer's cut due to higher transaction risk and thus lower Axis's POS commission as POS commission = Net commission on Transacted Amount(i.e. Merchant's Deduction) - commission (Issuer + Network + Acquirer)        

Having answered this question, lets now build Construct-3.

" Build a single POS per-merchant, that uniformly lowers issuers risk on a transaction, by channeling the transaction in the path of lowest risk, where on any card transaction irrespective of network (VISA / Mastercard / RuPay, etc.), acquirer bank & credit card company ; the commission charged to merchant can be fixed and placed at lower than 3-4% at around 1-1.5% and every issuer bank has equal risk while approving the transaction"

Construct-3 is the Problem Statement that, Pine Labs adopted. We shall now understand the Payment Architecture solution that Pine Labs built around this Problem Statement.

D. The Problem Statement: Part 2 - Understanding Pine Labs Payment Architecture based on Construct-3

I hope you have read my last newsletter on a POS payment architecture (link in the pre-requisite section). Before you begin reading this section, I strongly insist you read it for a clear understanding.

Traditional POS Payment Architecture:

A traditional POS Payment Architecture is like this:

The above POS, is pretty much a traditional bank POS at a merchant store. It has the following details

• HDFC POS Commission = 0.05 % of transacted amount
• Network = VISA : i.e. it can accept cards only of this network, a Mastercard network ICICI Credit Card will not work here.
• Lowest Risk Issuer Bank = HDFC, i.e. if we use an ICICI Credit Card, the issuer is ICICI Bank and the transaction risk goes up, implying Issuer's cut > 2.15 % of transacted amount, thus implying HDFC Visa POS's commission lower than 0.05 % of transacted amount. Since HDFC is not making money on this transaction as an issuer, to recover the cost it will compensate the loss at the point of POS commission; it will charge a cut of approx. 4% to merchant, to recover it's lowest risk earning revenue amount = (2.15% as Issuers Cut + 0.05 % as POS Commission). This time the revenue for HDFC will be equated as = x% as POS Commission, where x > = (2.15+0.05) % of transacted amount. Thus building Merchant's pain point.
• Also these POS are for Card transactions, without any CRM / data visualization dashboards. When UPI revolution happened in India, they were thrown in dungeon as these POS machines, had no architecture to accommodate a UPI transaction.

Pine labs POS resolved all these 4 problems. Here is Pine Labs Architecture for Credit Cards. 3 Cases is all you need to understand how their architecture works!

Pine Labs POS Architecture:

Case-1: Transaction of an Axis Credit Card of Mastercard Network || POS - Pine Labs || Transacted Amount = 100 $ || Deduction % of Merchant = 1.5 %

Observations:

• Transaction a success
• Path of lowest Risk : Axis Master Card >> Pine Labs POS >> Mastercard Network>> Axis Issuer >> Merchants Acquirer Account
• Merchant's Deduction = 1.5 %
• Axis = Issuer's Cut = 1%
• Mastercard = Networks' Cut = 0.15%
• Merchant's Bank = Acquirer's Cut = 0.15 %
• POS Pine Lab's Earning = 1.5% - (1+0.15+0.15)% = 0.2 %
• Merchant's loss = 1.5%

Case-2: Transaction of an ICICI Credit Card of RuPay Network || POS - Pine Labs || Transacted Amount = 100 $ || Deduction % of Merchant = 1.5 %

Observations:

• Transaction a success
• Path of lowest Risk: ICICI RuPay Credit Card >> Pine Labs POS >> RuPay Network >> ICICI Issuer >> Merchants Acquirer Account
• Merchant's Deduction = 1.5 %
• ICICI = Issuer's Cut = 1%
• RuPay = Networks' Cut = 0.15%
• Merchant's Bank = Acquirer's Cut = 0.15 %
• POS Pine Lab's Earning = 1.5% - (1+0.15+0.15)% = 0.2 %
• Merchant's loss = 1.5%

Case-3: Transaction of an HDFC Credit Card of VISA Network || POS - Pine Labs || Transacted Amount = 100 $ || Deduction % of Merchant = 1.5 %

Observations:

• Transaction a success
• Path of lowest Risk : HDFC Visa Credit Card >> Pine Labs POS >> Visa Network >> HDFC Issuer >> Merchant's Acquirer Account
• Merchant's Deduction = 1.5 %
• HDFC = Issuer's Cut = 1%
• Visa = Networks' Cut = 0.15%
• Merchant's Bank = Acquirer's Cut = 0.15 %
• POS Pine Lab's Earning = 1.5% - (1+0.15+0.15)% = 0.2 %
• Merchant's loss = 1.5%

Observations & Conclusion : The Equi-Risk plane POS

Observe how the the Architecture, Risk Structure and Commissions of a Traditional POS (Fig:13) is so different than that of Pine Labs's (Fig 14, 16, 16)

Observation 1:

Irrespective of Credit Card's Bank & network type name, for Pine Lab's POS the Merchant's Deductions is fixed at 1.5%. Unlike the case for traditional Bank POS.        

Conclusion:

• Merchants now need not have multiple POS, and is saved of the inventory management headache. Just 1 Pine Labs POS is enough for them.
• Rent for multiple POS is now reduced to that of 1 @ 200 Rs per months, that's 2400 Rs. Rent cost reduced by 80%!
• Their Commission for Merchant-Deduction is Fixed at 1.5% per transaction. Which is lower than most Bank POS's commission who charge 3-4% per transaction. Saving on commission for merchant > = 50%
• No Card is rejected for Network boundaries.
• Pine Labs POS also facilitates UPI Transactions, thus merchants have a 1 stop payment center. Pine Labs provide insight & CRM to merchants to track and analyze their customers, sales & revenues.
• Thus all merchant's pain point addressed! Merchants are happy :)

Observation 2:

Issuer's cut across all Banks: Axis, ICICI, HDFC is now fixed at 1% . A transaction for any card is now at an eqi-risk plane (Fig 17). This risk plane is at the coordinate of lowest risk path, thus issuer's commission is 1 %. However do note, it is possible for different networks with added advantages and higher DAUs, MAUs & subscribers, to negotiate a deal with PineLabs, where they may choose to increase the Network's commission. For such cases even though Pine Labs earns a lower share of the 1.5% cut but makes revenue, out of bulk usage due to higher DAU & MAU of the credit card.        

Conclusion:

• Issuers, having the lowest risk path now choose a 1 % commission, over 2-4%
• All issuers are now on an equi-risk plane. (Fig-17)
• Since PineLabs now deducts 1.5% against 3% to merchants acceptance of POS by merchants is now higher, thus leading to higher count of transactions, thus bulk earning for the bank even at 1 % commission (approx: 1/3rd commission).

Observation 3:

Pine Labs POS's revenue per transaction is higher than traditional bank POS's commission: Even though the merchant deduction is at 1.5 %, due to increase in transaction number due to higher acceptance rate of POS amongst merchants, banks make money in bulk at the lowest risk at 1 % issuers cut. A 0.15% cut for Network is a fair market average to consider. Now the POS's (Pinelabs') earning is thus 0.2 % keeping 0.15 % as acquirer's commission. Pine Labs commission as a POS Company is at 0.2% against 0.05 % of most bank POS's commission; which is 4 times higher!        

Conclusion:

• Introduction of PineLabs increased POS's share (0.2%) against POS's commission (3-4%) in the traditional POS architecture. (Ref Fig:13)
• The reason being PineLabs solved the pain points of the merchants, by reducing their commission from 4% to 1.5%-2% along side providing a 1 stop payment solution including UPI pay integration, and helping merchants with business & analytics insight. This increased acceptance of POS and credit card payment at merchant stores, thus increasing bank's earning in bulk as an issuer even at 1 % commission, at the lowest risk path. Hence a win-win ecosystem was created between banks & merchants due to PineLab's POS Architecture (Ref fig: 14, 15, 16), as a result of which acceptance and partnership of PineLabs was encouraged by both the parties.
• Concluding, Pine Lab's increased the POS's commission by 4 times, by lowering the net merchant deduction by 50% and lowering Issuer's Cut by 2.15 times, by providing the lowest risk payment path through versatile network integration at backend, and helping banks make money even at 1 % issuer-commission on increased volume of transaction, due to higher merchant acceptance of POS.

Today, even though many banks are adopting a similar payment architecture like PineLabs in their POS machines, PineLab's early identification of the problem statement and super fast execution & investors backed growth gave Pine Labs the first mover advantage, thus making them a deadly POS brand to compete with at present! However with BharatPe introducing 0 commission on UPI and focusing on UPI based payment in merchant stores, accompanied by RBI adopting the 0 commission on UPI, the POS market's did take a hit, including PineLabs, but they still own 70-80% of India's merchant POS business.

E. Company Details & Investors: (Study Material)

Incase you want to know more about the company & it's funding rounds and investors. Here is an excellent study material by YourStory, it has fetched all the details :)

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