Inside QR Codes: How Black & White Dots Simplify Digital Payments

You have probably seen QR codes. Those little patchworks of black-and-white dots are popping up everywhere. And nowhere are they spreading faster than in China, where they are used to rent bikes, give alms, order a serving of noodles, add social network or business contacts and even collect wedding gifts. In fact, one-third of all digital payments in China used QR codes in 2016. That’s $2.6 trillion worth of transactions.

But what is a QR code, exactly? How does it work? What impact could QR codes have on payments? And will they increase financial inclusion in China and beyond?

A QR code header.
A QR code header.

What is a QR code?

Quick response (QR) codes are two-dimensional barcodes that were developed in the early ‘90s in Japan to achieve high-speed scanning of automotive components on assembly lines and in warehouses.

QR codes differ from the traditional mono-dimensional barcode in two key ways. First, they contain more information — up to 2,000 characters, or the equivalent of one page of text. Second, they are faster to read. Unlike one-dimensional barcodes, which are read using light reflected off the white bars of the code, QR code patterns are captured with a camera and processed by a computing device like a smartphone.

The QR code reader works by locating three position-detection patterns and normalizing the image for size, orientation and angle of viewing using an alignment marker — a smaller square near the bottom right corner. Then the small dots throughout the QR code are converted to data — a web address, product information, payment transaction details, medical records, basically any information that can be digitized.

QR codes for payments

QR code-enabled payments are promising because they have the potential to lower transaction costs and make digital transactions easier, giving people better reasons to go cashless. With QR codes, you just point and scan. There is no need to type convoluted strings of letters or numbers, which minimizes the potential for typos and transaction errors. Each of the 2.5 billion smartphones in use worldwide can be used to read QR codes, turning smart phones into ubiquitous point-of-sales scanners.

There are two types of QR code transaction flows, both of which allow users to make payments by entering, at the most, two pieces of data: the transaction amount and merchant PIN. All other details are handled in the background, making the user experience comparable to that of cash.

A graph showing a fixed QR code and a dynamically generated QR code.
A graph showing a fixed QR code and a dynamically generated QR code.

QR code-based payments on the rise

The use of QR codes for payments is growing. In China, mobile payment volume reached $8.6 trillion in 2016, with WeChat and AliPay capturing a combined 92 percent of the total volume. Of this, a third — or $2.6 trillion — changed hands using QR codes. China’s QR code-based payments benefit from a high rate of smartphone penetration (72 percent vs. a global average of 55 percent in 2017) and internet use (688 million users as of January 2016). But the use of QR codes is gaining momentum elsewhere and is being standardized across payment networks for increased interoperability.

For instance, India’s Central Bank in February 2017 announced BharatQR, the world’s first interoperable QR code acceptance solution, jointly developed by India’s major card networks (National Payments Corporation of India, Mastercard, Visa and American Express). EMVCo, the global technical body that manages the Eurocard, Mastercard and Visa (EMV) standards, has launched specifications that support QR code-based merchant payments. In Africa, Ecobank recently deployed a QR code-based solution across all countries where it operates. Vodacom added QR codes to USSD for its Lipa kwa M-PESA merchant payments product in Tanzania.

Are QR codes the key to a digitally inclusive future?

QR codes appear to be gaining acceptance as a technology for proximity payments. While ease of use, speed and reliability are on par with cash, the fact that customers must own a smartphone and have an active data connection at the transaction point creates a major hurdle, especially in low-income countries. However, the relentless growth of smartphone adoption and data coverage is quickly eroding these obstacles. Will the future give us a world of micro-merchants that accept cashless payments at the snap of a picture? Will QR code-based payments stimulate adoption of digital financial services among the underserved? In a follow-up blog post, we will compare QR codes to other acceptance technologies in merchant payments and begin to explore these questions. In the meantime, let us know what you think in the comments board below.

Sub-topics: Payments


01 December 2017 Submitted by sonal agrawal (not verified)

Well articulated and informative blog. Apart from the obstacles mentioned in the blog for small merchants to accept digital payments, payment settlement or grievence redressal by payment providers would also determine the rate of adoption. I came across few merchants who adopted paytm but later discontinued due to slow grievance redressal system of the service provider.

10 December 2017 Submitted by AMIT ARORA (not verified)

My experience with new age service providers in developing a rural digital payment+merchant network is same ie not ready/ willing/ able to make desired investments in penetrating deeper; understandably since the semi urban market is still hugely untapped. Unless PSU banks Inc RRBs and Co-op come forward( which is tough!) it's a long road. Why do v see so few Bharat QR codes?

01 December 2017 Submitted by Martha (not verified)

In my view the future will give us micro merchants who accept cashless transactions in low-income countries. With the security and speed features of QR and other digital financial services, for micro merchants where security and speed are important considerations for service delivery especially, with regard to their business location, merchants can open longer hours and transact safely on cashless platforms.

MPesa Tap, a new payment solution was just rolled out in my country two months ago. This payment platform working similarly to QR codes, delivers convenience for customers and greater security to merchants – currently petrol station merchants have signed up for MPesa Tap which means they can receive payments more securely as they handle less cash especially at night when they were prone to security attacks.

01 December 2017 Submitted by Mark Pickens (not verified)

To really move the needle on payments acceptance at micro- and small merchants, QR codes really have to be bundled into a package which also includes a move to push payments (to cut chargeback and fraud rates) and new underwriting models (so financial institutions properly assess the different risks versus eg big retailers).

Put another way, QR codes are just one part of the puzzle, and probably not the hardest.

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