Data Science Drives Disruption: Replacing traditional POS rental with a one-time subscription fee Qorus-Infosys Finacle Banking Innovation Awards 2024

Merchants are vital to banks, banks install POS machines at merchant outlets to facilitate card transactions, collecting monthly rentals deducted from merchants' accounts. Insufficient balances can hinder fee collection, affecting rental, usage, and late settlement charges.

HDFC Bank SARAL - Simplified POS plan, a first in banking, lets merchants pay a one-time subscription fee with no rental or extra charges for lifetime, aimed at minimizing revenue loss due to maintaining insufficient balances.

The merchant's estimated lifetime, determined using the Kaplan-Meier estimate, is foundational for this program. This estimation predicts the expected number of months merchants will use the bank's POS services. Subsequently, the one-time fee is calculated by multiplying the expected number of active months by monthly rental.

The Kaplan-Meier estimator is a non-parametric method that calculates survival probabilities through iterative multiplication. It tracks how many merchants stop using the service at each time point and how many continue, providing insights into how long users are likely to remain active. The estimated survival probabilities contribute to determining the Lifetime (LT). LT = Σpt; pt = Survival probability, probability that customer will survive for at least t years.

Clustering to arrive at differential LT : To estimate merchant lifetime efficiently, we considered 12 months data to include cyclicity nature of merchant business, then entire base was grouped into clusters based on region, operating category, and turnover. Outliers were addressed, resulting in ~ 20 clusters.

Then, LT estimate = Σpt (summation of all above survival probabilities)

Out-of-time validation on merchants terminated within 3 months achieved 80% accuracy within ±3 months variation. Survival probabilities were then estimated at each time point for clusters using the Kaplan-Meier estimator, yielding lifetimes spanning 25-36 months at the cluster level.

Illustration to arrive at one-time subscription fee is as follows considering schedule of charges along with recovery % & cluster-wise lifetime.

***refer figure 6 in attached pdf

Therefore taking the most conservative estimate of 25 months ( ~95 % support) : One time set-up fees = 475 * 25 ~ Rs. 11,999