1. Towards a less-cash society: Why informed users, stakeholders are a must

Towards a less-cash society: Why informed users, stakeholders are a must

All efforts towards less-cash society would go waste unless we have informed users and stakeholders

Updated: October 6, 2016 8:38 AM

Payment and settlement architecture in India has been witnessing a metamorphosis during the last decade or so. These changes, particularly in the retail payment space, have been noiseless, but truly transformational. Indians are increasingly embracing electronic payments and as per the data from Reserve Bank of India, increase in volume of digital payments has outstripped the increase in cheque payments. Between 2012 and 2016, NEFT volumes jumped five-times from 226 million to almost 1.3 billion, IMPS transactions from almost zero basis to 221 million and mobile banking transactions from 26 million to 389 million. India has earned the respect of the international community for benchmarking the safety and security standards with the best of the breed.

Have we then arrived in the electronic payment map of the world? Far from it. Cash continues to dominate payments in India despite various efforts by the government and the central bank. This alongside the problem of shadow economy, a curse in many developing countries, has proved enormously expensive for the nation. Many studies have documented the benefits of digitisation of payments. According to a 2016 study by Moody’s Analytics, card usage alone added nearly $300 billion to the global consumption equivalent to 0.1% in global GDP.

Intuitively, cash has anenormous cost. How much? Quantifying the cost of cash usage in any economy has always proven to be a challenge, more so in India. How to plan, monitor and achieve the move away from cash to less-cash? Several studies have looked into these issues in the past. There have been several suggestions. But very few of them have got accepted and implemented, and those implemented have not produced expected outcomes.

It is against this background, when the country has laid all the building blocks to transform and when several working groups are simultaneously engaged in developing a road map for the digital revolution in India, that the report produced by Visa, Accelerating the Growth of Digital Payments in India: A five year outlook, October 2016, assumes importance.
From a reading of the report, it is evident that research has been extensive and the authors have attempted to compute a number for the cost of cash through a modelling techniques presently followed in many countries in Europe. The study identifies six factors that perpetuate use of cash:

  •  Propensity to save and use cash, more so in rural areas. Presence of a large shadow economy.
  • Propensity to save and use cash, more so in rural areas. Presence of a large shadow economy.
  •  Gender imbalance in the use of digital transactions.
  • Lack of adequate acceptance infrastructure and high cost of deploying it
  • Certain regulatory prescriptions that favour cash (free ATM transactions) and militate against digital payments (MDR regime).
  •  Lack of financial literacy

Having identified the principal reasons for high cost usage, the study computes the cost of cash following the framework used by Bundesbank. The framework reckons both external and internal components of cost of cash applicable to four principal actors—households, businesses, banks and the central bank. The study finds that the cost of cash in India is a staggering 1.7% of the GDP. If this is an alarmingly large number, add the cost of India’s shadow economy (facilitated by cash) reckoned to be 3.2% of GDP!
The next part of the study is devoted to discussing a strategy to achieve the transformation into a less-cash economy. Three pillars are identified (i) expand acceptance, (ii) energise innovation and (iii) bolster consumer participation. With just 1.3 million POS terminals and about 5% of personal consumption expenditure incurred electronically, India is way behind other Brics nations. Many countries have resorted to innovative methods, like setting up of an Acceptance Development Fund to increase the digital footprint. India should follow suit to achieve a three-fold increase in acceptance infrastructure, the study recommends. This is important as, thus far, attempts at financial inclusion through opening Jan-Dhan accounts without corresponding increase in acceptance infrastructure have not achieved the desired results.

The study also recommends that the government should consider providing tax concessions—a measure successfully adopted in countries like South Korea with great success. It is important to understand this suggestion in the right perspective. Such an incentive often tends to get dismissed as a potential loss making proposition to the exchequer. The study cites extensive research based on other countries experience to prove that if implemented properly, this can lead to an increase in GDP by reducing the cost of cash and shrinking the informal financial sector.

To tackle black money, the study seeks to put limits on cash transactions through regulations. It also suggests lowering duties on POS terminals and urges issue of direction by authorities that all salary payments shall be through digital mode—a measure Uruguay implemented with great success. In its suggestion for review of MDR regulation, the study flags an important message for the authorities. Intervention in pricing, in a market where infrastructure development is incomplete or inadequate, can result in unexpected and unwanted outcomes (slowdown in the deployment of POS terminals). It may be recalled that RBI had in 2012 capped MDR for debit card transactions. The stated objective was to encourage the use of debit card (although having been associated with the move, I can say that it was also to counter the argument from certain quarters to reduce the MDR to zero on fallacious assumptions). Not only did that not happen, but the data shows that infrastructure deployment lost its momentum. In retrospect, although there is no counterfactual, it is safe to argue that regulatory interventions in pricing is not a good idea in a market where infrastructure development is yet to reach a mature plateau.

The second strategy suggested is to energise innovation. The merit of this recommendation is undisputed. What also needs to be carefully crafted into the policy is the twin rule of non-exclusivity and inter-operability. In other words, segmentation needs to be avoided for any infrastructure that needs to serve a national purpose. Further, any authorised entity should have unfettered access to the central infrastructure operated by RBI and UPI, which was launched by NPCI. Unfortunately, this is not happening at present.

The study specifically highlights the case of mass transit infrastructures. To expect the user to carry multiple form factors will surely drive them more into using cash. So, the alternative is to provide the same convenience with better safety to ensure customer delight. Therefore, there is a suggestion for open loop systems(open loop is not to be confused with ‘cash out’, but to be understood as seamlessly interoperable infrastructures) that encourage multiple form factors (cards, key chains, Samsung Pay) enabled with near field communication technology to be used to make transit payments. I would go to the extent of arguing that in the fast evolving payment and technology space, regulations need to move away from product-wise approvals to ensure that, “many a flower is (not) born to blush unknown”. Lest I am misunderstood, what I mean is that the regulator should develop a two-step process for payment system regulation. It should make public a broad set of rules or prohibitions that any product will have to adhere to. As innovations start becoming a product, more granular regulations can be brought in. This process will encourage innovations as it removes the uncertainty of regulatory disruptions to the process.

There are other interesting suggestions like non-bank corporates being permitted into the “acquiring” business. As we know, today it is within the exclusive domain of the banks. Rightly so, since only authorised entities can sanction credit in India. But with P2P guidelines in the offing, should there be a rethink of this stance of the regulator? Perhaps yes, but with the relevant risk management measures in place

All the above efforts would go waste unless we have informed users and stakeholders. In an inter-connected, technology-driven world, understanding “Dont’s” is as important as understanding “Dos”. As they say; just as eternal vigilance is the price of democracy, eternal education and updating is the price that the stakeholders will have to incur in technology driven payment infrastructures.
India is at a critical juncture in its journey towards a less-cash society. If all stakeholders get their act right, we should see an explosion in digital payments. As the study concludes, “India is at an inflection point in its payment digitisation journey…. achieving outcomes would have far reaching benefits as India’s cost of cash would drop from 1.7% to 1.3% of GDP. This would result in consumption expenditure incurred digitally to rise to about 35% from less than 5% today, savings of R70,000 crore over a five-year period and a cumulative savings of R4.7 lakh crore by 2025. Needless to say, the time for action is on us”. Indeed so.

G Padmanabhan

The author is non-executive chairman, Bank of India. He is also former executive director at Reserve Bank of India.
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