India must move towards a less-cash future; here’s why an e-payments roadmap is critical

Published: April 3, 2017 5:52 AM

Considered in a proper historical and comparative perspective, cashless transactions and digital payment products, at merchant establishments have proliferated.

cashless transactions, digital payment products, JAM Trinity, Jan-Dhan, AadhaarConsidered in a proper historical and comparative perspective, cashless transactions and digital payment products, at merchant establishments have proliferated.

Manoranjan Sharma

Considered in a proper historical and comparative perspective, cashless transactions and digital payment products, at merchant establishments have proliferated. Progressive digitalisation reflected in direct benefit transfers (DBTs), the JAM Trinity (Jan-Dhan, Aadhaar, Mobile) and Unified Payment Interface have altered ground realities. The adoption of new technology and digital payments has transformed conventional banking and significantly enhanced banking outreach. This overarching process has been greatly aided by 1-billion-plus phones, 500 million internet connections, 350 million smartphones and the distinct possibility of making all the 5.5 lakh ration shops Aadhaar-enabled.

Revamped digital ecosystem and the winds of change sweeping India provide an enabling environment for the new normal. Given the humongous potential of digitalisation, its full realisation will revolutionise India’s socio-economic landscape, similar in its range and sweep perhaps only to the mobile or the internet revolution. This onward march, which received a renewed thrust by demonetisation, would thus positively influence both growth and distributive equity.

The macroeconomic case for demonetisation, as the finance minister Arun Jaitley emphasised, stems from the fact that “from counterfeit currency to terrorism, everything is a result of heavy dependence on cash economy.” With banks flush with low-cost funds, interest rates have significantly reduced. SBI slashed its marginal cost of funds-based lending rates (MCLR) by 90 basis points, whereas Punjab National Bank, Union Bank of India, Kotak Mahindra Bank, Dena Bank, etc, cut their lending rates by 45-50 basis points across tenures.

Further, with more transactions coming into the banking network eventually, there will be direct and indirect improvement. Cash is predominant in India’s monetary ecosystem with estimates of cash transactions varying from 68% to 90%. Asia’s third-largest $2 trillion economy has high cash-to-GDP ratio-nearly 12% vis-à-vis 3.9% in Brazil and 3.7% in South Africa. Cash is not cost-free because of the ATM fees and the opportunity cost of time for consumers, money spent in handling, securing and transporting cash for businesses, operating and maintaining ATMs for banks and huge cost of paper and printing money for the government. Optimised cash could save RBI and commercial banks up to `21,000 crore annually (The Cost Of Cash In India-Tufts University, 2014).

Significantly increased non-cash payment facilitated opening of new bank accounts, growth in e-payment services, almost eliminated cash-on-delivery in e-commerce, mushrooming of digitally-focused sectors, eg, online grocery business. Digitalisation also contributed to Paytm’s three-fold rise in new users and an increasing acceptance of Bitcoin.

Digital drive is facilitated by electronic payments because of convenience, discounts, tracking spends, lower risk and gains, such as, refuse borrowers and eliminate the problem of small change. Further, macro-economically, it enhances efficiency and transparency by reducing transaction costs (India ranked 76 out of 168 countries in the Corruption Perception Index).

In a cashless economy, the flow of cash is non-existent and all monetary transactions are done electronically via internet banking or wallets, and debit or credit cards, thus eliminating or drastically reducing physical presence between two transacting parties. Less cash is a win-win situation for all stake-holders, viz, customers, bankers, government, etc. However, ‘cashless’ economy is a misnomer because very few economies are ‘cashless’—certainly not the most developed economies. For example, the proportion of cash is quite high across countries-Germany 80 %, Austria 80 %, Australia 65%, France 55%, Canada 52%, the Netherlands 50 %, USA 46% (Bloomberg).

Even the FM stressed “digital transactions are a parallel mechanism, not a substitute, for cash transactions, and a cashless economy is actually a less-cash economy, as no economy can be fully cashless.” Post-demonetisation, digital payments grew robustly both in terms of number of transactions and value with cumulative growth of electronic transactions among various instruments ranging between 95% and 4,025%. But such fast-paced growth has to be maintained over the long haul.

Transitioning India to a cashless economy has been powered by Aadhaar (unique biometric identity to over 1 billion Indians); PM’s Jan-Dhan Yojana (98 % households with a bank account); smartphone penetration and connectivity reflected in rise of smartphone users from 20 million in 2010 to 220 million, this is expected to rise to over 700 million by 2020; and intense competition in the telecom sector leading to drastically reduced prices for mobile telephony and data usage. This process needs to be accelerated by public investment in digital infrastructure, public-private-personal partnership, complementary skilling and development of appropriate back-end infrastructure for high-volume, low-value transactions.

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Coordinated and concerted measures with a sense of urgency are needed to encourage mobile banking and payments channels. But there are issues of Internet “penetration rate” of 27% (342 million internet subscribers) in India, adult smartphone usage rate of 17%, internet conspicuously absent in rural areas (only 15% of 1.02 billion mobile subscriptions have broadband internet), and higher average page load time on mobile 5.5 seconds in India vis-à-vis China (2.6 seconds), Sri Lanka (4.5 seconds), Bangladesh (4.9 seconds) and Pakistan (5.8 seconds). The e-payment option is also hampered by conspicuous absence of interoperability between wallets, abysmally low level of 1.46 million PoS machines in use and a large share of the workforce in the unorganised sector. Hacking and other internet crimes have caused security and privacy concerns necessitating indigenisation of cyber-security products and systems.

Given India’s socio-economic peculiarities, the promotion of an eco-system of digital payments is challenging and necessitates, inter alia, a roadmap for e-payments, enhancing AEPS, robust online banking systems, incentivising cashless transactions and, successfully implementing country-wide digital transaction mechanisms. The surge in digital payments post-demonetisation needs the complete support of all stake-holders to meet the challenges of the present and the expectations of the future.

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