Towards a cashless economy!

By Anand Mishra
In Cover Story
December 27, 2016


On Nov 8th when PM Narendra Modi spoke on national television banning old Rs 500 and Rs  1,000 notes, the country was sent into a tizzy. In one stroke, the bulk of the high value denomination notes lost their luster. Everyone rushed to nearest ATMs to take out as many hundred rupee notes as possible. Since then, banks have seen massive  rise in deposits, long queues to change old notes with new and businesses at the lower levels of pyramid have to a moderate extent lost business. Some sections of the economy that have high dependence on cash payment, realty for example, are facing the heat and many daily wage earners are not getting employment as cash has evaporated from the system.

Not to be left behind, political parties have announced their  responses ranging from support to the move to demand of roll back of the move. As is customary, parliament has been held to ransom by opposition parties and not allowed to function. On its part, the government is firm on its argument that the move will hit black money in the country and also give impetus to cashless transactions which will lead to more transparent transactions, with less evasion of taxes. Over the longer run, the government says, it will also result in lower interest rates, and reduce corruption in various sections of the society.

Amidst all the usual hullaballoo, however, what is pertinent to ask is whether we are really heading for a more cashless economy and if yes, what does it mean for a country like India, which has a huge number of people who are still unbanked. The population is still largely technologically illiterate and despite proliferation of cheap smart phones, the number of people using phones to do either banking or online shopping and paying in digital cash is too low for comfort. Most people are still not using their debit or ATM  cards to do purchasing because the trust on the security of transaction and privacy of data shared online is low. But at the same time, there are definite and tangible benefits from cashless environment which are ultimately helpful for people at large. Then there are questions regarding the infrastructure to sustain cashlessness in semi urban and rural India.

So, what does it mean to have a cashless economy? It can be defined as a situation in which the flow of cash within an economy is nonexistent  and all transactions have to be through electronic channels such as direct debit, credit and debit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer and Real Time Gross Settlement in India. While no country has gone totally cashless yet, and it may never be possible to eradicate cash completely from transactions, developed countries have gone for higher level of electronic payments which reduces the scope of creation of black money, is easy from cash logistics point of view and also saves money spent in printing and maintaining the cash in the system.

India runs on cash

India is among the most cash driven economies of the world. Less than 5 per cent of all payments happen electronically in India. Nearly 80 per cent of all consumer payments in India are made by cash, whereas in US, 80 per cent transactions occur electronically. While lack of banking access has been cited as the reason for the same, the attitudinal aspect has not received enough attention. In an A.T. Kearney survey on consumer behavior at malls, close to 90 per cent transactions were found to be done by cash. This shows that even those who can use electronic transfers prefer using cash instead. Another example is e-tailers who are giving the cash on delivery (COD) facility to expand consumer base. Though the proportion of people opting for COD is decreasing, it still accounts for 60 per cent of transactions. Even the luxury retail segment sees most transactions in cash.

In a report titled Cost of Cash in India, the Fletcher School of Tufts University presented some disturbing facts. It found that India had a very high ratio of currency in broad money, and a low velocity of cash, making its ratio of currency to GDP very high at 12.2 per cent compared to other major emerging economies such as Russia (11.9 per cent), Brazil (4.1 per cent), and Mexico (5.7 per cent). The study also found that the ratio of money held in bills and coins, to the amount held in demand deposit and savings accounts in India was in excess of 50 per cent, much higher than Egypt (29.3 per cent), South Africa (8.9 per cent), and Mexico (8.7 per cent).

coverstory1What is not much realized and appreciated is that printing and maintaining cash in a system is a costly business. On an average, India spends Rs 21,000 crores a year on currency operation, most of which falls on the RBI and commercial banks. Some experts have put the direct cost of running a cash-based economy close to 0.25 per cent of the country’s GDP. On the logistics of cash, the Cost of Cash report says that Delhi spends 60 lakh hours and Rs 9.1 crore to obtain cash. Compared to this, Hyderabad spends 17 lakh hours and Rs 3.2 crore to do the same, which corresponds to fees and transport costs about twice as high as Delhi on a per capita basis.

Benefits are immense

The cashless economy has numerous advantages. The greatest of these is that in such a system, all economic transactions are recorded  and money trail is established automatically in real time, making it almost impossible to generate black money. It also makes underground economies unsustainable which are not only damaging to the economy, but is also the primary conduit to finance anti national and anti social forces. Secondly, a cashless economy means low transaction costs as cashless transactions obviate the need to print, manage and move money around. Third, the lesser use of cash reduces money laundering and increases tax compliance.

Another advantage of greater usage of electronic payments is that it increases the “velocity of money.” According to a Moody’s report, the impact of electronic transactions can lead to a 0.8 per cent increase in GDP for emerging markets and 0.3 per cent increase in developed markets. An associated benefit is the increase in spending. A Visa study of 2003 had estimated that a 10 per cent increase in electronic payments correlates with a 0.5 per cent increase in consumer spending. It also found that electronic payments  can achieve cost saving worth about 1 per cent of GDP. Cashless or low usage of cash also reduces the scope of pilferage from public services. In 2010, a report of McKinsey found that initiating electronic payments as a means of disbursing government services can reduce current payment inefficiencies estimated at Rs 1 lakh crore annually.

From peoples’ perspective, cashlessness means no need to frequently visit ATMs, complete control over spending power as well as no risk of carrying currency notes in the wallet.

But is India ready?

So, if there are so many advantages and benefits from going cashless, why have we not moved lock, stock and barrel in this direction yet? Surely, something is hindering this progress. Indeed there are very credible challenges in moving towards a cashless system in India.

First and foremost, a large part of the population is still outside the banking net and not in a position to reduce its dependence on cash, even if they want to. According to a 2015 report by Pricewaterhouse Coopers, India’s unbanked population was at 233 million. Not more than half of villages are covered by banks. A related aspect is the prevalence of ATM or debit cards. Much of rural India is out of the debit card ambit and this is because the number of ATMs is itself very low and is highly skewed in favor of urban centers. Even for people with access to banking, the ability to use their debit or credit card is limited because there are only about 1.46 million points of sale (POS) which accept payments through cards. On a total POS number of over 10 million, this is miniscule and inhibits the willingness of usage of cards by public.

coverstory2Second, about 90 per cent of the workforce, and nearly half of the country’s economy works in the unorganized or informal sector, the set of economic activities that are neither taxed nor monitored by the government. It will not be easy for the informal sector to become cashless as merchants prefer not to reveal sales in order to avoid paying taxes. On the other hand, for want of better price, buyers find cash payments more convenient. Third, as the Payment System Vision Document of RBI said, unless the government payments are migrated to electronic platforms, the overall goal of cashlessness cannot move any forward. This is a governance issue and much preparation is needed in changing mindset of conducting business in government circles.

Then there are problems related to attitude of people that emanate from poor literacy and awareness. Majority of India’s literate population is not educated beyond rudimentary level and for them, using electronic means of handling money is a complex task, even if the language of interaction is local. The low digital literacy naturally makes consumers averse to using digital payment means.

Next is the set of technical limitations that inhibit the growth of cashless transactions. First of all, even though mobile penetration has gone up sharply over the last decade, smartphone penetration is still low which is an important component for digital transactions. This is also a price issue as the cost of smartphones has still not gone down to a level where a daily wage earner can afford it. Second, debit and credit card penetration is still low which is directly related to setting up of ATMs in the country, especially in rural areas. Third, the internet penetration and its reliability are quite low in the country, and so is the bandwidth availability. In such a scenario, it is not possible to guarantee the success of transactions made online. Fourth, The payment interface i.e. UPI is still at a nascent stage which cannot handle large volumes of transactions. Finally, the lack of proper cybersecurity framework is a big constraint hindering the move towards a cashless economy.

Creeping up on new technology

Though on a broad, macro level, the infrastructure does not look promising, there are signs of positive developments which inspire confidence. Personal internet banking has become more popular in India over the past decade and more people are using mobile and net payment than Also it felt that by the same year, the number of smartphone users in the country will likely be 520 million, and the number of internet users 650 million, twice the current number.

The recent spurt of growth in digital payment system has come from non-bank companies offering payment services. Cellphone companies like Airtel and Vodafone offer facilities to transfer money using phones, while “wallet” companies like One97 Communications’ Paytm, and MobiKwik allow users to store money digitally and pay through their systems. As the acceptability of these wallets increase in hinterlands, the dependence on cash would naturally decline, though on a country wide level, the real, visible impact could be years away.

What needs to be done?

Even though cashless transactions have gone up in recent times, it has remained an urban phenomenon as only in tier I cities there is a basic infrastructure ready. If the success has to be spread to smaller cities and to semi urban and rural areas, actions are required at various levels. already made some progress on this front. It has got a large number of bank accounts opened and started direct benefit transfer is part of the overall idea to reduce cash usage. On its part, RBI has issued licenses to small finance banks and payments banks which are expected to roll out innovative banking solutions with higher technological input, which will encourage cashless transactions. The National Payments Corporation of India’s Unified Payments Interface which aims to make digital transactions simple, has started on a promising note, though technical issues remain.

coverstory3A tougher job will be to boot up the ATM network the country. India has currently near 200,000 ATM machines. Not only the numbers and reach has to go up, the service has to be improved too. In a survey of 4,000 ATMs that RBI conducted, it found that a third weren’t working. Banks have been expanding their ATM networks rapidly over the past decade. Bank, on the other hand, say that ATM machines may be out of order for a variety of reasons, from mechanical failure and paper jams, to software malfunction or lack of electricity, a common occurrence in India. Needless to say, poor ATM network discourages people to move towards greater usage of ATM card.

On their part, banks will have to invest in technology and strengthen cyber security as online payments are most vulnerable to theft. People will only shift when it’s easy, certain and safe to make cashless transactions. As largest players in banking industry, government banks will have to take a lead in this regard. They will also have to take a lead in increasing the number of POS accepting card payments. Next, telecom companies will have to improve internet bandwidth reliability which could facilitate online traffic.

Needless to say, the government will have to create conducive environment in which people can easily and fearlessly make online payments. Initial push is critical as it will decide how the drive towards cashlessness proceeds, both from institutional and infrastructure perspective. Though the confidence and control that people feel with cash in their pocket is hard to match, the future is of electronic transactions and sooner India moves in this direction, better it will be for economy, government, and people as well.


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