A roadmap to cashless economy

Cashless economy is an economy where cash is not used or least used. In cashless economy, digital money is used instead of cash, and transactions are made by digital devices such as mobile phones, ATMs etc. The government has also announced incentives like reduction on service charge and other levies on debit/credit card transactions.

Dec 6, 2016 15:01 IST
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Cashless IndiaCashless economy is an economy where cash is not used or least used. In a cashless economy digital money is used instead of cash, and transactions are done by digital devices such as mobile phones, ATMs, Swipe Machines etc. Cashless economies have existed in past too. They were based on barter and other methods of exchange, and cashless transactions have also become possible in present time by using digital currencies such as Bitcoin.

Demonetisation Impact: Cashless India?

In India, the government’s decision of demonetizing Rs 500 and Rs 1,000 currency notes raised some obvious questions about the validity of cash in Indian economy. As a solution, the use of plastic money in the form of credit and debit cards was touted as the way forward. The government is also propagating cashless transactions to enable people to get by in the time of demonetization.
The government has also announced incentives like reduction in service charge and other levies on debit/credit card transactions. The government’s strategies over the past year or so have been centered on promoting e-payments, cashless payments, and plastic transactions. It is, indeed, the future of the Indian economy.

Steps towards cashless India

 1. Jan Dhan Yojna, Aadhar, and Mobile (JAM)
The government pushed the country in the cashless direction amd promoted people to move towards digital transactions right from the launch of the Jan Dhan Yojana to JAM (Jan Dhan-Aadhaar-Mobile) and other initiatives, including the Micro Units Development & Refinance Agency Ltd. (MUDRA) Bank. With Aadhaaaracting as an important link between the people and the government, the common citizens no longer need to the bidding of unscrupulous and corrupt officials to secure what is rightfully theirs.

A Moody’s report has shown that the impact of electronic transactions led to 8 per cent increase in GDP in emerging markets as against 0.3 percent increase in developed markets. People need to make full use of electronic payments as they are faster and easier to trace.

There are various other options which are instrumental in moving the economy towards a cashless or less-cash economy. These are Unified Payments Interface (UIP), ATM, Bank Card prepaid cards, using various cards at any PoS (point of sale). Aadhaar-enabled payment system (AEPS), Unstructured Supplementary Service Data (USSD) based mobile banking, and e-wallet or digital wallet.

2. Enhancing Online Transactions Demonetization of the currency notes will have positive effects on Indian economy when it comes to pushing it in cashless direction. There will be three major impacts of this announcement of demonetization. Firstly, the digital payments will increase exponentially and e-commerce transactions which were paid by cash on delivery (COD) will now reduce drastically. The third impact would be the number of credit cards will also go up.

Earlier, the income tax regulations had imposed a rule of scrutiny for transactions above Rs.2 lakh through credit cards in a year and the customers were reluctant to show electronic payments. Now this limit will be extended further.

Payments Council of India (PCI) of India released a statement in which it said that overall growth rate of digital payments has already been around 40-70% between different payment products. Debit cards are growing at the rate of 40%, credit cards at 15-20% but with the growth in the overall spend, and cash was also growing. Now it’s the beginning of a new era and the cashless industry is all set to expand at the rate of 100% in the next two years. This is a positive sign for the Indian economy to move in the cashless direction.

CAshless Economy

3. Idea of Digital India
As we know, that India’s more than 70 percent population lives in rural areas. So, the main challenge before the government is to develop plans for creating required infrastructure in rural India. India has already begun the process of digitizing the economy. Mobile internet penetration at grass root level is crucial since PoS works over mobile internet connections.

Also, the low literacy rates in rural areas along with the lack of internet access or even basic utilities in many places, it becomes very difficult for people to adopt the habit for digital transactions. It can be said that till the time this penetration for online payments doesn’t reach local stores, the transition will never be truly effective.

4. Financial Security
Financial security over the digital payment channels is imperative for pushing the cashless economy idea. When recently, the data of lakhs of debit cards was rather easily stolen by attackers, the ability of Indian financial institutions to safeguard electronic currency and exchanges came into question. Also, a big reason why people prefer cash as financial fraud has become too common and complicated for the common person.

5. Learning from other cashless Economies
India can take into considerations the model of those economies which have already moved towards being cashless economies. Uruguay has put in place incentives for merchants to prefer digital payments. India may need to think about doing so too. Sweden is another example. Even after a full scale-up, a fully financially digitized economy like Sweden still conducts about 20% of its money transaction in cash.

6. Financial InclusionIndia still has a huge disadvantaged and low-income segment of society which is bereft of any financial services. Without the financial inclusion of this section of the society, the goal of a cashless economy cannot be achieved. Thus, financial inclusion is a fundamental step towards a cashless economy.

Challenges in Cashless-ness

India economy continues to be dominated by ash. Overall, less than 5% of all payments happen electronically. This happens due to the paucity of access to the banking for a large part of the population as well as cash being only means available to many. Both large and small transactions continue to be performed in cash. Even by those who can use electronic transfers use cash.

So let us examine the status quo of all those factors which are sine qua non for cash less economy one by one. It will give us a panoramic picture of the present scenario of the Indian economy and in turn it will help us to build a concrete perspective about a possibility of the cashless economy in India.

1. Cards and POS
RBI showed in July 2016 that banks had issued 25.9 million credit cards and 697.2 million debit cards to customers after deducting cancelled cards. The number is huge. But it is quite obvious that cards alone can’t turn the economy into a cashless one. While keeping the number of the card in mind it is important to note that a number of cards does not equal number of individuals carrying those cards. The cards are used more in numbers by urban residents and now this trend is visible in rural areas as well. The number of cards in use is not the reflection of the number of Indians using these cards as a large number of people, especially in urban India, have multiple cards. Further, there are only three main purposes for which cards are used. These are making online payments, withdrawing money from ATMs, and making online payments and swiping for buying or payments at the point of sale (POS) at merchant outlets like restaurants, shops, fuel pumps etc.  
Another set of data released by RBI showed that India had a total of 1.44 million POS terminals established by various banks at different places at the end of July. Axis Bank, SBI, ICICI Bank, HDFC Bank, and Corporation Bank account for 1.16 million POS terminals. Four of these five banks are substantially urban.
2. ATMs
The stark fact is that in a country of over 1.2 billion people, we currently have only 2.12 lakh ATM machines and 1.3 million point-of-sale card machines. People may want to shift to the digital mode of payment now that their trust in cash has been shaken, but shortage in the bandwidth and uncertain power supply in most of the parts of the country make reliability of the digital systems a big challenge.
3. Mobile
Paying through phones may be attractive but phones must first be connected to the internet. In the month of July, a total of 881 million transactions across India took place through debit cards at ATMs and POS terminals. About 85% of these transactions were done to withdraw cash at ATMs. In terms of value, 92% of all debit card transactions were at ATMs. This only suggests that debit cards are used less for purchase and more as a means to withdraw cash.

In Uttar Pradesh alone there are approximately 150,000 to 200,000 telecom recharge counters. This figure is referred only to telecom retailers and cannot be used to figure out the total retail universe, either in the state or in India. And by keeping the population of India in mind it becomes clear that the POS terminals available at present are not sufficient to make India a cash transaction free country.
4. Internet
At present only 13 out of every 100 Indians in rural areas actually have internet access and the quality of internet is not up to the standard. And bringing all the rural Indians within the cashless system would demand a reliable internet network which would be a gargantuan challenge.
5. International Reports:A.T. Kearney did a survey of consumer behaviour at malls, it figured out that close to 90% transactions happened by cash. E-tailers still continue with the cash on delivery (COD) facility to spread consumer base. While the proportion of people looking for COD is decreasing, it still accounts for 60% of transactions. Apart from it, even the luxury retail segment of the market sees most transactions in cash.
A report created by the Google India as well as the Boston Consulting Group revealed that around 75 per cent of transactions in India were cash-based in last year while in developed countries like the US, Germany, Japan, France etc, it was around 20-25 per cent. Due to demonetization business for mobile or e-wallet companies has grown up to 4 times and the figures are keeping up.

However, in the long run it would be interesting to see the impact of cashless-ness in India. It will give the entire transaction trail to the authority which will control the tax evasion and round tripping. We need to keep our fingers crossed to see which side the camel sits. How India will approach this change and how people embrace this change? If all goes perfectly to the plan- this may very much change the condition of finance in India.

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