Going cashless is a good idea. For the government, the biggest gain is an easy audit trail to assess individuals and businesses to tax and to ferret out illegal transactions like the financing of crime, terror, smuggling and drugs. For individuals, plastic (payment cards) and e-money provides far greater security, despite the risk from cybercrime. Businesses also gain. Studies of consumer behaviour show that paying by card or e-money encourages you to spend more than you would otherwise.
So it is no surprise that Prime Minister Narendra Modi, a man in a rush, is pushing the country to abandon cash. But how far are we from the point where a cashless economy can kick in? A US study in California noted in 2012, that even in the case of those who state a preference for paying by card, there is a 49 percent probablity that they will settle payments less than $20 by cash. The probability drops to 8 percent for payments above $20. In India the inverse is true. At least, 95 per cent of personal consumption related transactions in numbers (not volume) are in cash.
Access to bank accounts is key for going cashless
A 2015 World Bank survey established that increasing the number of banked adults in the economy is the most relevant intervention till one reaches the level of around 800 accounts per 1,000 adults. India stands at a ratio of 480 accounts per 1,000 adults. This is pretty far from the point after which increase in the number of bank accounts cease to matter. Nevertheless, the extension of banking services in India is impressive given the scale of poverty, illiteracy, gender discrimination and the sparse spread of bank branches, particularly in rural areas — just around 40,000 for six lakh villages and a population of 800 million or on average 1 bank branch per 20,000 people..
The high level of poverty in rural areas; low savings and consumption levels make rural branches uneconomic. So innovative mechanisms should be developed to provide “barefoot” banking to the poor. This is virtually impossible via our clunky and inefficient public sector banking system. The Reserve Bank of India revolutionised the licensing of payment banks earlier this year by bringing in a “year-around”, entrepreneur-driven approach of welcoming proposals for opening payment banks -which provide less than the full range of banking services- without inviting proposals for bank licensing through formal rounds, as previously. We need to pursue this approach and establish at least a “payment only” bank branch for every cluster of 5,000 adults. But inevitably this will take time.
e-money is a low cost, “quick win”, to digitise payments
A faster way of displacing cash payments is to scale up the use of e-money. Across economies which do not have universal financial access, over the period 2010 to 2015, the number of e-money accounts have grown at the rate of an astonishing 63 per cent per annum — more than triple the rate at which bank accounts have increased over. Mobile money accounts comprise 55 per cent of such e-money accounts. But, in India, e-money continues to languish at merely 10 per cent of transactions.
Getting merchants digitally ready for Point of Sale applications.
A more serious missing link for ramping up cashless transactions is the relative scarcity of point of sale (POS) acceptability of cashless transactions. Easy access to POS ready merchants and vendors is key for building the credibility of plastic money as an alternative to cash.
Photo courtesy: thehindu.com
This is a chicken and egg situation. Merchants do not see the value of accepting e-money payments unless enoigh people want to use them. Also, mechants lose interest on the deferred payments into their accounts. On top of this card providers charge merchants upto 3 percent of the transaction value for the service. All this pushes up the prices of customer purchase price of products. Customers in turn, try and dodge the servive tax and additional charges which comes with buying digitally. No wonder then that a mere 1.5 million commercial entities accept cashless transactions in India. Compare this with the 44.7 million registered micro, small and medium enterprises (comprising industrial and service related businesses) with an investment ranging from Rs 1 to 50 million, estimated in India by the 2006 SMSE survey. Bringing all these service providers into the POS net expands the market by an order of magnitude. Why not start by first “Carpet bombing” commercial entities in the 50 largest cities in India, with assistance and persuasion to say no to cash? Lets start by making cities cashless first and let the smaller towns and rural areas follow in an orderly manner.
Make cash transactions more expensive than digital ones
One cannot develop an entire ecosystem for junking cash by fiat alone. The incentive structure, which today privileges cash settlement because of its lower transaction cost, must be reviewed and reversed. The government started the RuPay debit card in 2014 with the hope that it would compete with the international biggies in the business — MasterCard and Visa – and make them look more seriously at the potential fortune which lies at the bottom of the pyramid — the small transactions end of the market.
India has 26 million credit cards and 712 million debit cards. But their use is low at just 12 times per debit card every year at an ATM and barely two transactions per year per debit card at a POS. The corresponding numbers are less than 1 transaction for a credit card at an ATM and 38 at a POS. In comparison in high income economies cards or e-money options are used to conduct around 280 transactions a year per person. We are a long way off from the frontier of cashless transactions. The good news is that we are better off than low and middle-income countries, which averaged just 22 cashless transactions per year per person.
Plastic money becomes expensive to use if the individual transactions are small. Typically, micro-transactions of less than $5 (Rs 340) are not viable through plastic money and would need to be cross-subsidised. This is where e-money becomes the most appropriate vehicle to mop up the micro-transactions market which could account for as much as two-thirds of the total transactions. After all, cigarettes are still sold as singles in India; a paan (betel) costs just Rs 20 and a street meal is Rs 100.
Build the eco-system for expanding payments beyond traditional banks
If the government is serious about junking cash it must engage with commercial entities which have a large , diversified customer base to leverage for diversifying into the payments space. Phone carriers, progressive electricity utilities and the Railways are some options. They can quickly scale up the use of digital money by their customers in collaboration with e-pay platforms and provide some assurance to merchants against the risk of not realising the payments from the e-pay platform. Developing a “reward” based strategy to move 50 per cent of commercial transactions above Rs 500 to digital settlement by 2020 is a reasonable target.
There are some limitations which need to be overcome or gone around- the poor quality of electricity supply, dodgy net connectivity and the additional cost that needs to be borne to digitise small-value transactions via POS arrangements. Regional hackathons to find solutions to specific barriers can pay rich dividends. They can create an ecosystem of innovative thinkers focused on solving the problem. The future is digital. Engage millennials to figure out how to fast forward us there, out of turn.
Adapted from the authors article in the Asian Age November 28, 2016 http://www.asianage.com/opinion/columnists/281116/in-rush-to-go-digital-dont-junk-cash-yet.html