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Wednesday, November 16, 2016

Is India ready for a cashless economy?

India’s most radical national-level decision came in last week regarding the demonetization of the Rs 500 and Rs 1000 Notes. There are many near term and long term effects of this decision and many of us are eager to see things unfold. The biggest discussion point was that this move will be a major step towards a cashless economy. Companies like Paytm etc are gung-ho about this move and are preparing themselves for the major surge they expect in terms of cashless transactions. In my opinion, this is surely a big leap but there are many other systemic changes that need to be in place for our nation to go truly cashless.
The Indian love for cash: We as Indians are a big fan of having cash with us. Even if we have a numerous credit cards, debit cards and what not, we would still carry a small bunch of notes. Many of us treat plastic money as a backup for cash and not the other way around. The primary position is still of cash and the secondary of the plastic money. One of the good things about the announcement made by the government was that they are limiting the amount you can withdraw, limiting the cash you have in hand and thereby making you to use your credit and debit cards more often and causing that much needed behavioral change in all of us slowly and silently. This will surely make plastic money move to the primary position and cash to the secondary position.
The network: For the entire monetary system to become cashless, the network of complimentary and supplementary services need to be in place. Let us accept the fact that we are still a nation where few of the merchants either don’t have a facility of taking payments by cards or refuse to accept payments by cards even after having the necessary infrastructure in place for the Indian love of cash or charge use an additional fees for providing you the convenience of paying by card. We still have a lot of petty things we buy from petty shops like milk, flowers, vegetables etc where cash is still the mode of payment. We have a strong retail network and we are still not in a state where we buy things like milk from a supermarket and pay cashless. Merchants refuse cashless transactions primarily because they need cash for rotation, for buying goods and for other business transactions. We still have the sentiment of visible cash being the blessing of Goddess Lakshmi and the invisible cash doesn’t hold any value for us. Unless the network of major merchants are forced to move to cashless mode of transactions, the system around them will continue to be driven by cash. There are many government agencies as well which are still not matured to accept card based payments. This is a major prerequisite for a cashless economy along with a much stronger and faster settlement process.
The cashless apps: I am still not quite convinced on how well we are using the cashless apps like Paytm etc. I know for the fact that they have a large subscriber base, but do they really have the transaction volumes. I myself know many of them who registered on these apps just because they got some discount or other promo and used it once or twice. How many of the registered users actually got converted to regular customers and used such cashless apps repeatedly for every payment they could make through that is the question. The network of the cashless apps have the same problem as that we have for credit cards. There are a selective few merchants who are onboard with this mode of payment and hence cashless apps act as a secondary for credit cards interestingly. Even if many of the merchants are on boarded, the whole pain of both the parties having to transact through an app might be a deterrent. Options like contactless cards or even QR code based payments might need to be looked at.
Technological challenge: Let’s look at reasons why we love to carry cash even with our plastic money. The top reasons would surely be: The shop might have a credit card machine but most of the time it is not working or does not complete the transaction due a system or network glitch, There might not be an ATM where I go and hence let me carry cash, the transaction amounts would be petty and the shop might not accept cards for it, I don’t want to the pay the additional charge for using my card and the list goes on. Few of the people are still wary of using plastic money as they feel it is insecure and can be easily hacked into especially in the online world. For cashless apps, the main challenge would be to get the app work in the toughest of the network and power conditions and also the ease of use. If cashless apps don’t look convincing for anywhere anytime use, then it might still fail to become mainstream mode of payment across the nation. All these reasons conclude to the same point that our backend technological infrastructure needs to be available, reliable and secure for people to be least worried about the mode of payment and encourage cashless transactions.
The common man: The PMJDY scheme was easily the best nationwide scheme implemented as far as I know. Now every citizen has a bank account with an ATM card which has empowered every citizen with the basic necessity of a cashless economy. Although all of them have it, many of them do not know the utility of this and banks need to play a major role in educating every common man on the benefits of the ATM card with them and how they could use it for making transactions. Banks need to facilitate this fully and this will be the most critical step in getting the crucial mass on board the cashless economy. Getting them to use their cards in near term itself would be a big achievement, cashless apps might be a distant target.
The old-youngsters: It might be a lot more easier to bring in the Gen X and Gen Y on board with cashless transactions but we have a majority of the old-youngsters who trust the nation’s oldest bank only, rely on their pensions and use cash for most of their transactions. This is the generation that is still taking baby steps in adopting to technology, many of them still might not be using internet banking, they are still getting used to using smartphones and other electronic devices, they are still unsure of how to download and install an app (Unfortunately many of the greatest apps being built in the Indian startup ecosystem like Uber, Ola, BigBasket etc have high utility for the old-youngsters but are catering to the young-lazy-office goer crowd just because of this technological barrier) and are still scared of using their plastic money. Some of them might get convinced to move to cashless mode of transactions but majority of them will find their own reasons to avoid them and can be on boarded only in the form of compulsion where they are forced to use only cashless mode.
A cashless economy is going to bring in more transparency and ease of doing business. It might also bring more regular streams of incomes for many of the citizens due to the receivables financing based schemes that banks and other financial institutions can implement due to the increased use of plastic money. However, this would also need the same style of implementation like the Aadhaar and Bank linkage for LPG subsidy where over a short period of time every one was forced to take an Aadhaar card and a PMJDY bank account to avail the LPG subsidy and retain only the genuine connections. The same feeling of compulsion and urgency needs to be created to make every citizen embrace the cashless economy, however, the necessary system and infrastructure would be needed before that starts.


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