Transitioning to a Cashless Economy: Challenges, Opportunities, and the Path Ahead

The world is now moving on from Paper Currency based economy to Cashless economy. By embracing Alternate Delivery Channels and other Cashless modes of payment which include old ones like NEFT,RTGS etc. to newer one’s like POS, e-wallets, debit and credit cards, UPI, BHIM etc. we are steadily moving towards a society that embraces a cashless economy. But before that we need to identify the problems standing in the way. In this article, we explore why the need to shift, what are the emerging options, what are the bottlenecks and issue standing in the way and finally where do we stand as a nation in this effort for transition now.

Financial transactions among people have been the driving force behind the economy since time immemorial. Thus, human beings have always hunted for innovative ways to make these transactions convenient and hassle-free. For example, transition from metallic to paper currency took place to make the production, storage and handling of currency easier. Now, the next big move in this direction is making the economy cashless.

The gamut of transactions, intensity of economic growth and their complex nature today has propelled economies all over the world to go cashless in the form of debit cards, credit cards, RTGS, NEFT, e-wallets etc. The idea behind embracing a cashless economy is to tap into the potential of wireless communication, made possible through the smart phones and internet, and use it for financial transactions. In context of India, the government’s demonetization scheme was also aimed toward achieving a cashless economy. 

Do We Need to Go Cashless at All?

The Indian Economy heavily relies on cash transactions with cash driven businesses accounting for about 13% of our GDP. There are many benefits of going cashless: low storage cost, no issues of not having the change, proper record of all transactions made etc. to name a few. Yet only 5% of the transactions are done digitally. Why? Because paper currency helps in concealing underhand activities for evading laws, regulation and taxes. However, not just this but many other bottlenecks as well have prevented the promotion of cashless India despite serious initiatives by the Government.

The first bottleneck is lack of infrastructure. A cashless economy would need a strong infrastructure to make the shift from cash to digital transactions. India lacks the same as of now which garnered ample proof in the form of glitches on the GST portal in the event of a surge in filing of returns. This problem is more severe in the rural areas and adding insult to injury is the fact that more than 65% of India lives in the rural areas even today. On top of poor internet connectivity in most of the areas, even in areas with internet most of the people either do not own a smart phone or are digitally illiterate. Also, the quality of the network is so poor even in the metro cities sometimes that people simply avoid relying fully on just digital payments. The disadvantage due to computer illiteracy is further aggravated by poor IT security. Recently around 30 Lakh debit cards were affected due to leak in the PIN codes, not to mention WannaCry and Petya Ransom ware further creating an atmosphere of lack of trust on digital options. And the final nail in this coffin happens to be the weak Privacy and data protection laws in the country which do not instill an iota of confidence in the masses.

Another area which provides a setback to the dream of a cashless economy is the Indian Labor market being informal and cash dependent. Since most are daily wage earners they find cash to be the easiest way to distribute and accept money and that being precisely why this portion of the workforce was critically hit by demonetization. Then there is the issue of language compatibility, meaning that most digital payment methods and wallets do not have a local Indian language interface and even if they do the language is such that even for prolific readers it becomes very difficult to understand even the easiest of things. Consider this on top of the fact that a huge number of our countrymen are not able to read or write in , forget English, any language for that matter. This leads to presence of e-wallets more in Tier-1 and Tier-2 cities which then further widens the digital divide, leaving cash as the only option on the table.

Though we have seen a growth in the use of e-wallets like PhonePe, PayTm, Google Pay etc. slowly adding to a revolution in how we use our money, using them still requires having a Bank Account which unfortunately many people still don’t have. Now the Government launched the Jan Dhan Yojana to address this problem of financial inclusion, yet data indicated that most of those accounts still remained dormant. Also, there is no provision for wallet to wallet transfer which happens to be an issue even for the urban dwellers facing interoperability issues as they are confined to a particular wallet system which add to the confusion of a lay man. Even so the wallets are a relatively newer technology than RTGS and NEFT. The problem with the older tech is that they are not available 24x7 and also yield high charges to the banks. Though recently the Govt. has made NEFT a 24*7 phenomenon, yet it only is not reason enough to motivate people to shift to cashless.

Even from the perspective of business men, going cashless is not the smart move. Be it credit cards debit cards or UPI , there is an extra cost involved for a digital payment wherein a percentage is paid as the transaction fees. Also, there are hidden costs like those involved in making internet connection PoS Machine smartphone etc. and incurring such hidden infra costs doesn’t go down very well with people of a country like India. In light of these issues, trust deficit among people for digital payments is understandable. A report by Google and Boston Consulting Group (BCG) provides valuable insights as to why even after using digital payments, people have switched to other modes. These include - inconvenience of remembering login details, wasted time for waiting for the system to accept commands, frequently running out of balance etc. The multiplicity of payment options have added to the problem.

There are obvious benefits from a cashless Indian economy. According to a study by Tufts University in 2014, the annual cost of cash operation is around Rs. 21,000 crores. Digital economy will also make it difficult for tax evaders to hide the illegal money or indulge in money laundering. Synergy between banks and telecom sector can be the first step towards cashless economy. Telecom sector can boost the drive towards digital economy. Mobile banking is expected to make banking services accessible to many. In addition to this, Financial Institutions must act as facilitators. Instead of charging customers for online transaction, they should incentivize them for the same. There is hope in this regard as there has been increase in tele-density in India. Additionally, there has been an enthusiasm among the merchants to use digital payment modes because of its ease. The revolution in the field of smartphones has led to the rise of E-commerce, m-commerce and other services, including cab-aggregators that promote digital payments for the use of various services. The value added Services such as Cash back, Bill Payment Facilities, Loyalty Points, Rewards etc. have resulted in a boom of such digital platforms and also, these developments have given rise to competition amongst these platform to outshine each other leading to creation of better, easy to use and more sophisticated interfaces that are a pleasure to use for the consumers and attract a techno-savvy customer base despite the loopholes which need to be plugged.

The government is already on the path of cashless economy through schemes like Jan Dhan Yojana, Unified Payment Interface (UPI) Bharat Interface for Money (BHIM) app, Direct Benefit Transfer (DBT) etc. Although addressing the basic issues like digital literacy, infrastructure and internet connectivity etc. is important, the next significant step must be to allow portability among e-wallets and other service providers. The incidence of ICICI Bank Limited blocking transaction on PhonePe app shows how companies are using methods to protect them from their competitors. In such cases the customers end up suffering. Commercial banks must co-ordinate with Non-Bank mobile wallets to provide seamless services. This can be a step towards interoperability. Also, despite many Indian Companies having come up with cheaper smartphones as compared to the foreign brands, they are still far from what the people can afford. Unless the government provides necessary subsidy or affordable solution for the same, cashless economy will remain a farfetched dream.

To cut the pervasiveness of cash and the habit of using it, people need to be nudged to do cashless transactions. The first time users are most vulnerable to security threats. Therefore, they need to be educated on the risks of digital payments. According to Digital Evolution Index, India is among the top Nations that have huge potential for Digital payments. Cashless society is the need of the hour and we will be able to achieve it. But currently our society does not fulfill the requisites for it. For now the aim must be to go from cash intensive economy to a less cash intensive economy. It is true that we cannot become a cashless economy overnight, but sustained efforts towards achievement of this goal , and the will to move forward with this vision in mind will definitely help us achieve this goal.