Forget black and white! It’s going to be really tough and expensive for India to go cashless.


Let’s not focus on the internet connectivity and it’s speed in India, it itself is a big point to discuss but there are costs which are associated with digital payments.

At the Startup India Standup India event i.e “Disruptive Power of Technology in Financial Inclusion”, the panelists included Paytm CEO Vijay Shekhar Sharma, the Founder and CEO Abhishek Sinha, and Ispirt’s Sharad Sharma, who pledged to make India a cashless economy. That was January 16 and nearly 10 months later, Prime Minister Narendra Modi put a disruption into the financial payments space by taking a drastic decision, with the move to remove (and gradually recycle) 86% of the cash in the Indian economy

But is India really ready to go cashless? Will it be affordable for people to go cashless?

Major concern here is that there is no parity between cash and digital money: a rupee paid by cash is far more convenient for a user, and affords less costs, as compared to a cashless system. Lets look at the following aspects.

1. A good number is prompt to technology : Not all Indians are using technology. The latest figures from the Indian telecom regulator TRAI shows that, till July 31, India had a teledensity of 83%. Of this, Bihar, Assam, Madhya Pradesh and Uttar Pradesh had teledensity which was even less than 70%. Note that these are the number of connections per 100, not exact users, so you will have to short this significantly, because many users have multiple SIM cards. Proof: Delhi has a teledensity of 234.77%. Urban wireless teledensity is 148%, and rural is 50.72%. Even of the 1,034.23 million connections, 88.88% are active.

A big question now is, do we have enough people with mobile connections in India? Not close to a billion, especially in rural India.

2. Number of mobile users who are connected to the Internet: There were 342.65 million Internet connections by the end of March, of which 20.44 million were wired connections. In total, 149.75 million were on broadband (3G + 4G + wireline broadband) and 192.9 million on “Narrowband”. Narrowband Internet subscriber base was 192.90 million (2G and wireline broadband).

3. Reliable connectivity Is it?: “When we were doing Aadhaar, and we said it will be an online infrastructure and identity,” TRAI Chairman RS Sharma said at an event WiFi in India, People said you are creating an online identity in India where connectivity doesn’t exist. So there was a huge amount of pressure on us to make it work offline as well. Government’s view was that they are creating a future-proof identity infrastructure. Because they know The future is online. The future is a connected world.”
So do we have enough people with mobile connections in India who have an Internet connection, a reliable Internet connection, and are active online daily? And this figure is not even close to a billion.

4. Merchant acceptance: India had 712.5 million debit cards, and 130.53 million transactions, as of August. That’s around 18 transactions for every 100 cards. Credit cards? Only 26.38 million in India as of August 2016, accounting for 83.95 million transactions. This simply means that not everyone is ready to go cashless using their debit cards they have to rely on other payment gateways such as Paytm.

Demonetisation will definitely lead to greater utilisation of cards, but there were only 1,461,672 point of sales machines in India as of August, according to the RBI. In the entire country.
In all likelihood, these are concentrated in major cities, with some merchants having more than one machine, as backup. A 2015 Ernst and Young report said that India has the dubious honour of having one of the lowest POS terminal penetration, with only 693 machines per million. Brazil had 32,995 terminals per million people and China and Russia, had around 4000 terminals per million people.
So we don’t have enough people with debit or credit cards, and not enough point of sale machines to use them. This is apart from not enough people with mobile connections in India who have an Internet connection, a reliable Internet connection, with handsets that support Indian payment apps, and are active online daily. Not close to a billion. This will lead to a false hope for cashless economy.

5. Payment and mobile network capacity: Un-Doubtingly demonetization and the increase in usage of cards and online payments is gone in trend and this leads to banks and/or payment gateways were not in a position handle the load. Transactions failed. What we were told that Visa is not able to handle the load. At present, there isn’t sufficient capacity for the escalation in usage if everyone starts transacting digitally. More importantly, do we have the network capacity to deal with this? What happens in an emergency situation, when networks are down because everyone is trying to call everyone, as we’ve seen previously in India? If you don’t have cash, and there is insufficient connectivity, how will you be able to buy anything, use public transportation?

6. Time taken for a transaction: If you’ve driven through a toll booth, or paid for parking, you know that operators keep exact change because they expect notes to come in with a specific denomination. The time taken isn’t usually to tender change for notes, but for printing a receipt. Watch a small shop selling high frequency purchases like mobile recharge cards, candies or cigarettes, and you’ll see that the pace at which they close a transaction with a customer is critical for them: they don’t typically give a bill for each transaction, and that’s a problem when it comes to taxation. But from a user’s perspective, think of the additional time it takes.

For a card a person needs to place it in a point of sale machine, get a user to input a PIN, and if there is connectivity, wait for the merchant to get a confirmation before you can leave. For digital transactions, you need to get a user to scan a merchant QR code, authenticate with a PIN. Or, you need the merchant to send a payment link to a customer, for the customer to receive it, open a page, type in details and complete a transaction. Then wait for the merchant to receive a confirmation of the transaction before you can leave. Can you imagine doing this while exiting a parking or at a toll booth? If you’re buying a Rs 2 Pulse candy, imagine the friction involved, as indicated here. The quickest means of payment is an NFC machine, but most phones aren’t NFC enabled in India, nor do merchants accept NFC payments.

6. Security issues: The weakest security link in any transaction is not the technology system, but the user, and their lack of understanding of security issues. To get a sense of this, to withdraw money from ATM’s, some people were giving others their card and PIN numbers. But there are other risks too: In 2011, it was believed that payment gateway CC Avenue was hacked. HDFC Bank too. Last month, HDFC and Axis Bank were hacked too

7. No privacy with cashless: A switch to cashless means that each and every transaction is tracked and documented. This is awesome for the government, with taxation, but there is no protection for citizens, as to who owns that data, whom they can share it with, and how it will be utilized. If I’m using a wallet, where is the law that prevents usage of that data for advertising to me? By switching to cashless, you’re not giving users a choice. Sirprisingly India doesn’t have a privacy and data protection law, and this is shamefully enough, the Indian government has gone to court arguing that there isn’t a fundamental right to privacy in the country.

As the Attorney General of India, representing the Union of India, said in August last year “Violation of privacy doesn’t mean anything because privacy is not a guaranteed right”

Cash offers that relative privacy and anonymity, that the Government of India is trying to deny its citizens. The only cashless currency that affords anonymity is bitcoin.

8.Language compatibility: Paytm was recently updated with some features enabled in Indian languages. Mobikwik has gone for English and Hindi. PhonePe also works in English, Hindi and Tamil. However, most mobile handsets here in India don’t have an Indian language interface and this is ironic as these payment gateways will not support all phones. Ola is available in Indian languages only for drivers, not passengers. Apart from Snapdeal, no e-commerce company tried going the Indian language way. There’s a part of the population in India which still isn’t able to read and write, leave alone being able to read and write English, while we don’t have phones that are are in Indian languages and apps that aren’t in Indian languages. The digital divide here is massive. And therefore physical notes are a visual medium of e wallets.


9.Cost of transaction: There are three aspects to the costs involved in transactions.

Merchant costs: Merchants need a working Internet connection to accept digital payments. They need to pay a monthly rental for a machine, or a smartphone with an application to accept payments and all this costs them too much. On Credit cards, merchants are charged a merchant discount rate (MDR), an inter-bank exchange fee, of 2.5%-1.7% per transaction. On debit cards, they need to pay 0.75% per transaction below Rs 2000 and 1% for transactions above Rs 2,000. For UPI, merchants are charged 0.75% per transaction plus other costs (on par as debit cards.)  Well who will bear this cost, yeah the customer.

Customer costs: a customer needs a smartphone, an Internet connection and/or have to pay USSD charges (Rs 0.5 per session) and data charges when applicable.  Cost are applicable when cashless is converted into cash:From an RBI paper on processing costs on cheques and ATMs: “The feedback received from different banks revealed the following – a total cost of Rs.1.95 per Rs.1000/- which excluded the cost of insurance and dispensing cash at ATMs; the cost of dispensing cash through ATMs alone is approximately Rs.17 per transaction; the opportunity loss for holding idle cash would be approximately 9%; the cost per transaction at ATMs ranges from Rs.6.60 to Rs.15.88 in case of fully outsourced operations depending upon the service provider and area of operation.” Therefore going cashless is going to be very expensive as not everyone can afford these additional charges that are charged on the digital transactions therefore this becomes very important to ask where are we today?

Cash is not going to be the same as cashless because:

Not a pretty good amount of people in india have mobile connections, an Internet connection (which can survive massive usage in times of emergency), or can use it regularly, on a smartphone, which supports all Indian languages, with an application that supports all Indian languages. Internet connectivity is not at all reliable or available or as cheap or say affordable for all users. The process of making digital payments in India is not easy and is very very time consuming. Making digital payments is costlier either for the merchant or the customer, or both. We cannot forget this that digital payments can lead to major security risks, with adequate processes not in place for easy redressal, for either merchant or customer. Above all, not enough is being done to educate the consumer, the weakest chain in the link. Digital payments are not a single standard like cash: money in one type of account is not the same as in another type of account, and it is not interoperable, unlike cash therefore people need to be made aware about the all these aspects of digitalization of Indian economy.

Indeed cash might be more expensive for the government, because of tax evasion, corruption and the need to keep recirculating old, spoilt, currency, and enabling transfers, but digital is very expensive for citizens so the government needs to take some important decisions regarding digitalization of the economy.

But this doesn’t mean that there should be no digitalization! The point is that we’re not ready yet. Many of these issues mentioned above will surely be addressed one by one: connectivity will hopefully improve; Indian language interfaces and operating systems will be developed soon, security improved, customer care improved, smartphone prices will come down, but the idea to force people into adopting cashless payments is foolish and unnecessary, when you don’t have the wherewithal to meet the demand at that scale, this quickly. People are hurting, and there are no means of meeting that demand in the near term. The important thing is to give people choice, and switch people to cashless gradually.

Encouraging people to go cashless and to move towards a cashless economy, the following steps must be taken

Giving an indirect tax rebate for using cashless methods of payment, which brings parity between cash and cashless. Even online merchants can be incentivized to charge less for digital payments and this will surely help and encourage people to go for cashless, and more for cash on delivery. Digital payments businesses have tried their hand with cash backs, and lower rates for digital purchases have already encouraged digital payments. Incentives could be given to businesses, which they can transfer to customers.

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