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The challenges of going cashless

Monika Mahope, a junior college student in Dhasai, a tiny village of 5,000 in Maharashtra’s Thane district, used a gift card from her parents for the first time on December 6. She bought berries from a local vendor. “It’s very easy and convenient,” she says. Dhasai has seen some radical changes ever since it resolved, on December 1 this year, to become what is touted as the country’s first ‘cash-free village’. With a state-owned bank distributing 50 point-of-sale (PoS or swipe) machines to local traders, most of them, except the vegetable vendors, have now gone cashless. Customers, some commuting to work in nearby Thane and a few farmers, have resumed buying after the cash crunch of two weeks following demonetisation. “My daily sales were around Rs 1,000, but I’m now earning an extra Rs 500 after installing the swipe machine,” says grocer Swapnil Patkar. The reason, he figures, is that customers tend to buy goods in bulk with their debit cards.

Stories of more and more traders, transporters, customers, or, in cases like Dhasai, entire villages shifting to cashless or less-cash transactions have come in from many parts of the country after the Narendra Modi government demonetised Rs 15.4 lakh crore worth of Rs 1,000 and Rs 500 currency notes, ostensibly to fight black money in the system-estimated to be around 20 per cent of India’s $2.3 trillion (Rs 156 lakh crore) economy. Demonetisation suddenly sucked out 86 per cent of the total currency in circulation. And by the first week of December only a third of that had been replenished by the new notes. Even if the printing presses work at full capacity, it will take at least another two months before the currency circulation becomes normal again. Assuming that some Rs 8 lakh crore worth of currency will have been printed till December 31, is it possible that digital money can effectively fill the breach?

While the idea of a cashless or less-cash society is appealing, given that it would help bring more money into the banking system and, as a result, create better tax compliance and possibly lower corruption, the challenges of implementation are huge. Consider the facts: as much as 92 per cent of the $800 billion (over Rs 52 lakh crore) worth of annual retail purchases in India are made in cash, says a Vodafaone survey done prior to launching a digital wallet app in the country. RBI data shows that there are only 1.4 million PoS terminals installed across India, of which a significant number would be in large retail outlets (see graphic: Show Me a Swipe Machine). Minus these, say experts, PoS terminals would be anywhere between 5-7 lakh, while the number of merchant outlets runs into several crores. While the use of plastic money has been growing in cities and towns (Indians use 661.8 million debit cards and 24.5 million credit cards as on March 2016, as per RBI data), much of the debit card usage (94 per cent in value terms) has been for withdrawing money from ATMs. In fact, India’s average number of card transactions per capita, at 6.7, is among the lowest in the world (it is 249.3 in Australia, 54.8 in Brazil and 14.4 in China).

Part of the reluctance to use credit and debit cards is the traditional preference for the look and feel of cash, its anonymity, instant clearing and universal acceptance. Moreover, it is free of technology, and can be used even during a power outage, a frequent occurrence in small towns and villages (see graphic: Cash Still Has Its Pull). A survey by Gallup in the United States in June this year showed 24 per cent of respondents still used cash for most purchases, despite the proliferation of mobile technology and e-commerce there, supported by advanced technology infrastructure. While India has made swift strides in banking technology, especially with its 2.15 lakh ATMs and mobile banking, these remain largely urban phenomena. Consider this: between October 2013 and October 2015, the number of ATMs increased by around 43 per cent. But a stunning 80 per cent of ATMs are in metro, urban and semi-urban areas, making it all the more difficult for those in villages and small towns to access them. That was the story before demonetisation. With cash drying up, even the existing number cut a sorry figure, sometimes with serpentine queues as people throng to withdraw money or at other times with cold ‘no cash’ announcements.

But the government now says it is not necessary that the entire amount quantum of (pre-demonetisation) cash be replaced and circulated in new currency. It would prefer to go less-cash, if not entirely cashless. “Our dream is that there should be a cashless society,” Modi said in his monthly radio programme, Mann ki Baat, on November 27. “It is correct that a 100 per cent cashless society is not possible. But we can make a start with a less-cash society, for then a cashless society will not be a far-off destination for us.”

While using less cash, as ‘e-cash’ technologies proliferate, is a natural progression for any economy, what has sceptics worried is whether the new narrative is being spun as an excuse for not being able to replenish the cash pulled out of the system. Former finance minister P. Chidambaram has termed the idea of a cashless economy “foolishly utopian”, adding that even developed countries have cash transaction volumes of up to 20 per cent. The government too has been shifting its public posture ever since the note-change announcement, first from attacking black money hoarders, to choking funds that fuel cross-border terrorism, to the latest ‘cashless’ drive. On December 17, addressing industry body Ficci’s delegates in Delhi, finance minister Arun Jaitley said not all demonetised currency will be replenished, adding that the Centre will “supplement the rest with digital currency”.

The question, then, is this: Is India ready to take the plunge into a cashless economy? “There is a huge portion of the workforce that prefers cash,” says Naresh Makhijani, partner and head, financial services, KPMG India. “People are used to the touch and feel of money. It is a habit they have formed, and changing that will need a change in mindset.” It’s a feeling that resonates through India’s rural belt. Sitting largely idle in his tiny little shop in Haryana’s Manakpur village, Mohan Lal finds the very suggestion of going cashless absurd. “I essentially cater to schoolchildren who trundle across before or after school or during recess,” the shopkeeper says, pointing to the utter ludicrousness of selling minor stationery supplies or candy through credit and debit cards, or even e-wallets. “Rab de vaaste (For god’s sake), I sell to schoolchildren,” he says.

A July 2016 study by the Boston Consulting Group (BCG) says that a large percentage of the population is still habituated to cash even when making online purchases, with 68 per cent of surveyed customers admitting to using cash as a medium of payment. They also feel using cash keeps spending in check. The informal sector, which employs a majority of India’s workforce, largely prefers cash. This explains why demonetisation has crippled several mandis or fruits, vegetables and foodgrains markets across the country. At the Vashi mandi in Navi Mumbai, business was down 50 per cent post-demonetisation, with vegetables and fruits left to rot due to the cash crunch.

Rajeev Chandrashekhar, MP, and a serial technology entrepreneur, says for e-payments to be successful, digital penetration has to be ubiquitous. The underlying platform, the internet, should be available everywhere. Nearly 850 million Indians are not connected to the internet and the challenge is to take digital infrastructure to these people. Broadband penetration in India is about seven per cent, according to a white paper presented by the International Telecommunications Union (Thailand’s reach is 36 per cent, Singapore’s 98 per cent and Malaysia is at around 35 per cent). Having said that, if it took a decade for 200 million people to get access to the internet, scaling it up to 500 million could just takes up to five years, according to tech entrepreneurs and policymakers.

The other issue is the complexity of digital payments, which impacts universal acceptance. Other hurdles include a lack of awareness and clarity regarding transferring money from an e-wallet to one’s bank account, and fears of fraud and hidden fees. The likelihood of fraud cannot be ruled out, especially after 3.6 million cards were compromised and had to be withdrawn after several cases were reported in October this year. There’s also the perception of inferior technology and poor support infrastructure. Many merchants are sceptical that technical issues could get them stuck between the payment service provider and the customer. They also want a physical access point while managing disputes for query resolution.

The government is also lagging behind in its ambitious Digital India programme, which aims to connect 2.5 lakh gram panchayats through optical fibre cable. Of these, 97,480 panchayats were to be covered in Phase 1 by March 31, 2016. Having missed that deadline, a new one was set for December 31, which too is likely to be missed. In the interim, using USSD (unstructured supplementary service data) technology can be a short-term solution, say experts. USSD helps transmit information through mobile channels, and can be used for transactions up to Rs 5,000.

Meanwhile, there is no comprehensive legislative framework to protect the consumer. “As more Indians go online, digital Indians need digital rights. Currently, consumers are unprotected,” says Chandrashekhar. The IT and communications ministry has recommended some changes in the existing IT law to incorporate data security. The government is also considering a privacy law.

However the votaries of ‘cashless’ believe the change in mindset is not impossible. Sudhir Kapadia, partner and national tax leader at EY India, says going less cash is not impossible. He cites India’s achievements in mobile phone penetration as an example, when, in the initial days, there was much scepticism. “As a country, we have leapfrogged from huge dependence on landline phones to mobile phones,” he says. Telecom regulator TRAI said in September this year that India has over 1 billion mobile phone users compared to around 25 million fixed line users (the actual users would be much less, estimated at around 600 million, since the 1 billion figure includes multiple SIM cards and several defunct subscriptions that may have not been updated). Kapadia says there is a desire among the new generation of entrepreneurs to go into the formal system (where they conduct transactions through banks, which leaves a digital trail and is taxable), either to raise finance through external means or as a good corporate governance practice. It also helps many small and medium size business firms who want to be part of the forthcoming GST (Goods and Services Tax) system.

A MasterCard white paper, ‘Cashless Journey’, published in September 2013 places India in the ‘inception’ category-where over 60 per cent consumer spend by value is using cash. But the paper does suggest that innovation can provide shortcuts in the journey. M-Pesa, a remittance and payment scheme using mobile phones, is widely accepted in Kenya. Launched by Safaricom, the country’s largest network mobile operator, M-Pesa enables anyone with a mobile phone to pay or send money electronically. It has cut across the traditional barriers to going cashless, such as a buyer needing a bank account, or a seller a landline connection. Once you have signed up for M-Pesa, you pay money into the system by handing over cash to one of Safaricom’s 40,000-plus agents who then credit the money to your account.

Some experts agree with Jaitley on not replacing all the demonetised currency in order to get the economy back in shape. Rather, they argue that the economy will be in better shape with less cash. K.V. Kamath, president, New Development Bank (formerly Brics Bank), said in a media interview that the game seems to be to compress the amount of currency in circulation. “If you were pushing towards a digital economy…you don’t have to get back the whole amount of life blood, as it were [to get the economy back in shape],” he said, using the analogy of a patient going under the knife. Sangh Parivar ideologue S. Gurumurthy supports this, pointing to what he felt was an “alarming” growth of cash in India. Fuelled by black money, cash as a proportion of GDP has grown from 9.4 per cent in 1999 to 12 per cent at present, he said in an interview. Bringing the proportion of cash down to earlier levels required a big clean-up, he said, adding that only administering a sudden shock would have made people move towards digital transactions.

To be sure, cashless transactions have been on a sharper upswing since demonetisation. Small shopkeepers, for fear of losing business, began to display signboards of mobile wallet companies. From florists to roadside tea vendors to auto drivers, many were quick to board the digital bandwagon. IT and communications ministry data, as of December 18, say the four major mobile wallets-Airtel, Mobikwik, Paytm and SBI Buddy (a mobile wallet app from the State Bank of India available in 13 languages)-saw a jump in their transactions, from Rs 88 crore to Rs 288 crore a day, in the first three weeks of demonetisation. Paytm, the largest Indian mobile payment wallet with over 100 million users and 2 million transactions a day, said its app downloads went up three times and payments for offline transactions five times in the first two days following the government’s move (see graphic: Jumpstart the D-engine). The firm, which made losses of Rs 1,549 crore in 2015-16, is backed by Chinese firm Alibaba, and is gearing up to launch a payments bank in India (which can accept deposits but cannot lend).

MobiKwik, which has around 35 million customers today (a 40 per cent increase since November 8), says the number of users doubled day-on-day following the demonetisation announcement. According to Innoviti Payment Solutions, a Bengaluru-based lending platform for small and medium scale industries that processes transactions worth $2 billion annually, the use of plastic money for transactions of less than Rs 500 has increased 65 per cent since demonetisation. Overall, the use of debit cards is up 70 per cent, and of credit cards, 40 per cent, suggesting a sharp jump in first-time users. After a long delay, banks have also begun to push their united payments interface or UPI apps that enable cashless transactions even in small denominations.

But the greatest push for digital transactions has come from the government. It has waived transaction fees for buyers on credit and debit card purchases up to Rs 2,000, made petrol and diesel cheaper by 0.75 per cent for people using digital wallets, and announced two PoS machines each for one lakh villages with a population of less than 10,000. It is also supporting regional rural banks and cooperative banks through Nabard to issue ‘RuPay Kisan Cards’ to 4.32 crore Kisan credit card holders. States like Maharashtra, Goa and Assam have also offered a slew of incentives to go digital. There will also be a 0.5 per cent discount on suburban season railway tickets for digital payments, starting with Mumbai on January 1. Rail passengers buying tickets online will also get free accident insurance of up to Rs 10 lakh. Other measures include 10 per cent discount on toll charges using digital identification cards, and pegging monthly rent for PoS machines at Rs 100. The RBI, on its part, has slashed merchant discount rates (MDR is charged to a merchant by a bank for credit and debit card services) to 0.25 per cent for transactions below Rs 1,000 and 0.5 per cent for transactions between Rs 1,000 and 2,000 (for all transactions between January 1 and March 31, 2017). Tax incentives are also being offered to small businesses going cashless. Businesses with annual turnover of up to Rs 2 crore could save up to 30 per cent in tax payments a year. Government officials have had urgent meetings with heads of e-wallet firms to accelerate adoption. The Centre is even considering service tax breaks for mobile wallet firms and importing millions of PoS machines.

Nandan Nilekani, the man who was instrumental in every Indian getting an Aadhaar, a unique identity number, says the multiple payment systems designed in the past few years should all co-exist in the cashless ecosystem. An Aadhaar Micro ATM (a PoS-sized mobile ATM with biometric authentication) can be used in rural areas for electronic transactions. About 93 per cent of adults have an Aadhaar card or number. The government has also decided to link all savings bank accounts with the Aadhaar number to enable digital transactions. Nilekani says that Aadhaar micro ATMs would be an enabler for the estimated 350 million people who do not have mobile phones.

The BCG Survey highlights key trends shaping the digital payments space in India, which included a favourable regulatory environment, emergence of NextGen payment service providers and enhanced customer experience. As many as 240 million Indians use smartphones already, a figure that is expected to rise to 520 million by 2020. Internet connectivity has been expanding, albeit at a slow pace, under the Digital India drive. The BCG expects around 90 per cent of all mobile devices to be internet-enabled by 2017 and internet users to hit nearly 650 million by 2020.

Meanwhile, digital transactions have shown a growth of 50 per cent year on year, followed by ATM transactions growing at 15 per cent. In the meantime, branch-based transactions have reduced by almost 7 per cent in financial 2014-15. Regulatory steps that have boosted digital payments include KYC (Know Your Customer, a detailed authentication documentation process at banks), exemption of two-factor authentication for e-wallet payments, making them simpler, and the advent of Aadhaar as a national identity instrument, making the KYC process a breeze. Linking a customer’s mobile number electronically to his/her Aadhaar account makes the KYC process simpler. Moreover, over 250 million accounts have been opened under the Pradhan Mantri Jan-Dhan Yojana, bringing more people within the banking ambit. But new Yojana account holders may not be up for plastic money transactions, let alone digital ones. Sarju Manjhi, originally from Sokorla village in Jharkhand’s Simdega district, has a RuPay debit card (a government initiative), but has never used it. “There was never an occasion to,” says the 35-year-old domestic help, who came to work in Chandigarh some 15 years ago. Manjhi, who opened a Jan Dhan account in September 2014 and also got an RuPay debit card, says he’s still using withdrawal forms and pay-in slips filled out by literate friends to operate his account. “I would never know how to use an ATM card even at the bank, let alone to make payments in shops,” he says.

Banks, though, have been exhorting their customers to go cashless. “It is necessary that most of the currency in circulation move through banks rather than being stored at various places in an unproductive manner,” says Aditya Puri, MD, HDFC Bank. This will give banks the capacity to lend and also to bring interest rates down in order to spur investment and be competitive, he adds. Meanwhile, ICICI Bank says it is providing 250 financial and non-financial banking services through internet banking and 165 on iMobile, its mobile banking application.

Ankur Saxena, CEO of mobile wallet firm Oxigen Wallets, is working towards aggressively adding PoS machines across the country in the next few years. These PoS machines have a micro ATM, instant KYC identification and Aadhaar-enabled payment services. “When we envisioned this product a year ago, the primary vision was rural. We started deploying it in rural areas and have deployed about a thousand so far. Our next focus will be urban areas,” he says. PoS machines cost Rs 5,000-15,000 and are mostly imported from China. While wallets have seen a surge in transactions, the fact that they are privately owned and India’s data security laws are at a fairly nascent stage make them a tricky option. Moreover, interoperability of wallets-where a shopper can transact between two brands of wallets-remains an issue the RBI must address. The government, meanwhile, has launched an aggressive information campaign through a portal, a digital education channel (DigiShala) and common service centres, which are training people to become digital users. IT and communications minister Ravi Shankar Prasad says this disruption will lead to a revolution where adoption of technology will be a catalyst of change.

Experts suggest a few measures to get customers to move to digital payment instruments. Incentives and offers always have an appeal, a simple user interface ensures a seamless customer experience. For added security, biometric authentication would eliminate the need for multiple user names and passwords. High frequency transactions must be brought under the ambit of digital payments to urge consumers to move in that direction. Moreover, transaction speed is critical while dealing with cash. Already, in the days after demonetisation, there have been many reports of PoS machines breaking down or taking long to complete a transaction, which points to a network creaking under pressure. Last but not the least, there is a need to build a transaction ecosystem for merchants, since the upstream supply chain also demands payments in cash. The fee structure should also be kept low to attract the unorganised retailer. They also need support, in the form of call centres or agent support, toll-free numbers and transparent processes in case of disputes and refunds to instill confidence.

There are many who believe that only a “shock treatment” would work in India, especially when it comes to implementing sweeping changes such as the idea of a cashless society. Clearly, it will not be impossible to get more people to transact in a cashless or less-cash manner, but hurrying through the process without plugging loopholes will do more harm than good. India’s cashless journey has just begun. Winning over reticent consumers by making digital transactions safer, simpler and more accessible could be half the battle won.

With Kiran D. Tare, Asit Jolly, Rohit Parihar and Jeemon Jacob
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