1. Digital moneyrevolution
Various developments have taken place in Indian Banking. Among the various
developments, technology has influenced the way customer interacts with banks.
Electronic channels and products such as ATMs, debit/credit cards, internet banking
and mobile banking are offered along with traditional branch channel. Differences in
the usage of channels exist between developed countries and developing countries.
Evidence suggests that there is a shift from traditional channel to electronic
channels. For example, usage of digital banking in developed countries is more than
90 percent and diffusion of digital channels in developing countries range from
11 percent to 25 percent.
Online banking was first started in 80’s.(where)
In India, Reserve Bank of India outlined the mission to ensure that payment and settlement
systems are safe, efficient, inter-operable, authorized, accessible, inclusive and compliant with
international standards. The Vision is to encourage
electronic payment system for ushering in a less cash society in India. Regulation is keen
to promote innovation and competition with an intention to help payment system achieve
international standards. Various initiatives by Reserve Bank of India, in mid-eighties and
early-nineties, resulted in offering technology based solutions. What are the initiatives
Electronic Clearing Service (ECS) was launched in 1990s (when exactly the year)
to cater to bulk and repetitive payments. By September 2008, National Electronic Clearing cell
was launched to handle multiple credits to beneficiary accounts. The retail funds transfer system
was introduced in 1990s to allow electronic transfer of fund for people to people payment.
In November 2005, a robust system was launched to allow one to one funds transfer
requirement of individuals and corporates. Prepaid instruments allow transaction for goods
and services against the value stored on payment instrument. It may be in the form of smart
cards, magnetic stripe cards, internet wallets, mobile accounts, mobile wallets and paper
vouchers (what is this). Consequent to the guidelines in mobile banking, selected banks were
permitted to offer the service after receipt of necessary permission from Reserve Bank of India.
Indian Retail payments pose significant challenges and opportunities.
It is estimated that Government subsidies alone constitute more than Rs.2.93 trillion (when)
and electronification has a potential to translate 4.13 billion electronic transactions in a year.
Jan 2016, at the end of a panel at “Startup India Standup India”, adequately named
“Disruptive Power of Technology in Financial Inclusion”, the panelists, Paytm(what kind of
organisation) CEO Vijay Shekhar Sharma, Eko Founder and CEO Abhishek Sinha, and Ispirt’s
Sharad Sharma, pledged to make India a cashless economy. Nearly 10 months later, Prime
Minister Narendra Modi, put disruption into the financial payments space, with the move to
remove (and gradually recycle) 86% of the cash in the Indian economy. The government’s
narrative surrounding demonetization has changed frequently since then: first it was an attack on
black money, then about addressing funding of terrorism, but the latest pitch, for a move that
reportedly has seen people die, is that it moves people towards a cashless economy; Mr
Venkaiah Naidu, the Union Minister for Urban Development and Information and Broadcasting,
referred it as a “Cultural Revolution”, entailing, to quote him, a “behavioural modification”.
2. Presently, the entire administrative machinery is towards digital payments in
the country to realise the lofty goal of cashless India.
Aims & objectives
Although there are no exact figures available, the proportion of cash payments
ranges from 90-95 % going by various sources. So only 5-10% of all
transactions are currently in non-cash methods including cheque payments. If
we talk about only digital payments this figure goes down even further. This
scenario is completely opposite in case of developed countries.
Let us look at the status of non-cash transactions in developed countries as
per the World Payments Report 2016.
As you can see from the above figure, the percentage of non-cash
transactions ranges from 4-10% only. This is the complete opposite of the
situation prevailing in India. Hence we need to adopt digital payments on a
3. Benefits of Digital Payments over Cash Payments
Check the black money market: (What is black money and how it is
generated and what are the causes) As you’re aware that the black money
market is mostly cash based. If more transactions are done using non-cash
methods this will help to track the transactions more effectively and bring
down the black money market which is a big hurdle in the economic progress
of the country.
Increase in tax revenue: Since cash payments are hard to be tracked, shop
keepers and other merchants can evade the govt. taxes easily by reporting
lower than actual sales. As share of digital payments increases, the
government tax revenue will proportionally increase too since digital payments
can be tracked very easily and tax evasion will go down.
Check leakage in govt. schemes: One of the biggest problems with various
social-welfare schemes is that the payments either do not reach the targeted
beneficiary completely or they do not reach them at all. These payments get
pilfered midway at various levels due to corruption and administrative
inefficiencies. Once payments for social schemes like MGNREGA (What is
this scheme about) are made entirely through digital means, this will ensure
that the money reaches the right person. This will also lower corruption in the
Promotes convenience of payment: It is far more convenient and safe to
carry a debit card than large amounts of cash with us without worrying about
Reduces economic burden imposed by cash transactions: Visa, the
global leader in payments technology, in its report on “Accelerating the Growth
of Digital Payments in India: A five–year outlook” released in 2016 states that
the cost of cash (what is cost of cash) places a huge burden on the Indian
economy equivalent to 1.7% of GDP. However, India has the opportunity to
reduce its cost of cash from 1.7% of GDP to 1.3% of GDP by promoting digital
payments in the country in the next five years.
However there are certain hurdles involved in changing the country to a
cashless or a less-cash economy.
Only 27% Indians have access to internet: Only about 342 million out of
1.25 billion Indians have access to internet. Since almost all digital payments
require internet access, 73% Indians are still out of the digital loop. Internet
penetration has to be increased on massive scale.
Only 17% adults use smartphones: Since the bulk of digital payment
applications require a smartphone, the adoption of cashless payment mode is
quite low since just 17% of the adult population owns a smartphone. Even the
UPI payment method recently launched by the government is app-based
which requires a smartphone device.
Broadband internet penetration is very low: Broadband refers to internet
speed in excess of 512 Kbps and reliable internet banking usage and
4. smartphone usage requires high speed broadband connection. However, only
15% of the total internet connections in the country are at present broadband
based. Rest are low speed 2G connection that poses a challenge for making
Very low number of PoS machines: There are only about 14 lac (check)
Point of Sale (PoS) machines in India that enable payments via debit and
credit cards. So while card adoption rate has increased in the country, these
are largely used for cash withdrawal from ATMs and not for making cashless
payments since there are only about 856 PoS machine per million Indians
which is very less.
Low level of digital literacy: While literacy levels are increasing in the
country, not many people have the skills or knowledge to engage in digital
payments. This is due to the fact that India is largely an agrarian country and
internet access is quite low in the rural areas. Also majority of the people in
villages and small towns use their phones for calling purposes only. Boosting
digital literacy will help a great deal in promoting cashless payments in the
Steps Taken by the Government to Promote Digital
Keeping in view the benefits of cashless payments in the country, the Union
Govt. in conjunction with the NITI Aayog (erstwhile Planning Commission) has
announced numerous measures to promote digital payments in the country.
1. Waiving off excise duty on manufacture of Point of Sale (PoS)
2. Offering various incentives and discounts on making digital payments
for purchase of petrol/diesel, railway tickets. Offering free accident
insurance on rail tickets, offering discounts on premium of general
insurance and life insurance policies, directing Public Sector Banks to
not levy Rs 100 as monthly rental on PoS machines issued to
3. Businesses with turnover of upto Rs 2 crores that make 100% cashless
transactions will be taxed at 6% upto Rs 12 lacs instead of 8% at
4. Reducing the transaction fees levied by banks on IMPS, NEFT, UPI
5. A discount of Rs 5 online cylinder booking is being offered by oil
5. 6. Launch of DigiShala TV and toll-free helpline to promote digital
awareness in the country
7. Bharat Interface for Money (BHIM) mobile launched by the government
to promote the Unified Payments Interface (UPI) for digital transactions
8. Launch of jackpot schemes like Lucky Grahak Yojana and Digi-धन
Vyapar Yojana for consumers who undertake digital payments
Need & importance
(to acquire knowledge)
Every year, millions of people around the world transition out of poverty in a number
of ways — by adopting new farming technologies, investing in new business
opportunities, or finding new jobs, for example. At the same time, large number of
people fall back into poverty due tohealth problems, financial setbacks, and other
shocks. Compounding this situation is the fact that the majority of those living in or
near poverty lack even the most basic financial services.
Access to the right financial tools at critical moments can determine whether a poor
household is able to capture an opportunity to move out of poverty or absorb a shock
without being pushed deeper into debt. However, the existing “bricks and mortar”
banking system doesn’t work for poor people, in part because most of their
transactions are conducted in cash. The global revolution in mobile communications,
along with rapid advances in digital payment systems, is creating opportunities to
connect poor households to affordable and reliable financial tools through mobile
phones, and other digital interfaces
India, which observes “Digital India Day” on April 14, is now expected tobe the
biggest digital hotspot of the planet. The digital medium is now seen as the most
potent tool for cutting the divide between the wealthy elite and have-nots. India’s
earlier attempts floundered for several reasons but now the time appears to be ripe
for such an enterprise. Digital finance has suddenly acquired a magical nuance.
However there are several challenges peculiar to India that may constrain a full-scale
digital transition in the foreseeable future. On the surface, this transition may not
appear to be very deep. But as it pans and plays out, this tectonic shift will have much
wider implications and policy executioners will have to contend with a diversity of
exponential societal changes. The race to go digital cannot be turned into a sprint.
India culturally believes in cash and a paradigm shift in thinking will need time and
resources. Digitalization will actually involve a migration to new social and cultural
patterns and habits; in a way it is more of a cultural-economic revolution.
(to study & to compare)
Though 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.
How ready up are we to go cashless? How affordable is it for people to go cashless?
6. Infrastructure Issues
1. Number of citizens on mobile: The latest figures from the Indian telecom regulator TRAI
show that, as of 31st July 2016 : India had a tele density of 83%, with Bihar, Assam, Madhya
Pradesh and Uttar Pradesh with tele density of less than 70%. While state-wise data for wireless
tele density is not available, it won’t be very different, since most connections in India are
wireless. These are number of connections, not users, because many users have multiple SIM
cards. Proof: Delhi has a tele density of 234.77%. Urban wireless tele density is 148%, and rural
is 50.72%. Even of the 1,034.23 million connections, 88.88% are active. So we do not have
enough people with mobile connections in India, 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 2016, 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). For the top four telecom operators, the number of mobile
connections that are data enabled in a manner that is more than 1mb or more than 10mb per
month is around 30%.
So we do not have enough people with mobile connections in India who have an Internet
3. How many people are online daily? According to Facebook India MD Umang Bedi,
165 million log on to Facebook on a monthly basis. So we do not have enough people with
mobile connections in India who have an Internet connection and are active online daily
4. Availability of reliable connectivity:
5. Availability of user devices: According to Idea Cellular CEO Himanshu Kapania, there are
currently over a billion mobile phones in India: around 850 million feature/smartphones, and
150 million LTE enabled phones.
Vodafone’s smartphone estimate:
7. Airtel India MD and CEO Gopal Vittal recently said that: “What we have found is that people
with smart phones, not all of them use data. That number of people with a smart phone using
data is probably around 60% to 70%.
This is important because the most payments business don’t support feature phones , and we need
feature phone support for now. Mobikwik has promised it, apart from rolling out a low
6. Merchant acceptance: India had 712.5 million debit cards, and 130.53 million transactions, as
of August 2016. 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.
Demonetization might lend itself to greater utilization of cards, but there were only 1,461,672
point of sales machines in India, as of August 2016, according to the RBI, in the entire country.
In all likelihood, concentrated in major cities, with some merchants with have 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 (check)
terminals per million people.
8. 7. Payment and mobile network capacity: What we’ve seen with Demonetization and the
increase in usage of cards and online payments is that somewhere in the value chain, banks and/or
payment gateways were not in a position handle the load. Transactions failed. 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 etc?
8. Time taken for a transaction: when we’ve driven through a toll booth, or paid for parking,
we 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, it takes additional time.
8.1 For a card, you need to place it in a PoS 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.
8.2 For digital transactions, you need to get a user to scan a merchant QR code, authenticate
with a PIN (ideally). 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 (What is
NFC) machine, but most phones aren’t NFC enabled in India, nor do merchants accept NFC
9. 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. There are
other risks too: In 2011, it was believed that payment gateway CC Avenue was
hacked. Recently, HDFC and Axis Bank were hacked too
The difference between cash and digital is that cash limits the damage to the loss ofa note or
of a number of notes. In digital, the risks are higher. The advantage of wallets was that you
could transfer money to them bit by bit, and lower your risk of exposure.
10. No privacy with cashless: a switch to cashless means that each and every transaction is
tracked and documented. This is great for governance, 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 utilised. By
switching to cashless, you’re not giving users a choice. India doesn’t have a privacy and data
protection law, Whereas, Cash offers that relative privacy and anonymity,
11. Language compatibility: Paytm has recently updated their application with some features
enabled in Indian languages. Mobikwik has done English and Hindi. PhonePe works in
English, Hindi and Tamil. However, most mobile handsets don’t have an Indian language
interface, as don’t most applications and services. Ola is available in Indian languages only for
drivers, not passengers. Apart from Snapdeal, no ecommerce 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,
9. leave alone being able to read and write English, while we don’t have phones that are in Indian
languages and apps that aren’t in Indian languages. The digital divide here is massive. Physical
notes are a visual medium of exchange.
12. Interoperability issues (between payment systems): cash is interchangeable: you don’t
need a connection, an application or an account to exchange cash. Here, you have a situation
where State Bank of India doesn’t allow payment into a Paytm wallet via netbanking, or wallet to
wallet transfer isn’t allowed. There’s the Unified Payments Interface, set up by the bank owned
group NPCI, where the Reserve Bank of India has not allowed wallet to wallet transfers.
Customers are locked-in whether it is to their bank account (because you need banking systems
functional to transfer money) or to their wallets.
13. Cost of transaction:
13.1 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. 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.)
13.2 Customer costs: You need a smartphone, an Internet connection and/or have to pay USSD
charges (Rs 0.5 per session) and data charges when applicable.
13.3 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.”
So where are we today?
Cash isn’t the same as cashless (digital payments) because:
Not enough people have mobile connections, an Internet connection (which can survive
massive usage in times of emergency), or use it regularly, on a smartphone, which supports
all Indian languages, with an application that supports all Indian languages. Internet
connectivity isn’t reliable or available or as cheap for users as cash.
The process of making digital payments in India is not easy, and is time consuming.
Making digital payments is costlier either for the merchant or the customer, or both.
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 aren’t 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.
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.
10. (to find out)
Does that mean that there shouldn’t be any cashless transactions?
Certainly not. Many of these issues mentioned above should be addressed. Further people
should not be forced to adopt cashless payments.
The important thing is to give people choice, and switch people to cashless gradually.
Parity between cash and digital money is probably impossible to achieve, but there are means of
getting closer to it: by creating an incentive structure for that switch, and that involves making
cash more expensive than cashless, and better enforcement.
Some ways in which cashless can be encouraged
Giving an indirect tax rebate for using cashless methods of payment, which brings parity
between cash and cashless. Even online, merchants can be incentivised to charge less for
digital payments, and more for cash on delivery.
Digital Payments businesses have tried their hand with cashbacks, and lower rates for digital
purchases have already encouraged digital payments. Incentives could be given to businesses,
which they can transfer to customers.
Migrating from a cash economy to a digital economy will demand a recast of the
entire mind set for consumers. In fact, the last mile of the digital highway is not only
infrastructure but user skill levels. Making gadgets available will not help unless we
bring about a change in the overall outlook of people. Consumers will take up digital
platforms and embrace new opportunities if they believe that changing their
behaviour and exerting the effort necessary will make certain specific pains go away.
Increasing financial and digital literacy alone will not be enough to bring about the
digital revolution. Changing the financial framework is also not enough. Consumers
will have towalk that extra mile if they want to reap the harvest of these new
Talk of “cashless societies” might be overblown, but societies in which digital
transactions can be made seamlessly by all are by no means fiction. The biggest
success story is Kenya. The Kenyans (How is it being done) discovered that with the
right technology, exchanging money between physical and electronic forms can be
done securely, and as naturally as exchanging notes for coins.
A survey of accounts opened under Pradhan Mantri Jan-Dhan Yojana (PMJDY),
India’s flagship financial inclusion program, found that only 33 percent of all
beneficiaries were ready touse their Rupay cards. The others were bewildered by the
complicated PIN and activation procedures. Inconsistent electricity and sporadic
internet access further eroded customers’ trust in ATMs and POS machines, with one
failed transaction enough to make an entire village swear off formal financial
India should avoid the usual overstep and haste, such as the way it pushed millions
of new users onto the digital economic grid by virtual fiat of demonetization,
triggering large sale social and economic disruption. The government must make
11. sure that the pace of this journey is determined by the ability of it people to cope with
Building inclusive digital economies requires the collective action of governments,
industry, financiers, and civil society. Before speeding ahead, we need to build the
infrastructure, align the policies, and create the tools that will enable the poor to
comfortably board the digital train.
When we design solutions that recognize all as equal partners, we have a real chance
of reaching the goal. Each society is at different stages of digital financial inclusion
and the necessary solutions and interventions must be appropriate for the cultural
and economic context. By respecting the cultural outlook of the people and
embracing their concerns we enlist their buy in, and that is what paves the way for
lasting and sustainable success.