India's long journey to a cashless economy: Digital vs. Cash

The Indian government has been pushing for a cashless economy, but only a fourth of country's half a billion mobile-Internet users opt for digital payments. Though cashless transactions are seeing brisk growth, notes in circulation, and the usage of cheques continue to remain high. Further, despite cash backs and other attractive offers, the popularity of digital payments is still largely limited to urban areas.

India's long journey to a cashless economy: Digital vs. Cash

Indian Prime Minister Narendra Modi is a strong proponent of a cashless economy. In August 2019, on the eve of the 73rd Independence Day, he gave his countrymen a motto to follow "Yes to digital payment, no to cash. Although, a country as vast and diverse as India, building a completely cashless ecosystem is an unenviable challenge

Though digital payments are registering brisk growth, notes in circulation, and the usage of cheques continue to be high. Further, despite the government's firm push, India is getting nowhere near to a cashless economy owing to a multitude of problems. Indeed, it's estimated that around 90% of financial transactions in the country are still in cash.


To begin with, digital payments are far from being frictionless. While many smartphone users are attracted only by the cash backs on offer and keep hopping from one scheme to another, feature-phone users pay in cash. And the popularity of digital payments is still
largely limited to urban areas. This holds true for credit card transactions as well.

Moreover, the cost of enabling digital payments is high. For instance, the goods and services tax (GST) on transactions via banking correspondents is 28%. This is discouraging, especially for low-income users, such as a manual labourer in Delhi NCR who sends money back home to his parents in a village, via correspondence.

Even in newer businesses like e-commerce, cash on delivery accounts for nearly half of the payments.

A big opportunity
The first real booster shot for digital payments came when the government demonetised high-denomination currencies in November 2016.

Despite this growth, only less than 120 million people out of the 500 million mobile Internet users are opting for digital payments. The Universal Payment Interface feature, started by the National Payments Corporation of India (NPCI), is the major mobile-only digital payments platform and more than 100 banks and third-party apps (including Paytm, PhonePe, Uber, and Google Pay) offer UPI-based payments. Meanwhile, the share of cheques in financial transactions continues to be high. In fact, the value of cheque transactions jumped by INR2.08 lakh crore between 2017-18 and 2018-19, though there was a drop in volumes (or the count) of cheques issued by 25.99 million.

Also, discounts and cashbacks are availed more by users who are self-reliant in carrying out financial transactions. Those who need assistance (like say at ATMs) to complete transactions do not know how to avail of such offers. Hence, if the digital process is not fully seamless, it would put off such users.

Structural hiccups
The hurdles in making the Indian economy less dependent on cash, according to Manish Jain, partner, digital and fintech, KPMG India, are "regulatory, technical, and procedural in nature."

For instance, Jain explains that a user who has completed her KYC (Know Your Customer) to open a bank account needs to undergo the ordeal again when buying an insurance policy, investing in mutual funds, or taking a loan, even if all the transactions are through the
same bank. Besides, "it takes a lot of time to reverse transactions a user wants to change; there are transaction charges on failed transactions," Jain adds.

A recent RBI bulletin noted that the Committee on Deepening of Digital Payments under the chairmanship of Nandan Nilekani has recommended increasing the volume of digital payments by 10 times in the next three years, which can be facilitated by initiatives such
as removing transaction charges on digital payments, simplifying KYC processes and reducing the costs for banks. The committee also noted that a 10x increase in digital payments is achievable if the friction points are addressed. If that happens, there will no longer be a
dependence on carrots such as cashbacks to lure customers and retain them.

While feature-phone users (accounting for half of India's mobile user base) had an option to pay digitally via USSD (Unstructured Supplementary Service Data), the technology was a non-starter due to technical glitches and banks' reluctance to promote it. There's a
UPI option for feature phones as well, but that is yet to take off.

Moreover, Pos (Point of Sale) machines for card payments are mainly concentrated in the urban areas. And while outlets that accept QR codes outnumber the ones with PoS terminals, this mode is used only by a few that are comfortable with digital payments and
technology.