Digital India: 3 Reasons Why Cash Made A Comeback; 4 Ways How Cashless Economy Can Be Nurtured
In November 2016, the ripples of India’s demonetization drive were felt throughout the country.
Sample this, in December 2016 – the month after the demonetization move, Eko’s transactional throughput stood at a meager INR 250 crore. This was roughly half of its average monthly throughput. Two years on and Eko is pulling off an impressive throughput of over INR 2000 crores! This points out to an obvious phenomenon – 96% of the cash is back in circulation.
The Challenges to Unraveling a Digital Revolution in India’s Financial channel
Currently, well over 90% of the retail transactions happening in India are cash driven. The rest of the pie is shared by cards, digital wallets and other digital payment options. While the government is pushing for digital adoption with much gusto, cash continues to be the predominant mode of financial transactions in India. This can be attributed to three factors mainly –
- The trio of informal jobs, migrant population and a sub-contracting system of employment
In excess of 90% of the Indian population is dependent on informal economy and hence cash is their preferred mode of transaction. There are many supply chains that keep the Indian economy thriving, however, there is the trifecta of the informal job sector, the migrant population and a layered system of sub-contracting. This system employs millions of Indians informally, many of them belonging to the 120 million strong migrant population. Their main need is to send money back home. Cash continues to dominate as the preferred mode to do this. Most of the population is employed through a hierarchical process of sub-contracting. The multiple tiers of this structure render digital and direct bank payments difficult, if not impossible.
- The retailer-distributor supply chain
Another key component of the Indian financial supply chain is the retailer and supplier channel. A distributor covers a large area or region and has several retailers under him. While the distributor might use the electronic channel to pay the company, his transactions with the retailers are mostly cash based. It is impossible to turn this chain of cash into a digital one overnight. The eco-system in which these retailers and distributors operate is one where the digital channel has a limited scope.
The lack of enough smartphones, poor internet connectivity, shortage of power and a general resistance towards the adoption of technology due to a lack of awareness are valid reasons that thwart the growth of a cashless economy in these quarters. The underlying infrastructure as mentioned above needs a level of overhauling before the inertia can be lifted. To add to it, the ecosystem has an extra layer of complexity where the stakeholders demand anonymity in financial transactions for multiple reasons.
- The convenience of cash
Cash becomes the de facto mode of financial exchange in a less than mature ecosystem. For many, cash provides direct control over one’s money. It is a physical asset compared to digital money which cannot be accessed as easily as cash – a strong reason for a technologically resistant customer. With fewer dependencies and high anonymity, cash remains a preferred choice for business and personal transactions.
How to Enable India’s Evolving Digital Eco-System?
There is an increased awareness of the perceived benefits of going digital. But it is important to bring in changes that are both behavioral and infrastructural in nature. The cashless economy can be helped through the below-mentioned steps –
- Put the building blocks in place
The government is making concerted efforts to bring in some infrastructural changes through campaigns like digital India, providing power access to every village etc. It is also working on the basics with schemes like Pradhan Mantri Jan Dhana Yojana (PMJDY) providing every citizen with access to banking. These are the building blocks of an infrastructure that is ready to support a digital movement.
A series of studies by organizations such as CGAP and Gates Foundation have concluded that adoption of digital money is directly proportional to the availability of cash-in and cash-out points like ATMs. The ease of transition from cash to digital and then back to cash gives users the confidence to maintain their money in digital formats. Such confidence-building measures will fuel the rapid adoption of digital money.
- Reduce the cost
Presence of infrastructure like Aadhaar brings down the cost of sourcing and servicing low and moderate-income users as it removes people and paper from the process. Similarly, initiatives by NPCI in the form of various financial switches like IMPS, UPI, AEPS, Aadhaar Pay, Bharat QR etc. will play an instrumental role in reducing the cost of transactions.
Disruption in digital technology will help startups, business correspondents and cash-in prepaid issuers to convert cash to digital money by utilizing the other legs of the cash supply chain. This will be like the disruption that happened in the P2P domestic money transfer. Today, over INR 10,000 crores of monthly IMPS transactions are being driven by business correspondents and cash-in prepaid issuers.
- Improve customer experience
Lack of consumer comfort due to little digital payment acceptance across merchants and a perceived absence of consumer protection stops customers from adopting digital money. Improved customer experience can give them the confidence to turn their cash into digital money.
Such a behavioral change can come in through the development of new use cases. This can harness a sense of consumer safety and convenience. For example, India Stack is a set of APIs that is helping governments, businesses and developers to utilize their infrastructure and initiate a presence-less, paper-less and cashless service delivery. Domestic money transfer services providers are enabling cash-to-digital transition by leveraging the conversion data towards digital lending for customers. Leveraging cash-to-digital conversion data will push the creation of many miniaturized products in the payments, credit and insurance domains. This will further disrupt the adoption of digital money among low and moderate-income customers.
- Increase process efficiency
A critical step in the widespread adoption of digital money is an improved process efficiency enabling fast movement of cash. When the digital medium enables fast and accurate movement of money, it helps convert cash to digital. Higher levels of speed and efficiency will ensure that the cash disappears and remains largely digital. Open access to the above-mentioned public infrastructure will fuel innovation leading to improved products and processes. The regulators and policymakers should actively engage with these players and push them to innovate further and address the other legs of the cash supply chain and convert much more cash into digital formats.
Today, only 6% Indian merchants accept digital payments and roughly 10% consumers used a debit card last year. 96% of the Indian money is still in the form of cash and India has a hard task ahead to convert this into digital money. However, we are steadily moving towards a digitally connected environment. Sustained government initiatives have led to the creation of more than 300 million Jan Dhana accounts, 1.1 billion Aadhaar accounts, 650 million phone connections and have rendered 450 million Indians with internet access.
Clearly, the stage is set for India’s transition into a digital, cashless and fluid economy. The need of the hour is to bank on the available resources, thrive on innovation and build the infrastructure that can fuel the next stage of growth.
About The Author: This guest post has been contributed by Abhishek Sinha, Co-founder & CEO at Eko India Financial Services.
Eko runs a prepaid wallet for the low and moderate-income customers in India more popularly referred to as the prepaid segment or the sachet segment. Eko’s wallet gets funded by cash unlike credit/debit card or online banking