The inability of payment systems to penetrate the country has resulted in a cash-driven economy with less than 5 percent of all payments occurring electronically, according to the National Payment Council of India.
By Kumar Karpe
A cashless economy encompasses the use of electronic payment systems to curb the flow of black money and revenue leakage. A Capgemini World Payment Report in 2015 states that global non-cash volumes reached a whopping 357.9 billion transactions in 2013, stabilising at 7.6 percent. While most global economies are migrating towards cashless transactions, India continues to lag far behind. The country presents ubiquitous complexities when it comes to cashless penetration, which has made it challenging to adopt. In most countries, cashless transactions have replaced existing financial infrastructure, but this has not yet materialised in India. Instead, mobile Internet networks have managed to penetrate into far more areas than banks.
From village banking infrastructure or distribution of government-enabled benefits, India’s existing payment systems are unable to comprehensively meet the needs of the population. The inability of payment systems to penetrate the country has resulted in a cash-driven economy with less than 5 percent of all payments occurring electronically, according to the National Payment Council of India. In fact, India is the fourth biggest cash user in the world. But cash-only payments have excluded millions of rural Indians from the country’s incumbent financial infrastructure. The only way to channel this last-mile gap is through the espousal of electronic and mobile payment systems – following a trend of cashless transactions increasingly adopted worldwide.
Cashless Transactions Reducing Risk and Cost of Cash Management
Cashless transactions reduce the cost and risk associated with cash management. A majority of the operating cost of a bank is from managing their retail cash business. For instance, if a person goes to a bank counter to make a cash deposit, then the bank encounters costs like cash counter employees, cash-handling branch support staff and branch infrastructure.
India is a vast country, which means that the Reserve Bank of India (RBI) has to disburse cash to far-flung locations every day. Banks spend enormous sums of money maintaining ATM networks countrywide, while cheques and cash remain major modes of payments. Maintaining a cheque clearing network is a highly labour intensive task and expensive when compared to cashless infrastructure. Moreover, the costs associated with money laundering, robberies and counterfeit money is staggeringly high. Adopting cashless payment models will eliminate these unprecedented costs and will funnel precious resources towards intended recipients. On top of it, each cash withdrawal from the ATM costs anywhere between Rs. 14- 20 (without the cost of 24 hour security guard). As we can see its certainly not cheap.
While banks have been issuing greater numbers of debit cards to promote cashless transactions for reducing the cost of cash management, there remains a clear gap between issuance and usage at POS outlets. The issuance of debit cards registered a sturdy growth of 64 percent between October 2013 and October 2015. During this period, ATM growth surged by 43 percent, but POS machines only increased by 28 percent. The use of debit cards at POS outlets is still low in comparison to ATM’s. With the right education, people need to understand that their debit cards are far more than ATM withdrawal cards to derive maximum value from them.
Sheer numbers and the gap indicate that catch up will not help, while challenging, there appears to be a ray of hope for cashless transactions thanks to increasing mobile Internet penetration in remote parts of India. The number of mobile Internet users is expected to be 371 million by the end of June 2016, according to a ‘Mobile Internet in India 2015’ report released by the IMRB International and the Internet and Mobile Association of India. RBI data indicates that the transaction volume of mobile payments increased by nearly 87 percent between October 2011 and October 2014. This is a huge impetus because it brings a majority of the cash-driven population under the cashless umbrella, reducing friction in the economy and stemming the flow of black money. Cashless mobile transactions will shepherd more people through the system, which will boost financial inclusion. If implemented well, a majority of the rural population will soon rely only on mobile payments for their day-to-day activities.
Mobile Superwallets Curb Revenue Leakage And Channel Cashless Economies
India is a large consumer market with huge numbers of cash-based transactions still taking place. Most payments are either undertaken on a person-to-person or person-to-merchant basis. Large transaction volumes and burgeoning mobile penetration presents an opportunity for mobile super wallets to become an intrinsic part of the payments landscape in India.
While mobile wallets are being increasingly accepted in the country, there are a growing number of challenges that remain unresolved in most parts. For instance, requirement of bank accounts for wallet funding, wallet validity, closed acceptance network and restrictive usage are challenges that continue to plague India’s mobile wallet industry. These challenges must be overcome for the economy to seamlessly adopt cashless mobile transactions.
The acceptance network remains challenging because people are unwilling to send and receive money via mobiles. Nearly 57 percent of consumers cite security as a challenge for rejecting mobile payments and wallets. Some mobile wallets are not compatible with lower end handsets, which are used by a large section of Indians. RBI understands these security fears and thus insists on 2FA for all card transactions. Believe you me, there has been a steady increase in consumer confidence with the advent of this 2FA which has helped many industries to now go cashless.
Banks are now equipping themselves with Fintech companies to offer seamless payments using simple interfaces like phone numbers and emails. Mobile super wallets using smartphones will potentially eliminate the need for a physical POS machine, reducing revenue leakage and channeling cashless economies. With a virtual POS feature enabling merchants and customers to pay for items on secure systems, these mobile super wallets are creating an exciting opportunity to pave the way for seamless cashless transactions. Through these platforms, the popular cash-on-delivery feature in India can be converted into a virtual POS system with a COD assurance and other benefits for exchanges and returns. While the west has seen tremendous success by adopting mobile wallets, India needs to find its own path using these innovative payment tools for cashless transactions.
To sum it up, digital super wallets are expected to transform the face of the Indian economy, but immense groundwork needs to be undertaken to reduce cash-based transactions. India, has a vast potential for payments industry, a visible movement can be seen with the introduction of numerous payment innovations that are carving a clear path for financial inclusion through cashless opportunities.
The author is CEO, TechProcess Payment Services Ltd