Cashless Economy in India?

The economic shock posed by demonetization, which purged 86% of the currency (by value) in circulation lead to a talk about cashless economy in India. A cashless economy is one in which all the transactions are done using cards or digital means. The circulation of physical currency is minimal.

The move to eradicate 500 rupee and 1,000-rupee notes, representing 86 percent of currency in circulation, would also force millions of cash-dependent Indians to use more online payments and bank accounts. Problem is that India remains one of the most cash-dependent countries in the world. Just over half of the nation’s adults have bank accounts, a hurdle to using digital payments. Roughly, 98 percent of all transactions are in cash, with 11 percent of consumers using a debit card in 2015, while most retailers do not accept cards.

How do you build up acceptance?

Most of the Indians depend on cash because of few good reasons. Cash transaction is instantaneous; do not have to wait for any approval for transaction, no other changes other than the value of transaction is applicable, no hassles of follow-up, the transaction between two strangers are safe.

There are only 14.4 lakh digital acceptance locations for all the Indians. How these all have to work together on acceptance and build the acceptance infrastructure in locations across India. Of course, the waiver of charges will help government to promote the digital transactions, but eventually the banks and other financial institutions will move to government to stop the wavier of service charges on electronic transactions, because they need to generate the income out of the infrastructure they have created.

The cost of setting up a typical POS machine varies from between Rs 4,000 and Rs 8,000. However, with more low-cost options coming to market that require only a QR code and a sticker, more merchants are likely to adopt alternative, cheaper, payment methods, experts hope. However, there are barriers to low-cost options as well. That is because a large number of digital payment options available on the market require a smartphone with internet connectivity mostly 3G speed. Currently, India's smart phone penetration is only about 250 million, meaning the vast majority of the population does not own a smartphone and will find it difficult to jump on these digital wallets instantly.

Cyber crime is a clear and present danger.

 Does India have the infrastructure to prevent cyber-attacks? When we are continuously talking about moving to a cashless society, Cyber security is clear and present danger. It is here to stay and is getting much more severe and organized. The lack of proper cyber security framework is a big constraint. Without proper digital security, we cannot have a sustained digital economy. Financial institutions are investing very heavily in this whole space. They claimed to have moved to very high encryption technology at the physical point of sale.

However, how safe they are?

In July 2016, state-run Union Bank of India Ltd said one of the bank's offshore accounts was breached in a cyber-attack. Axis Bank recently informed the Reserve Bank of India  that it had experienced a cyber-attack, while the State Bank of India said it was re-issuing over 600,000 debit cards because of a potential security breach. A survey on fraud in the financial sector by Assocham and PwC found these caused $20 billion in direct losses annually. The RBI has said the number, frequency, and impact of cyber-attacks have increased manifold in the past few years.

The cost of poor internet security measures, whether at the consumer-end or the point of transaction can be significant, with money stolen from online bank accounts and personal identifiable information used to commit further fraud. The risk is significant in this respect and the cost of poor security measures can be vast.

Electronic banking cost

Digital banking is undoubtedly the greatest retail banking innovation of the past 20 years. As consumers we consider a product or service to be free if we don’t get charged at the point of use. However, just because we do not get charged every time we log on to our internet banking accounts it doesn’t mean it is free.

Most of the electronic banking financial companies do not have those rigid fee structures and the hardly customers know it. As is true with most 'good deals', the news is spreading quickly about true online banks and as more and more customers realize that banking online is about as safe as off line banking, they are checking them out.

Banks use their electronic platforms to ‘cost shift’ to the consumer. This occurs when an individual or group underpays for one service and this results in another individual or group overpaying for a different service, hence shifting the true cost of service a to users of other service . A substantial cost shift occurs due to the expense of the online banking infrastructure. These are costly to implement and manage and the consumer pays for these in overdraft charges and or current account fees.

Electronic banking future in India

It is very doubtful that demonetization will lead to any meaningful financial inclusion. It does seem a little tacked on; Government is trying to find more and more uses for demonetization than may have originally been intended, only to justify the chaos created by the demonetization announcement. 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. However, the latest pitch, for a move that reportedly has seen people die, is that it moves people towards a cashless economy.

Most people are using digital payments, as a temporary measure and an alternative to overcome an abnormal situation. They are likely to revert to cash because of the same reasons for which they had not signed up or used these until now; Primarily because of charges and fear of surveillance and disclosure of actual transactions.