Will going cash-free really supercharge the Indian economy?
Anubhooti Gupta

Will going cash-free really supercharge the Indian economy?

It will need a high level of adoption and usage, and that isn’t happening any time soon.

By Ateesh Tankha

Published on :

An old joke about beer states that only the United States, famed for fortified mineral water like Budweiser, could ever have imposed Prohibition, while only Germany, with real lager, could ever have produced a Martin Luther to take on the Catholic Church. In India, we’ve seen unending trials and regulations over the last four years, beginning with demonetisation in 2016 and, more recently, a zero merchant discount rate, or MDR, diktat for UPI and Rupay debit cards in 2020.

It makes one wonder if the government’s fanatical intention to wean people off cash is the result of a serious commitment to equitable economic growth, or an addle-headed scheme that has resulted, as was recently discovered, in banks surreptitiously, and illegally, charging their clients for digital payment transactions.

It is more likely the latter because a strategy focused on the former demands a high level of adoption and usage. And such an objective is likely to fail for at least three reasons.

First among these is the lack of convenience, whose true north lies in both ubiquity and reliability. For years, acquiring banks tried to drive the proliferation of POS terminals to enable cashless spend, with limited success. It was felt that the various fees, or MDR, paid by the merchant were too high because they were not justified by a commensurate uptick in sales. The digital era brought in its wake a procession of players and technologies that sought to solve this problem through inexpensive POS consoles, personal mobile devices, and, most recently, quick response (QR) codes. On the back of UPI, it was tempting to believe that access to digital payments, anytime and anywhere, was finally within the realm of possibility.

But the plan was foiled by disincentivising the entire payment services network. Zero MDR ensured that there was absolutely no commercial reason to expand or maintain merchant acceptance or consumer adoption. Even where acceptance was enabled, the laws of physics — QR code tent-cards, for instance, have a finite life and need to be placed in adequate light to be read by a phone camera — and spotty network coverage undermined its use. For many small merchants and their consumers, cash is a less troublesome way of making a payment.

The second reason is security. Currency transactions — cash, cheque, card or digital — require a safe environment. The main drawback with cash, or so the government and the digital payments fraternity have gone to great lengths to explain, is theft. But petty theft is nowhere as damaging or widespread as digital fraud. The recent allegation of a data breach at Paytm Mall is only the latest instance of digital vulnerability impacting a large number of people simultaneously.

It is well known that many wallets and payment companies have inadequate fraud warning systems, which makes users wary of depending entirely on their services. Because bank accounts are not insured (unlike in developed countries), the threat of digital fraud — exacerbated by the garden variety of grand larceny that plagues banks today — takes on frightening proportions.

The last and most important reason has to do with value. Like the economy, digital payments make for a two-sided market. You need buyers and sellers, borrowers and lenders, service providers and users. And value must accrue to both sides in order to make it sustainable and acceptable. Globally, the volume of cashless payments has grown on the back of access to credit. Without this, consumption in India will never be augmented. As a result, digital payments will never be profitable for banks, valuable to consumers, or a significant driver of sales growth for merchants.

A recent paper by IIT Bombay recommended that the Reserve Bank of India defray the cost of zero MDR, because the costs associated with printing cash is in excess of Rs 5,000 crores. But the paper misses the point. It’s true that banks should be allowed to offset the costs of maintaining a digital payments network, or compensated accordingly. But until the government can enable ubiquity and security in digital payments, and increase credit throughput, the need to replace cash as reliable tender is unwarranted. In the interim, let banks and payment companies earn while they grow.

The vision of Mastercard, a global network, is “a world beyond cash”. This is understandable as its profits depend on it. But for the government of India, whose avowed aims are the secure transmission of direct subsidies and the curtailment of illegal transactions, the profit motive seems unreasonable. This single-minded aversion to cash, then, may lie in some deep-seated belief, impervious to fact. But such prejudices, akin to the one that championed Prohibition in America, may cause, in the words of Al Capone, “nothing but trouble.”

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