5 reasons why India is not ready to give up cash

Post-demonetisation, Union minister of state for finance Arjun Ram Meghwal said India will soon be a cashless economy. While a cashless economy may be a spinoff of the demonetisation decision - ultimately, it is still a long way to go.

Lack of availability of cashless payments, like cards and other means, make up a miniscule percentage of the merchant network. This would mean smaller volumes of trading as long as cash is not readily available at banks and ATMs.

As long as lines before ATMs do not see a reduction, trading and business, at least for the smaller sector, would suffer. This is because over 95 per cent of all business transactions take place in cash.

India has one of the lowest card swiping machine numbers per capita, worldwide. Data indicates it has some 690-odd terminals per ten lakh people. Even among emerging economies this is very low, with China having some 4,000 terminals per ten lakh people and Brazil having almost 33,000 terminals per ten lakh population.

Moreover, most of these 690-odd terminals, over 70 per cent, are located across 14-15 cities in the country. Hence, over 75 per cent of cashless transactions are reported from these 15-odd cities. With such a low penetration of swiping terminals, the possibility of India becoming a cashless economy soon looks remote.

Why are there so few card-swiping terminals?

Basically it is the cost factor that acts as a deterrent. Setting up a card swiping terminal costs a trader between Rs 4,000 and Rs 8,000 today. The next factor is the consumer's preference for cash, that includes black money, although not always.

Huge swathes of employed professionals, artisans and traders deal in cash and all of them cannot be said to be participants in a black economy, although it looks like that and can technically be dubbed so.

It is a parallel cash economy that has shunned banks because of the technicalities involved in opening an account, personal reluctance, low penetration of banks and ATMs across the country (in a country of 130 crore, there are some 2.2 lakh ATMs, and that points to a huge discrepancy in the banking system itself).

Even governments, till the latest demonetisation scheme, have not been too keen to drive cashless payments on a large scale.

According to data available with Mastercard and Visa, some 14 lakh merchants across India accept cards. Only about 5 per cent of consumption expenditure is transacted on cards. In developed countries, the figure of cashless transaction goes up to between 50 to 60 per cent for personal expenditure volume.

Cheaper options available

More low-cost options are coming to the market that require only a QR code and a sticker for transaction. Given the lower setup costs, merchants are more likely to adopt these cheaper methods.

Mobile payment wallets like Paytm, MobiKwik and Oxigen can be an alternative, cheaper, secure option to go cashless. These wallets had a market size of about Rs 400 crore pre-demonetisation, which would only grow post the exercise.

Practical barriers exist

There are barriers to low-cost options too. Most of such payment options available in the market require a smartphone. India's smartphone number is around 25 crore. So a majority of cellphone users cannot instantly jump on these digital payment bandwagons.

Those braving the demonetisation exercise have seen a flurry of small traders joining the digital wallet platform. That the platforms have waived off their joining fees can be seen as an added incentive. And in case they can register huge volumes, they will be in a position to substantially reduce their user fees.

Another deterrent to a mass move to cashlessness is upgradation needed at the end of banks and payment gateways. As the currency ban was announced, cardholders across India complained of sporadic server outages and malfunctioning card swipe terminals.

Nobody has come forward to point to where the technical glitch lay, and that means tech support is not robust enough to support even the existing number of cards - some 26 crore credit cards and some 69.7 crore debit cards.

That the country suffered a massive debit card breach in October 2016 that ended up affecting 3.2 crore debit cards across several banks, only showed up the vulnerabilities of our banking networks.

Mobile wallets see record growth

In the past few days, mobile wallets have seen record sales. Paytm claims a 700 per cent jump in overall traffic and 1,000 per cent growth in the amount of money added to it. Other mobile wallet companies are seeing exponential growth too.

Move to cashless economy has to be a steady one

The move to digital economy is not a rapid exercise; it is more of a steady journey. It takes time to shift to digital platforms. Typically a period of three to four years with sustained government policies, pressure, upgradation of existing banking network security, increased penetration of ATMs, cards and sustained education of the masses coupled with popular incentives like low end user fees. As you upgrade your security, more people will keep joining the bandwagon.

Some experts are of the view that the government's demonetisation move will push more people and merchants to consider digital options. Besides, the government's initiative to scrutinise large cash transactions and demand PAN cards and IDs will keep on discouraging cash transactions.

Then the cellphone-savvy generation, which is more comfortable with a digital lifestyle, will also act as drivers of the change.

Also read: It's time Indians become disenchanted with cash