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Journey To Cashless: The Gains & the Pains

Or Should I say ‘Less Cash?’ ‘Less Cash’ sounds more reasonable and achievable. Our honorable Finance Minister also allured to it a few days ago. The semantics though does not matter for India, as we are staring at an economy which is 95% cash.

The first question that matters is ‘Why Cashless’ and the ‘Downside’ of ‘electronic/ digital’ payments’. Refer to the below table which highlights the key points.

Will India be better off in terms of expenses? Will consumers/ payment participants are better off? We need to dig deeper.

Cost of cash or Transaction fees?

  1.  Apparently for any layman, there does not seem to be any real cost of cash. We just need to exchange notes and complete a transaction. We don’t pay beyond the price. Yes, we have to pay some:
    1. Transaction fee for ATM usage (if one utilizes the free quota)
    2. Pay some bucks to travel to ATM (mostly it will be close/ walking distance to our office/ home)
    3.  Attach a value to time spent at ATM (but for a low per capita Gross Income country it does not translate to a very high number for a person on average)
  2. But we do pay indirectly through our taxes, service charges etc because the RBI & GOI faces a huge expenditure running into billions of Indian Rupees every year to manage the end to end cash management. So how do these figures look like?
    1. Printing of cash: For e.g. in FY1516 alone, banknotes supplied was 21.2 billion pieces costing RBI exchequer of 34.21 Billion INR
    2. Running cost of currency chests: There are 4075 currency chests in India spread across the country and run by RBI and by the different scheduled commercial banks e.g. SBI, IDBI etc. Their expected run cost annually is around 25.92 Billion INR
    3. ATM run cost: While there will be variation based on the actual ATM machine configuration, location etc, an average estimate puts the run cost for such ATMs at 121.68 Billion INR for the over 2 lakh ATMs in India
    4. Bank Teller cost: Every branch has to employ Teller specifically to handle cash. A back of the envelope calculation puts the yearly cost at nearly 100 Billion INR for the over 1 lakh branches that are in India. (Take this, out of 1600 commercial bank branches in Sweden (very high on cashless), nearly 900 no longer provides cash handling services and some have stopped providing cash services in branches.)
    5. Cash Transit cost:  This includes the cost borne by the logistics company which manages, transports, fills ATMs/ branches with currency. A study report (by Institute for Business in Global Context & The Fletcher School),  estimates this cost at 15 Billion INR per year
    6. Interest loss: Additionally there is a notional interest lost for ‘carrying cash’ stored in ATM, branches, chest. The same study report mentioned above, pegs the cost at a few billion INR
  3. Apparently then it seems, as a country we are spending annually somewhere between 300 – 320 Billion INR for purpose of cash.
  4. BUT for a consumer/ merchant, he does not see all of the above generally and what he sees is that he is either paying processing charges to the bank (for accepting cards) or he is paying card usage fee annually etc. While most consumers seems to be ok, merchants who has to pay per transaction fee, seems to be a little wary off accepting digital payments. This is especially true for small shops etc as for them, POS instrument investment and then per transaction fee does not sound so lucrative compared to cash. For same reason the GOI has been pushing for reduction of merchant fees to ensure at least higher adoption in the initial days.

Transparency vs. Privacy

  1. One of the biggest advantages of digital transactions is transparency or you may call easy identification of payee & beneficiary and the traceability of the transaction end to end, reduces the chances of tax evasion and minimizes chances of money laundering. Couple of statistics will amplify why it is so important for the government:
    1. In a 2010 report of World Bank, India stood 15th in shadow economy size (average of 22.4% of GDP) among developing countries
    2. A 2013 AT Kearney study on European countries highlights the direct correlation between the %age of cashless transactions (electronic payments) to size of the country shadow economy (%age of country GDP). It also refers to a research done by Prof. Schneider’s research, as per which, an increase of 10% of electronic payments annually for at least four consecutive years can shrink the size of the shadow economy up to 5%.
    3. As per a report from GFI (global financial integrity), India is among the top 5 exporters of illicit capital. Pls. note that this calculations ignores illicit transactions in cash (which is difficult to estimate)
    4. Only 3% of India filed taxes in Assessment year FY1415 (3.65 Crore among ~ 121 Crore population as per 2011 census)
    5. A study of Australia, which is very high on cashless, estimates that the impact of cash-in-hand economy (widespread among small enterprises) impacts the GST & business tax calculation (no/ under reporting) and the impact may be around $2.7 billion annually
    6. Even a study of Singapore payments ecosystem (Singapore has made significant progress towards cashless) shows that hawker centre, small shops, domestic helper salary, taxis, Household repair, Convenience stores, private tuition fees are the most cash prone areas for consumer payments. As a positive effect of demonetization, we are at least seeing our kirana stores acceptance of digital money thru Paytm/ Mobikwik etc have increased manifold.
  2. Same time, there are privacy concerns as well.
    1. In an article (computerweekly), co-founder & CEO of Swedish mobile startup iZettle quips “The most important thing for me is privacy…nothing is a secret any more, I hope from the bottom of my heart that there is always backup cash, even though I rarely use any”. We are sure, many of us, would also feel similarly
    2. A key cash management supervisor at the Bundesbank was quoted saying “Abolishing cash would hurt consumer sovereignty – the free choice of citizens about their payment instruments,” in an article by Telegraph, UK

Avoid cash loss due to break-in etc OR Inviting more trouble?

  1. It is obvious that less cash means much lesser bank branches break-ins, lesser chances of cash lost in transit (ATM / ATM van loots) etc. Recent demonetization exercise also quoted some unverified reports that house break-in at Pune decreased post demonetization! Swedish experience shows that annual bank robberies dropped from 51 to 5 (2012) within 10 years!!!
  2. On the flip side, Sweden saw electronic fraud doubled in span of 10 years. Even in India, we are seeing a significant increase of cyber fraud. For details, you can refer to our another article on Cyber frauds

Ease of transacting vs. High dependence on external systems

  1. While mobile payments, card payments has made the payment much more easy and better than carrying & counting notes every time, there is a flip side of the transaction success being defined by all the systems in the payment chain working properly. That would mean the communication network, payment processor network, bank network, POS network all working and it is not so easy. Post recent demonetization, digital payments have increased manifolds but we have seen quite a few instances of payment failures due to network failure (for e.g. in 2nd week of Nov, there were significant POS terminal failures!)
  2. There are rural areas where connectivity is a serious challenge? How to get them online? Even in a developed country like Sweden, there are internet network challenges in some of the remote corners/ villages.

Minimize impact of Fake currency notes vs. Sitting duck for organized electronic espionage & attacks?

  1. As per RBI 201516 data, nearly 6.33 lakh FICN (Fake Indian currency notes) were detected only in banking system. Obviously, the actual number of FICN in circulation will be several multiples. As per Indian Statistical Institute estimates, 250 out of every 10 lakh notes are fake and every year FICN worth INR 70 Crore is infused into the country every year. (Refer to our column on plastic currency for more details)
  2. According to NPCI, fraudulent transactions of 1.3 Crore INR across 19 Indian banks were reported, Bangladesh central bank reported recently of a massive fraud that led to its account of being swindled of more than $ 100 million. And there are many others incidents being reported every day! While no system is fool proof, it makes sense to first develop a very secured & robust infrastructure to minimize cyber attacks vulnerability and also at same time have intelligence & police forces trained adequately in cyber attack investigations.

A second question pops up as a corollary to the above discussion. How are other countries faring and what laws they have put in place to minimize cash transaction?

The following table provides a snapshot of some of the top successful countries in terms of ‘less cash’ usage in economy. The European, especially Nordic countries have done well and we can easily figure out that India has a long journey ahead. The ‘Share’ value is from the Mastercard report on cashless (except Denmark). The ‘%age of all transactions’ is from the ‘Cash Report 2016: Eurpoe’ by G4S.

Obviously the comparison with the Nordic or even likes of UK & France is not exactly an apple to apple. We need to look at likes of China & Brazil as well. Well, China ‘share’ of non-cash (Mastercard data) is at 55% and that of Brazil is at 57%, still significantly ahead of India at 32%.

A column by Bangkok Bank (China) pegs the non cash payments growth in China at 40% YoY, holding rapid urbanization and proliferation of choices in digital payments options as key catalyst. Also from an infrastructure perspective, the Chinese Government is pushing for more point of sale (POS) availability. Brazil, on the other hand, has one of the highest penetrations of ATMs globally but has challenges around the informal economy, consumer acceptance of digital payments especially for the lower income segments.

Now these problems look much familiar when discussing India as well. We have spoken of some it in our column on ‘cashless & financial inclusion’ .

That probably explains GOI focusing on a few initiatives:

  1. Encouraging greater acceptance of digital payments by incentivizing (Niti Aayog) digital payments, reducing card charges
  2. Rupay and Jan Dhan accounts to maximize ‘banking’ inclusion, availability of card even in villages & remote corners
  3. Encouraging more & more banks to expand POS availability across the country
  4. Focusing on non-smartphone, biometric driven (Aadhar) solutions for digital payments to allow wider acceptance
  5. Surely also, the demonetization had acted as a ‘shock’ therapy as well

Also it is good to note that ‘state of digital’ for India, which is a key need for tasting success in cashless journey,  has shown significant progress. India has been the 11th fastest country in terms of growth in DEI index (Digital Evolution Index) from 2008-2013 as per a study report by IBGC & The Fletcher school. China was #1 while Brazil was just a notch ahead at #10 in the same list.

The GOI also needs to act swiftly on cyber security norms (to boost consumer confidence, reduce digital fraud risks and as well give edge to our investigative agencies), network infrastructure (so that we don’t have POS, payment gateways not working due to overload), work majorly on consumer awareness & education (not only to preach cashless but also to educate on how to avoid falling prey to fraudsters). Additionally as experience of Singapore & Australia shows, that consumer facing small businesses are the most difficult to move towards cashless payments. Considering the vastness of our informal economy, this is where the GOI will have its task cut to not only increase awareness & incentivize adoption but also have strict implementation of provisions to penalize those trying to avoid taxes so as to attack one of the fundamental reasons for leaning towards cash for such payment transactions.


Image (Made from Microsoft clip arts)















China’s race to a cashless society, by CEO Bangkok Bank (China), 2016

AT Kearney: The Shadow Economy in Europe, 2013

Cash Report 2016, Europe, G4S

The Global Journey from Cash to Cashless: MasterCard, Sep 2013

The Cost of Cash in India, Institute for Business In The Global Context

Digital Planet, Readying for the rise of e-commerce, Exec Summary, Fletcher School

HBR: The Countries That Would Profit Most from a Cashless world, July 2016

Illicit Financial Flows from Developing Countries: 2003-12, GFI

RBI Annual report FY1516

World Bank, Policy Research Working Paper 5356, Shadow Economies of the World

KPMG, Singapore Payments Roadmap, August 2016


8 thoughts on “Journey To Cashless: The Gains & the Pains

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  2. chatirnate.com April 9, 2017 at 8:19 pm

    The move to cashless options has even led to a backlash in which some defend their right to pay with cash as a civil right, and politicians and central bankers must assure citizens that they will maintain their right to use their money as they please.

    • Randomwalks April 9, 2017 at 9:44 pm

      Absolutely right. Cash is legal tender and hence that right to transact should remain. This though is more of a concern for Nordic countries which are more than 90% cashless. For India , which is at single digit, it is a more of ‘less cash’ rather than ‘cash less’ journey!

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