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psa-cashless-fiThe Indian government recently demonetized the INR 500 and 1000 notes and announced plans to introduce new design notes in INR 500, 1000 and 2000 denomination. In the wake of this move – trending on Twitter as #CurrencySwitch among other hashtags – many people have been asking why India hasn’t taken this opportunity to go totally cashless.

Many Indians have been replying with statements like “Indians are illiterate” and “Indians are not tech savvy”.

This is a Public Service Announcement to Indians to stop going on the defensive on this subject.

Not just because literacy levels in India have improved considerably in recent times or because Indians are far more willing to try out new technologies.

But because going cashless is less about literacy or tech-savviness and more about hurdles related to business model and consumer behavior. Obstacles include high MDR cost, friction of making cashless payments, aversion to being tracked, fear of overspending, reluctance of banks to issue merchant accounts, and so on.

I’ve blogged about these challenges here and on Finextra  over the past few years. Here’s a quick recap, updated with recent developments following the announcement of #ExchangeSwitch on 8 November 2016.

#1. High MDR Cost

“Merchant Discount Rate” or MDR refers to the fees paid by merchants for being able to accept cashless payments. For credit cards, which are the most popular form of cashless payments in India, MDR is around 2%. For many categories of merchants, this is a prohibitively high cost e.g. khirana stores (India’s equivalent of mom-and-pop grocery stores) who work at around 5% gross margin. There are other forms of cashless payments such as mobile wallets, prepaid cards, and so on. While they may charge lower fees, they come with their own challenges related to friction, speed, concerns around shareholding pattern, etc.

#2. Friction

Online card payments are subject to two-factor authentication. While 2FA has the noble intent of increasing security, it makes the payment journey tortuous and causes very high levels of failed payments.

Offline – or instore – payments are subject to PIN. While friction in offline payments has reduced since the Chip+PIN regime was introduced last year, hooded POS terminals are few and far between. As a result, there’s no privacy while entering PIN.

Online or offline, even tech-savvy people have gone from card to COD payments.

#3. Aversion To Being Tracked

Every cashless payment involves a third-party apart from the consumer and merchant. This means every purchase made with a cashless method of payment is being tracked. Even if people have nothing to hide, they tend to get put off by spam when their purchase information – what, where, how much for did they buy – falls in the wrong hands.

#4. Fear of Overspending

Cash is tangible whereas cashless MOPs are intangible. It is widely perceived that credit / debits can lead to overspending. As Santosh Desai points out in Times of India,

It is easier… to spend money using a credit card, for the outflow seems more theoretical than it does when paying in cash. The difference between Rs 2,000 and Rs 20,000 is a slip of the pen in one case and a complex exercise involving withdrawing money from the bank, carrying it in one’s wallet and counting it (twice) before handing it over.

Overspending is not a concern in my 25+ years of using credit cards because I maintain a meticulous record of all charges I put on my credit card. However, that’s only me and I can appreciate why most people do believe card payments can lead to overspending.

#5. Reluctance of Banks to Issue Merchant Accounts

To accept card payments, merchants need a POS terminal, telephone connection and a basic knowledge of operating the PIN keypad. Most merchants I come across can handle all this. But they’re not enough. One major prerequisite of accepting card payments is a merchant account. For the uninitiated, this is a contract between a bank (“acquiring bank”) and a merchant. Because of their conservative risk management norms, banks have traditionally shied away from issuing merchant accounts to khirana stores, vegetable vendors, cabbies and other so-called “micro merchants”. As a result, many merchants from whom consumers make everyday purchases are unable to accept card payments even if they wish to despite #1 above. Going by post-#CurrencySwitch announcements from State Bank of India, India’s largest bank, this may change going forward but it’s still early days.

#6. Cash-Out Costs & Delays

Because of #5 above, taxi drivers are unable to accept card payments on their own. They do accept card-linked mobile wallet payments via their aggregator company e.g. Uber, Ola. If you thought this would push one big everyday expense category to cashless payment modes, you’d be mistaken. Because cab drivers are reluctant to accept cashless payments, which entail heavy Cash-Out costs and delays. As a cabbie once told me:

When customers pay by cash, I get the money immediately. However, when they pay by card, the money goes to the aggregator. It takes me anywhere from a week to a fortnight and a couple of fareless trips to the aggregator’s office to collect it. So, accepting electronic payments is not good for my business.

This problem has only escalated since #CurrencySwitch:

#7. Card on Delivery Limitations

Because of friction in online payments, I’d gone back to Cash on Delivery for online shopping. Then Amazon India and a couple of other ecommerce companies started offering Card on Delivery. With this payment mode, I can avoid paying online but still pay with my card when the consignment is delivered. I’d rate this as the most convenient method of payment for online shopping. It also saves the ecommerce company a load of trouble of handling cash. Given these two benefits, I’ve been expecting this win-win MOP to go mainstream. But that hasn’t happened.

It was only from this post-#CurrencySwitch article on Economic Times that I learned why:

Therefore, ecommerce companies that outsource deliveries to third-party logistics firms can’t offer Card on Delivery.


currency-in-circulationTo paraphrase Hamlet, there are more things that come in the way of going cashless than are taught in an engineering course.

India is not alone.

No country has gone cashless. 85% of world’s transactions happen in cash according to Business Insider. Currency in circulation in USA has actually risen according to The Wall Street Journal.

So let’s not put ourselves down about not going cashless. For a cashless – or even less-cash – regime to happen, many more things need to fall in place than just literacy and tech-savviness. My post How To Really Kill Cash provides a few pointers.

Jai Hind!

Ketharaman Swaminathan On November - 18 - 2016

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BFSI, CX, eCommerce, Retail, Uncategorized

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  • sketharaman

    UPDATE DATED 18-NOV-2016:

    http://qz.com/262595/why-germans-pay-cash-for-almost-everything/
    http://qz.com/262595

    “Roughly 80% of all transactions in Germany are conducted in cash.”

    #3 and #4 are main reasons why Germany is predominantly a cash economy.

  • sketharaman

    UPDATED DATED 18-NOV-2016:

    “America has the technology to go cashless, but nobody trusts it enough to use it”. #3 and #4 are other reasons why Americans use >50% cash despite having the ingenuity “that gave life to services like Apple Pay, Google Wallet, and Venmo”.

    http://www.businessinsider.in/America-has-the-technology-to-go-cashless-but-nobody-trusts-it-enough-to-use-it/articleshow/55481238.cms

  • sketharaman

    UPDATE DATED 19-NOV-2016:

    Excerpts from “Going Cashless: What’s Good for Banks May Not Be Best for You”
    Knowledge@Wharton
    http://knowledge.wharton.upenn.edu/article/going-cashless-whats-good-for-banks-may-not-be-best-for-you/

    “Indeed, consumers of all ages are actually seeking out more cash than in past years. According to the most recent ATM volume data from the Federal Reserve, in 2009 consumers withdrew $629 billion from ATMs, up nearly 3% from 2006.

    “Banks and credit card companies have a vested interest in convincing consumers to convert to going cashless. In 2011, credit card issuers reported $154.9 billion of revenue, according to the credit card advisory firm R.K. Hammer. A separate study from the same firm said that in 2011, fee income surpassed interest income for all issuers of cards (including credit, debit and prepaid cards).

    For banks, less consumer dependence on dollars and coins means greater potential to collect fee income… For financial institutions, these various payment innovations are a source of profit,” Guttentag says. “Cash is the least profitable [source of payment], and it’s a lot of hassle.”

  • sketharaman

    UPDATE DATED 27-NOV-2016:

    Well said @jessie_paul : ~100% uptime is also required in the half-dozen s/w systems involved in completing a digital payment transaction. Given that Internet connections break not infrequently even in the heart of Silicon Valley & that core banking, card management & other payment systems break down quite frequently everywhere, the dream of 100% uptime may never become reality. That’s why a mere reliance on tech will not achieve a cashless regime. IMO, what we need to reach there, at least in the short term, is a change in the digital payment operating model à la USA card payments (http://qwt.io/s_ketharaman/rFPG) & RBI’s recent specs for recurring payments (https://twitter.com/GTM360/status/791618231580655616). https://uploads.disquscdn.com/images/70f03625c9262624b341babd9e39cc8e040faaca0aebefc32514d8732357a48e.jpg

  • sketharaman

    UPDATE DATED 7 NOVEMBER 2017:

    Today is the first anniversary of de/remonetization announced last year in India.

    In Japan, according to Economist, “cash accounted for 62% of consumer transactions by value” (compared to 22% in Britain, 34% in America, 10% in South Korea and 50% in China.).

    Key reasons for slow migration from cash to cashless in Japan are: (1) Loss of privacy with digital payments (2) Too many digital payments causing confusion for consumer (3) Fragmented digital payment market imposes costs for retailers and consumers alike.

    I’m not sure about #1 but #2 and #3 are equally well impediments for #CashlessIndia.

    https://www.economist.com/news/finance-and-economics/21730925-fragmented-market-imposes-costs-retailers-and-consumers-alike-japan

  • sketharaman

    UPDATE DATED 20 NOVEMBER 2017:

    If you feel nervous without carrying some cash around, you’re not alone.

    According to a joint survey conducted by Cardtronics and The Financial Brand, “Cashless society (is) contrary to the will of the people”.

    https://thefinancialbrand.com/68123/cash-digital-payments/

  • sketharaman

    UPDATE DATED 28 NOVEMBER 2017:

    As a digital payments professional, I may have a strong vested interest in the world going cashless but, personally, I still don’t see any reason to get defensive about cash.

    =====

    In Europe, cash still dominates at the POS

    Cash still dominates at the point of sale in Europe, accounting for more than three quarters of all in store transactions in the euro area last year, according to an ECB study. Despite the hype surrounding contactless cards and mobile wallets, 79% of transactions at the point of sale were carried out using cash last year, amounting to 54% of the total value of payments. In contrast, cards were used for just 19% of transactions and made up 39% of the value of payments.

    https://www.finextra.com/newsarticle/31376/in-europe-cash-still-dominates-at-the-pos

    =====

    This just shows that cash vs. cashless has very little to do with literacy or tech-savviness.

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