PSA: Don’t Get Defensive About Not Going Cashless

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.

Forfeit INR 50 Cashback vs. Keep my credit card on file w/ a virtually-Chinese company PayTM. Choice is clear. #CurrencySwitch pic.twitter.com/rgAhUk7hrx

— GTM360 (@GTM360) November 14, 2016

#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,

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