The Indian economy is witnessing nothing less than a revolution, as the country’s cash cover runs into thin air with critical reforms backed by the government and Reserve Bank of India (RBI) alike.
While ‘Digital India’ is being perceived by the whole nation as the government’s dream project, furthering the ‘Financial Inclusion’ agenda will play an instrumental role in accelerating the shift towards a cashless economy. With internet and mobile becoming the core elements of our lifestyle, there is a high degree of disruption already encroaching major areas of business and financial services will be one of the most vulnerable in the near future.
With the government implementing measures within a year and others within the next two years, the Indian economy which is all set to actively discourage cash payments beyond a threshold is now fiercely moving towards building a robust cashless ecosystem.
The recent notification issued by the government through a cabinet note to withdraw surcharge for online and card payment was one such move which was highly lauded by the industry at large. This was then followed by a concept paper which was released by the RBI on ‘Card Acceptance Infrastructure’. While the concept note brought in a fresh perspective to the industry on how to improve the country’s card based infrastructure, it also proposed some key reforms which clearly reflected that the RBI and the government were very much on the same page and are moving together to accomplish the grand ‘Digital India’ dream.
The note proposed to rationalise the Merchant Discount Rate (MDR) to encourage setting up of more point of sale terminals as use of plastic cards has gained traction for purchases of goods and services and set up a common fund to increase proliferation of such infrastructure which if implemented is being viewed as extremely encouraging by the players in the digital space.
The government has also suggested mandating payments beyond a prescribed threshold only in card/ digital mode; rationalisation of telecom service charges for digital financial transactions; promotion of mobile banking; and creation of necessary assurance mechanisms for quick resolution of fraudulent transactions and review the payments ecosystem in the country.
At the macro level too, paperless transactions through the internet, ATM, cards and mobile devices have surpassed paper-based ones for the year March ’15, reiterating the fact that Indians are transacting towards the digital structure.
However on the consumer side, the great divide still pertains and there is a huge scope for various measures to be implemented to incentivize digital transactions within the economy.
Bringing about the parity
Fundamentally, the true competition for digital money within the consumer world is ‘cash’. Though cash comes with risk attached, possibility of getting misused and amply promotes black money, it has its own competitive advantages of being universally acceptable, fungible and is inclusive in itself. Hence for digital money to compete in a cash heavy society, it is extremely critical that there is parity brought between the two structures.
Easy accessibility to e-payment instruments is another critical factor that needs to be addressed. The whole process of acquiring any e-payment instrument is cumbersome. Know your customer (KYC) norms therefore acts as a deterrent towards introducing more Indians into the formal financial fold vis-à-vis cash which is immediate, better and a more convenient option for the masses. Hence in order to make e-payments more accessible through prepaid instruments, either the KYC norms should be simplified or zero KYC needs to be introduced with restrictions only on cash withdrawals and forex transactions.
Also, it needs to be realized that the rift between the physical and digital eco-systems is almost irreplaceable considering the nature of cash, its powerful alignment to the centre, the RBI which issues it and the backing it receives from the government. Addressing this concern, setting up a digital money issuing or an e-currency infrastructure which would be at par with cash and regulated just like cash would be act as a trendsetter. This would gradually bring in the parity between money and currency with something that we may address as e-currency.
Digital Money ecosystem
The digital money ecosystem needs to be perceived as a part of the critical national infrastructure, thereby attributing national significance to the entire ecosystem. Hence whoever is a part of this ecosystem needs to be viewed differently so as to support and nurture the digital trend which is currently naïve in the industry.
While the e-payment industry continues to ensure that more and more Indians have access to e-payment instruments, there is no incentive for them to use their card in lieu of cash. In many other cases, there is no ‘point of payment’ infrastructure where these millions of instruments can be used.
The usage of digital money therefore needs to be endorsed through several measures. ‘Incentives to all’ would be a welcome approach to begin with, like an introduction of a rebate on expenses for transactions undertaken digitally, or a tax benefit to the end consumer among others. Even subsidizing the import duty levied on a POS terminal which actually forms a part of the digital infrastructure would indirectly benefit the system.
Doing away with the convenience fee charged for online utility bill payments would be another encouraging move towards going cashless. Payments companies are helping in the process of financial inclusion, but their business works on thin margins and longer gestation periods, hence they should be treated at par with other infrastructure development companies which require a relook into the tax issues of the segment.
A tax holiday of about 10-12 years to investors within the digital payments ecosystem will help the segment to gain more traction among potential investors enabling them to review the sector with a fresh perspective and with more preference.
Apart from promoting the usage of digital money, it is also important to disincentivize the usage of physical cash by altering the conventional usage pattern. This could be either done by levying a fee for physical cash transactions beyond a certain limit or imposing compliances for transacting digitally. Levying a charge on all cash transactions made by any mode beyond a set limit and using the pool to drive consumer awareness programs on the benefits of e-payments is something that can be considered. If the source of cash is charged, there will be fewer propensities from consumers to use it and will be encouraged to use the more efficient system of e-payments.
Korea is a classic example which adopted the digital cash practice rapidly. Within a span of approximately eight years the Korean economy moved from a mere 20% to being 80% digital. The system thrived on the government making it mandatory for every retailer to generate a receipt for any transaction conducted at POS irrespective of it being in physical or digital cash which was then diverted to a central system. There was also a limit set for cash transactions conducted which would be treated as exempt and anything beyond that was charged. Thus creating a structure motivating people to bring in more and more into the economy and creating more acceptances for digitisation is something that needs to be conceived for composing the right model.
The policies pertaining to the digital payments need to be unified at the macro level so that more and more things are aligned centrally such that a customer who undertakes a digital transaction is not restricted to any industry standardization. This in turn would not only help reduce duplication of efforts but also allocate a national recognition to the digital infrastructure thus attracting more takers to the digital model driving the digital India mandate.
National Awareness Campaign
Awareness operations for the digital infrastructure at a national scale, similar to the ‘Make in India’ or the ‘Swachh Bharat’ campaigns would mean to own the entire eco-system, thus promoting it as a key ‘national agenda’ and enabling its growth across categories, sectors and industries.
To further push for cash-less India, it will be critical that prepaid instrument issuance be brought under the financial inclusion targets of the banks and also incentivize them to accelerate the financial inclusion in the country. This would usher in universal acceptance thereby encrypting the digital model seamlessly with in the eco-system which can then be viewed as a huge game-changer for the entire economy.