Moving Towards A Cash Less Economy

Posted in Finance Articles, Total Reads: 601 , Published on 05 February 2016

What constitutes a Cashless Economy? An Economy in which flow of cash in non-existent and all transactions are done through Electronic channels such as debit or credit cards, electronic clearing, payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT), Real Time Gross Settlement in India (RTGS) or through other novel digital services like Bitcoin, M- wallets etc. can be termed as a cashless economy.

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A fundamental question that arises is why to go cashless when cash has been an effective medium of economic exchange all these years. This question can be answered by looking at the growth of Indian economy and the nature of cash flow within the economy. India currently has the largest cash economy in the world with over 75 % of all its domestic economic value being derived from cash or cash equivalents based transactions. The scale of such transactions makes it difficult to provide sound transmission mechanisms and becomes a cause of concern for regulators of the system. The system breaks down at bottom of the pyramid as cash flows don’t permeate to the lowest section in such a streamlined manner as is expected.

This is the reason for the sudden impetus from global economies in general and Asian economies in particular towards developing robust payment systems and strong digital payment services. The growth of Asian economies in the past 35-40 years has led to a shift in economic center of gravity of the world. A cash economy allows transmission leakages and accounting oversights leading to parallel economies operating under the same economic system. A cashless economy promises better accounting and apportionment so that value exchange becomes more efficient while facilitating more convenience in economic transactions. The cost of creating cash less systems is fraction of the cost of the cycle of printing, circulating, regulating and decommissioning paper currency.

There are already plethora of services like PayPal, Dwolla, Amazon, Google’s wallet, Apple wallet, Paytm wallet, Pay with a tweet etc. that are ready to take this world economic system towards a cashless future. A not so distant future where paper money will be nothing but a hazy memory in the mind of centenarians. But let us hold on for a moment. Before taking a jump into the future let’s analyze our present. Is the world really ready for a cashless economy? In order to find this answer, this article will focus on the current state and the future prospects of Cashless Economy in India which is the 3rd largest economy on the basis of Purchasing Power Parity (PPP).

India: Present Scenario

The finance minister in his budget speech talked about the idea of making India a cashless economy. However there are vital questions that needs to be answered before talking about the idea of as cashless economy. Are the people ready for this transition? Is their adequate infrastructure for this mammoth metamorphosis to take place? Without providing an answer to these questions we cannot hope to have hiccup free change.

As things stand today, India continues to be driven by cash. With a Cash to GDP ratio of 12% India is among the most cash intensive economies in the world, almost four times that of markets such as Brazil, Mexico and South Africa according to estimates by Master Card. Currently Less than 5% of the transaction take place electronically. A recent survey by A.T. Kearney regarding the consumer behavior at malls revealed that close to 90% transactions happened by cash.

However the scenario is not as gloomy as it sounds. With a population as big as that of India, percentages do not reveal the correct picture of a growing trend. Similar is the case with the cashless transactions.

Online Payment systems: Gaining Currency

21 million credit cards and 564 million debit cards in the market, can in no way be termed insignificant. While the preferred mode of transaction still remains cash for most of the people, the rise in the number of cards indicates that there is perceivable attitudinal shift. There has been a measurable reduction in the proclivity for cash transactions. With services like RTGS and NEFT people are finding it more convenient to handle their transactions online. Mobile payment system has further boosted this digital shift. Analysts expect mobile transactions to increase seven fold with increase in the number of smartphones in the market. Currently there are 40 million mobile banking users in India with a huge potential to grow further at a tremendous pace. Let us have a look at the number of transactions and transaction value through NEFT, RTGS and Mobile.

These figures reaffirm the fact that digital payments is gaining traction in the Indian ecosystem. Slowly but surely people have started accepting these modes of payment and the growth from here on will be at a blistering pace.

The growth of digital payment systems have been aided by a worldwide push towards achieving simple regulations and technological interventions. The technology push has provided a wide array of payment innovations: from the phenomenal growth of Bitcoin as a complete digital currency system on one end of the spectrum to services like m-pesa, allowing penetration of government systems in unknown territories on the other. The Indian economic system stands to gain a lot both in terms of better government presence in both diffusion as well as accounting of flow of monetary value in the country.

Future Prospects:

The ubiquitous role of technology in increasing financial efficiency and mitigating business risks is constantly going through a state of flux. The growth of effective payment and delivery mechanisms is being looked upon at both tactical levels and strategic platforms. The recent proclamation by G20 nations to cut international remittances charges from 10% to 5% shows the impetus provided at the level of the executive. The recent growth of companies trying to constitute an ecosystem of financial and digital services is where the next generation of more organic payment systems will come from. The crossover of technologies like Internet of things and predictive analytics is most financially hot area right now. Use of customer data to predict consumption patterns and to customize payment services to meet the exact need of the customer, be it through account based systems like m-wallets or through instrument based systems like smart cards is under beta stages for many financial companies, especially pro-technology banks.

In an Indian macro context, the new payment services will allow government to target its public welfare schemes better and to plug the leakages in public schemes. With Aadhaar, India has the largest bio-metric database of any country and schemes like Direct Benefit Transfers will integrate into the fold of a cash free aid delivery mechanism.

Another major issue that India faces is the hoarding of cash, particularly Black money leading to loss of currency velocity. The payment system will have a point to point accountability that will allow not just the tax authorities to reduce circumvention of tax procedures but individuals and companies will be able to manage its transactions better. This would require the current transactions costs which are amongst the highest in South Asia to drop significantly, mainly through technological interventions and sound services that create demand for greater liquidity in both financial and business markets.

All of this and much more can be achieved through digitization of the payment process. India may still be far off from the dream of realizing a cashless economy but it surely is headed towards it.

This article has been authored by Saurabh Pandey from XLRI Jamshedpur


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