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Much newsprint has been expended on the Indian government’s demonetisation initiative, which scrapped Rs 500 and Rs 1,000 currency notes on 8 November 2016. Undeniably, it has caused hardship. But it is also true that demonetisation has created a unique window of opportunity to drive India’s digital payments agenda.
Reducing Dependence on Cash
It is well known that India has made many foundational investments to drive this agenda over the last 5-7 years. Over a billion biometric IDs – Aadhaar cards – have been issued. The Pradhan Mantri Jan Dhan Yojana (PMJDY) has led to the opening of 260 million new bank accounts. A rapid surge in smartphone penetration and availability of shared infrastructure, such as the Unified Payments Interface (UPI) and the ‘India Stack’, is creating the conditions to accelerate adoption of digital payment.
However, unseating cash from the daily lives of people will be far from easy. India has a cash-to-GDP ratio of 12 percent, far greater than the average of 4-5 percent in global economies.
And although the ‘cost of cash’ to the Indian economy is now well-documented (estimated by some at 1.7 percent of GDP), research suggests that a large share of Indians still prefer cash – cash is still very much “king”.
So how do we build on the window created by the demonetisation experiment to drive digital payments? Here are five specific ideas:
1) Bringing About Behavioural Change
A bulk of the communication and messaging around digital payments seems to be focused on the general benefits of digital payments, not on its uses that people can relate to.
It will be important to focus on transactions that are pervasive (used by a large number of people), and repetitive (low value, high frequency), to create behavioural change on large scale.
Our analysis narrows the list to messaging around five key transactions – payments at kirana stores and hawkers, for public transport, at pharmacies, for remittances, and at PDS outlets – that account for more than 50 percent of all retail transactions in India.
2) Moving to a Cashless and ‘Cardless’ World
Card-based payments systems have inherent limitations which prevent adoption by merchants. These include merchant discount rates (which cut into the already razor-thin margins of small merchants), lengthy business registration documents, as well as the upfront costs of acquiring and setting up point-of-sale devices.
On the consumer end, the need to always carry your card, remember your PIN, and safety concerns limit adoption. However, the emergence of UPI and Aadhaar Pay are enabling digital payments to be done with just a phone or fingerprint based biometrics, at dramatically lower costs. This move to a cashless, but also a ‘cardless’ world, needs to be encouraged, by driving adoption of simple user-friendly interfaces for UPI (like BHIM) and Aadhaar Pay.
3) Digitising Income Flows
Current efforts to digitise the economy have largely focused on digitising outflows and payments. This overlooks the fact that a large number of Indians continue to receive their income in cash. In a recent study we conducted, approximately 80 percent of respondents reported earning in cash.
And those who earned in cash were 2.5 times less likely to spend digitally, compared to those who earned digitally. Hence, to ensure that people move to digital transactions in a sustained manner, it is imperative to digitise inflows and income as well.
The government’s direct benefit transfer (DBT) platform has familiarised the population with receiving payments digitally. Now, strategic stakeholders such as formal sector companies and government institutions must be pushed to digitise salary payments.
4) Building Trust in Digital Platforms
Financial and digital 'literacy' has been a major focus of financial inclusion campaigns: Informing people about the advantages and the channels available to access a bank and go digital. However, widespread reporting on data breaches and fraudulent transactions has led to limited confidence in using mobile phones or cards for payments. We believe that the narrative of the financial inclusion campaigns has to move from 'literacy' to building trust.
Our recent work shows that regular and positive communication with users is the key driver of digital payment adoption. This can be done by providing multiple proofs of transactions (messages, receipts, etc.), regular reminders of payment schedules and offers.
In addition, users prefer a human interface for on-boarding and grievance redressal (either on helpline numbers, or in person). These small measures can go a long way in instilling trust amongst users, and promote the frequency of digital payments.
5) Providing Security Similar to Cash Savings
While payments act as an important pathway to going digital, it is now time to go beyond, to other products, if we are serious about sustainable adoption of the digital route. Product innovation in user-friendly digitally delivered savings, credit, and insurance products is required.
Our recent work on understanding the financial health of low-income populations shows that people try to build reserves (through savings and asset creation), and cultivate a “receivable potential” (the ability to raise money in times of need).
Cash-based savings and borrowing not only provide security, but also help in building social networks and trust within a community – a “social transaction history”. This can be tapped into during times of need. If we expect people to adopt digital payments at a large scale, we will have to mimic and replicate some of these unique benefits in formal products.
For example, leveraging digital data trails – mobile phone records, remittances and social media footprints – to create a “digital transaction history” can be used to provide credit and insurance products. The room for product innovation is immense.
Demonetisation has made “digital” a household term. But going from awareness to adoption will require a concerted effort to push home the advantage.
(Varad Pande and Nadeem Ahmed Khan are Partner and Senior Consultant respectively at Dalberg, a global strategic advisory firm focused on social impact and inclusion. They can be reached @DalbergTweet. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
Also Read: Who are the Biggest Beneficiaries of Cashless India?
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