A survey of more than 1,000 merchants has found that India’s low use of digital payments is not due to inadequate availability of options but because of low demand due to factors such as “a perceived lack [of] customers wanting to pay digitally, and concerns that records of mobile payments might increase tax liability”.
Despite efforts to propel adoption of digital payments, such as the creation of India Stack, which uses Aadhaar to make transactions cheaper and efficient, and a government-supported unified payment interface (UPI), the “the cash-to-GDP ratio was already back to pre-demonetisation levels by May 2018,” the March 2019 study noted.
Conducted by the University of California, the study focused on digital adoption by small-scale fixed store merchants in Jaipur, Rajasthan. It surveyed 1,003 fixed store merchants (“businesses conducting enterprise activities outside the household but within permanent structures”) in August-September 2017, following a census listing that identified 6,011 households and enterprises in Jaipur. It did not include street vendors, home-based business, and service providers.
Catalyst, an initiative funded by United States Agency for International Development under the mSTAR or Mobile Solutions Technical Assistance and Research programme to increase adoption of digital payments in India, collected the data.
Advocates of digital payments say they provide more security than cash, ensure transparency by making transactions traceable and hence taxable, and improve financial inclusion by spreading access to financial services, including savings accounts, especially among women. It was claimed as a key objective of the November 2016 demonetisation, as we explain below.
Although critics point out that a hasty move towards digitalisation can leave behind the already disadvantaged who are not digitally literate, policy-makers seem to concur on the benefits of digital payments for economic growth, and the RBI aims to increase the annual per capita digital transaction 10 times to 220 by March 2021.
The total volume of digital transactions increased 58.8% to 23.4 billion digital transactions between 2017-18 and 2018-19, noted a June 11, 2019, RBI report. Payment and settlement systems are at the “heart of a modern economy” and provide the infrastructure for channelising savings and investments for the entire economy, it added.
Merchants meet prerequisites, but reluctant
Of the 1,003 respondents, 582 said the top three reasons for not adopting digital payments were lack of customer demand (54.7%), lack of awareness (41.7%) and a fear of being cheated (41.7%).
The reasons for adoption, as per 421 respondents, were demonetisation (73.8%), customer demand (62.9%), and ease of use (37.2%).
Both adopters and non-adopters stated customer demand as a top reason. “This suggests that adopters may have (or at least believe they have) more customers who demand to pay digitally than non-adopters,” the study noted.
“Supply-side barriers” such as the costs of digital payment systems and related infrastructure were not listed as reasons for low adoption. Nearly 98.6% of respondents were found to be “feasible prospective digital payment users, in that they have the necessary documents, business income, and literacy so that they could satisfy all of the prerequisites for digital payment adoption if they so chose,” the study noted.
Nearly 54.2% of the sample merchants satisfied all requirements: 97% of merchants had a bank account, 79% had an internet-accessing device, 55% had internet access, just under 100% could afford the related usage fees, and 96% were technologically literate. Yet only 42% had adopted digital payments.
Among current digital payment users, “usage is low, with around 80% of their transactions with customers still being done in cash,” the report added.
Low adoption “may depend mainly on other demand-side factors” such as the price of adoption (the charges that apply), the study noted. Beliefs about customer demand to pay digitally, and increased tax liabilities associated with digital payments, also seem to play an important role in merchants’ decisions to adopt digital payments, the study added.
“There are huge differences in adoption across countries,” Ethan Ligon, associate professor at the University of California and a co-author of the study, told IndiaSpend. “In the US and Europe the dominant payment system is credit or debit cards which has already squeezed out cash for most retail transactions save for small-value in-person transactions.” This can be seen in the US where cash accounts for less than 10% of transactions by value, and in major cities it is now common for retailers not to accept cash at all.
In India, penetration of credit or debit cards remains fairly low, but the dangers of carrying cash are much lower than in some other low-income countries, he added. This means mobile money is not competing against credit or debit cards, as in the US or Europe. It is competing with cash.
Digital transactions in India have seen a near tenfold increase to 22 transactions per capita from 2013 to 2019, but remain fewer than in other BRICS countries: China (97), Brazil (149), Russia (179), South Africa (79), a May 2019 Reserve Bank of India (RBI) report said.
With the right measures, per capita transactions could grow by a factor of 10 in three years and reach 220 by March 2021, said the RBI report, which was penned by its Committee on Deepening of Digital Payments, led by Nandan Nilekani, the architect of the Unique Identity Authority of India (UIDAI, or Aadhaar).
Digital payments are more widespread in sub-Saharan Africa, with 97% of adults in Kenya making a digital payment in 2017 and 60% in South Africa, compared to 29% in India, IndiaSpend had reported on May 17, 2018. Up to 80% of Indians had a bank account, the same proportion that had a mobile phone, but financial inclusion levels were still among the world’s worst, we reported.
India’s density of ATMs per geographical area (69 ATMs per 1,000 sq km) is second only to China (100 ATMs) among the major emerging markets, but it is still not enough given India’s higher population density, Livemint reported on October 23, 2018.
Demonetisation impetus not enough
In November 2016, the government had announced demonetisation (withdrawal of high-value currency notes, amounting to 86% of currency by value). Its objectives were “quite substantially” met, economic affairs secretary Subhash Chandra Garg was reported to have said in the Economic Times on August 29, 2018.
The stated objectives, which changed over the following days, included promoting digital transactions, and checking black money, terror financing, and circulation of fake currency notes. More than 99% of the withdrawn Rs 500 and Rs 1,000 currency notes were returned, while Rs 11,000 crore were not.
Merchants in Jaipur reported an increase in the percentage of customers demanding to pay digitally after demonetisation,
“Followed by a decrease in demand in the subsequent period (though not all the way to pre-demonetisation levels),” said the study.
“The demonetisation temporarily reduced consumers' ability to use cash, and had India not remonetised (albeit with some hiccups), I'm confident that digital payment adoption would have been given a big boost,” Ethan Ligon, co-author of the study, told IndiaSpend. “The catch is that without remonetisation the government would also have been dealing a serious blow to the economy.”
A comparison between adopters and non-adopters shows that “before demonetisation, 6.65% of customers of the adopters and 2.88% of customers of the non-adopters demanded to pay digitally. Directly after demonetisation these percentages were 26.09% and 12.36%, and at the time of the survey they were 15.10% and 5.22%.”
“It is possible that post-demonetisation there was a surge in the use of digital payments because of the lack of cash, and that once cash supply was restored, people only use digital payments as a fallback option,” Reetika Khera, a development economist, told IndiaSpend. “Contrary to the rhetoric, there is a debate about [to] what extent we should be celebrating digital payments.”
Payment fraud enabled by digital payment systems has been reported in India, and the abstinence from digital payments could be attributed to “people's raw wisdom”, she added.
"Bank accounts simply aren’t that important to people who prefer to use cash in transactions, and who store wealth in physical assets such as land, grain, or gold, a preference for cash and physical assets makes sense if one doesn’t trust the financial sector, or the government, which plays such a large role in regulating it, as in India." - Ethan Ligon, co-author of the study
Basic literacy, and access to and ease of using the modern banking system, have a bearing on why digital payments are low, and India’s priority should be to ensure that people have easy access to a robust, reliable and friendly banking system, Khera added.
Goods and Services Tax (GST) an incentive?
Digital payments tend to “promote business transparency, as they aid in creating an official transaction record for enterprises”, the study noted. Nearly 74% of those who adopted digital payment methods said they had registered for the Goods and Services Tax (GST), while only 48% of non-adopters said they had.
Out of the subset of businesses who report they are mandated to register for GST,
78.4% were adopters and 60.63% non-adopters. This showed that “digital payment users are significantly more likely to report that they are already registered to pay GST,” the study added.
Ligon is skeptical about the influence of tradition in people’s reluctance in moving from cash to digital payment methods. The key difference “is that transactions involving cash are anonymous, and so less transparent,” said Ligon. “People who value this anonymity and lack of transparency will always have a reason to prefer cash.”
However, the top takeaway from the research is that digital payment adoption depends on the incentives provided by the tax system, not the characteristics or costs of the digital payment platform itself, added Ligon.
“When new technologies are introduced, the existing ones should be phased out slowly based on a careful, independent evaluation of whether new technological interventions are achieving the desired effect. However, that has not happened,” Narayanan of Azim Premji University said. People have been forced to migrate to new platforms without seeking their consent. For instance, the mapping of rural bank accounts with the Aadhaar Payment Bridge System was done without the consent of the pensioners or MGNREGS (rural jobs programme) workers concerned. Workers’ money was reportedly diverted to Airtel wallets and ICICI bank accounts, he said, adding, “Such experiences serve only to increase the misgivings of people.”
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