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Assessment of the progress of digitisation from cash to electronic

The digital revolution is taking the world by storm and no other area has witnessed such metamorphosis as payment and settlement systems, resulting in a myriad of digital options for the common man. Consumers now have a range of options to choose from when selecting a payment method to complete a transaction. They make this selection based on the value they attribute to a payment method in a certain situation as each payment mode has its own use and purpose. In India, like in many parts of the world, cash is the well-established and widely used payment instrument. It is, however, reassuring that non-cash payments, especially those using electronic or digital modes are rapidly increasing.

Measure of Cash

While there is no accurate estimate of the cash payments, two key indicators, viz., (a) the value of Currency in Circulation (CIC) versus Gross Domestic Product (GDP); and (b) the value of ATM withdrawals that take place across the country, can be used for this purpose.

  • Currency in Circulation : The amount of CIC is related to the use of cash as a payment instrument since one of the major forces of demand for currency is its use for making payments. The CIC across the country increased at a Compounded Annual Growth Rate (CAGR) of 10.2% over the past 5 years, i.e., between the financial years (FY) 2014-15 and 2018-19. It is assumed that having high CIC relative to GDP indicates that cash is highly preferred as a payment instrument. Based on this assumption, India continues to have a strong bias for cash payments. Demonetisation and an active growth in GDP brought down the cash in circulation as a percentage of GDP to 8.70% in 2016-17. This increased to 10.70% in 2017-18 and to 11.2% in 2018-19 which, however, is less than the pre-demonetisation level of 12.1% in 2015-16. The rate of increase is lower indicating a perceptible shift away from cash. Over the past 5 years, the demand for high value denominated currency has outpaced low value denominated currency which may indicate that cash is increasingly used as a store of value and less for making payments.
  • Cash Withdrawals from ATMs : The cash withdrawals from ATMs increased over the past 5 years. India is next only to China in terms of the cash withdrawals from ATMs. However, the percentage of cash withdrawals to GDP has been constant in India at around 17%. In addition, with a CAGR of 9% in terms of volume and 10% in terms of value, the growth has been slow when compared to digital payment transactions (which grew at a CAGR of 61% and 19% in terms of volume and value, respectively), indicating a shift towards digitisation. Further, the infrastructure for cash withdrawal, i.e., ATMs has grown at a low pace (CAGR of 4% during the past 5 years)

Estimates of Cash Payments

Although many of the reports are only estimates, they do provide some indication of cash usage and digitisation in the country as also across the world. According to these estimates, cash still reigns supreme not only in India but in many other jurisdictions as well. Payments are, however, quickly expanding to include online payment channels.

According to a report by Credit Suisse Group AG, 72% of India’s consumer transactions take place in cash, double the rate as in China. According to the report, many merchants, especially in rural areas, remain unable or unwilling to accept digital transactions due to network connectivity issues and a reluctance to pay charges for what are often low-value transactions.

Digital Payment Enablers

  • Mobile Phones and Internet
  • Bank Accounts
  • Aadhaar
  • Debit and Credit Cards

Progress in Digitisation

Overall, the digital payments in the country have witnessed a CAGR of 61% and 19% in terms of volume and value, respectively over the past 5 years, demonstrating a steep shift towards digital payments..

Within the digital payments, retail electronic payments comprising credit transfers {NEFT, fast payments (IMPS and UPI)} and direct debits (ECS, NACH) have shown a rapid growth at a CAGR of 65% and 42% in terms of volume and value, respectively. Stored value cash issued in the form of wallets and prepaid cards demonstrated an increased adoption with a CAGR of 96% and 78% in terms of volume and value, respectively.

India has Immediate Payment Systems (IMPS) and Unified Payments Interface (UPI) as fast payments and the latter is driving the retail payments volume. In addition, with NEFT, which drives the retail payments value, operationalised on a 24x7x365 basis (with half-hourly settlements), India’s payment systems landscape is headed for substantial growth.

Bharat QR has grown as a lightweight, low cost method to bring merchants into the acceptance network. The deployment of QR codes is expected to increase substantially in the coming years which along with physical PoS terminals will facilitate the rapid adoption of digital payments.

Inhibitors of Digital payments

The factors inhibiting the digital push are connectivity issues, inadequate acceptance infrastructure, lack of familiarity with newer, alternative payment methods, delay in getting complaints resolved and security and privacy concerns.

Measures to improve digital payments

  • Reserve Bank has acknowledged the same and to address these issues has put in place systems like, consumer awareness programmes, ombudsman schemes, increasing the category of billers in Bharat Bill Pay, etc.
  • The Payments and Settlement Systems Vision 2019-2021 envisages empowering every citizen with an Exceptional (e) Payment Experience, and provide her access to a bouquet of options. To achieve this, the Reserve Bank has
    • made NEFT available 24x7 with effect from December 16, 2019;
    • mandated banks not to charge savings bank account customers for online transactions in the NEFT system with effect from January 2020;
    • permitted all authorised payment systems and instruments (non-bank PPIs, cards and UPI) for linking with National Electronic Toll Collection (NETC) FASTags; and
    • enabled processing of e-mandates for transactions through UPI. 

Conclusion

Both cash and non-cash payment instruments fulfil unique needs, and as long as these needs do not change, both types of payment instruments are required to meet the full spectrum of user’s needs.

Electronic payment methods are both at the service of and bound by India’s heterogeneous economic composition. Virtual payments are increasing in popularity, but the country’s ethnic and economic diversity render the shift toward digital payments geographically variable and certain regions and economic strata exhibit more openness to digitisation than others.

Cash still rules but is increasingly seen as a way to store value as an economic asset rather than to make payments. Speed, convenience and competition are shaping the future of payments.

Source : Reserve Bank of India



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