Market and State are principal agent of development. The welfare prone Indian state is now promoting the digital financial inclusion and cashlite economy.The demonetization narrative and data has been diverted towards digital and cashlite economy. The state appears to have vision of going cashless, notably like South Korea, Denmark, Sweden, and Norway. The cashless economy is an utopia but cashlite economy will happen till 2050. The digital ecosystem in India is demonstrated in the diagram below (Thanks Microsave) :
The issues in move towards cash-lite economy has been discussed in detail here -:
1. Policy Level: RBI has drafted policies (in its Payment System Draft Vision Document) to accelerate the shift towards electronic transactions. This policy will require an integration with National e Governance and Digital India plan for having a significant outreach and affect. The 'Committee on Digital Payments', headed by Ratan P Watal deployed by Ministry of Finance has already delivered report on digital payments. They have suggested fiscal incentives to promote digital transactions and a separate regulator to deal with issues concerning payment. Payments and Settlement Act, 2007 will need revision under fast changing digital ecosystem. Unified Payment Interface (UPI) acting as gamechanger has enabled all bank account holders to send and receive money from their smartphones without the need to enter bank account information or net banking userid/ password. RuPay has gained more than 1/3rd market share in total cards outstanding and 18% share in terms of volume of debit card transactions. RuPay is pioneering step as it has lower integration fee with banks and reduce the outflow of precious forex. There is need for incentivizing and strategizing the consumers to use digital accounts. Digidhan is an initiative for promotion of digital payments with lucky draws for consumer and business entity. Beneficiary of government user will receive DBT, scholarship, pension, social transfers and price subsidies from the state as well as central government.
2. Internet Connectivity: The first question to be asked by marketers on digital India: Is the quality of Internet connectivity good enough to go for consumption online? Current internet penetration in India is 34.8 % of the total population. (source). Connectivity issues and the power scenario in the country often impact transactions in India. The Cost, Speed and Reach are three major factors influencing spread to tier 2 and 3 cities in India. The introduction of 4G in the Indian markets is expected to be the next game changer but the prices of broadband connections as well as data charges for 3G/4G are quite high. Unless 3G/4G comes at par with 2G rates, one can't expect digital initiatives like these scaling up. Also, the failure of digital transactions is highest with 2G connectivity. With improvements in connectivity and reduction in cost, the market is set to explode with innovation.
3. Role of Banks: 24*7 and 365 days banking will come through the change in financial services in India. Promotion of (e-KYC) information previously captured during enrolment for Aadhaar, and available electronically to banks or enrolling institutions will reduce a lot of paperwork and time for the banks. A waiver on debit card fees having no credit risk must be promoted among customers. Instead of Surcharge fees and Convenience fees, promotional discount and incentive on current account with some interests will promote people to move towards digital footprint. The presence of multiple players and increase in e-commerce volumes has helped rationalize payment gateway charges to 2.5-3.0% that used to hover around 4-7%. Saral Mukherjee on Livemint has correctly argued : Benchmark for the merchant discount rate (MDR) for debit cards should be the NEFT/RTGS/IMPS fees rather than credit card fees. If the IMPS charge for transferring up to Rs1 lakh is Rs5, why should debit card use cost 1% of transaction value? Card-based transactions also leave an audit trail. Since MDR on debit cards is a cap and not a floor, banks could have proactively reduced MDR to spur adoption.
4. Role of Market: The old existing business models for the merchants must be molded such that digital transaction will reduce their time and cost of conducting business. The move to cashless transaction can originate from the retail consumer but needs to involve wholesalers, distributors and manufacturers in the supply chain. E-commerce firms are doing 70% of business through cash on delivery in India. Cash transaction increases another level of risk to the supply chain in the form of cash handling and higher rates of return of products. There is need to have push for digital payment infrastructure. With easier availability of capital through online lending will be a catalyst for MFIs to digital payments, both as a way to repay the loan, and accept consumer money. The future of rural banking and microfinance is sachet sized cashless transactions! This will reduce costs, minimize ticket sizes and volumes will go up!
5. Last Mile Connectivity:The network of Banking Correspondent agents will be utilized in the cash-lite economy. Agents are working on low profitability due to the low levels of transactions and high operational expenditure. Agent dormancy, or inability to deliver service, has a corrosive effect on trust, which is the bedrock for any system of digital financial services. Any initiative in digital services must pay attention to the business size and frequency that will come through use of micro ATMs, mobile money and mPOS terminals. There is a report by microsave on long road ahead for digital economy for all. The agent must be well prepared to handle behavioural traits like habit of using cash with compelling value proposition, offers and anti-fraud procedures in explaining the digital services to the rural customer.
6. Consumer Protection: More secured online payment systems is the primary concern of the consumer. The failure rates of transfer/payment, grievance settlement, fraud management, integration support and lead time are the evolving areas required for consumer protection in digital economy. Ease of use, honest pricing, individual data protection and cyber security are all required for customized end product and fintech providers will have chance for innovative solution. The financial service providers must be transparent in process of customer recourse, complaint management and dispute resolution.
7. Digital Financial literacy: Digital financial literacy program needs push from government in creating awareness and customer protection. The conception of financial literacy is packed with stereotypes of the poor as ignorant and in need of moral lessons on savings, consumption and credit. The attention must be paid for entertainment and engagement rather than learning module in design of mobile app, advertising and training material. There is need of persona or mascot for digital product that can target the early adopters.
8. Convergence: A digital ecosystem will prosper with the amalgamating schemes and campaigns. According to the EY report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS.There is 12.5% excise duty and 4% special excise duty on swipe machine imported from two manufacturers--Ingenico and Verifone. Manufacturing of Swipe machine must be linked with Make in India campaign. This can be done by promoting India an electronics manufacturing hub. This is what economist Atul Kohli called state-directed development, not simply private sector expansion. There is need for integration with Smart City for piloting schemes such as online payments for home utilities (electricity, water, gas and taxes) and municipal taxes.
9. Role of Development Sector- The development sector is least prepared for the change with digital India. They need to tap into informal sector through pilot scheme and CSR activities. Example, a pilot can be done by altering the flow of wage accounts in the informal sector from cash to digital through community mobilization and focusing on migrant workers. NGO as partner can increase outreach and capacity building of SHGs can be better done through their medium.
According to a 2014 study by Tufts University, The Cost Of Cash In India, cash operations cost the Reserve Bank of India (RBI) and commercial banks about Rs 21,000 crore annually. This shows India as cash intensive, even for a developing country. Internet usage and penetrations, smartphone penetration, e-commerce growth, GST implementation, new banking licenses, tax reforms and the evolving cashless payments landscape will take India towards cash-lite economy. Given the evolutionary stage of the digital market, both old and new business will be bound to make mistakes and business models are likely to evolve. The future lies in identifying business models and incentives for transitioning merchants and consumers to go digital.
The issues in move towards cash-lite economy has been discussed in detail here -:
1. Policy Level: RBI has drafted policies (in its Payment System Draft Vision Document) to accelerate the shift towards electronic transactions. This policy will require an integration with National e Governance and Digital India plan for having a significant outreach and affect. The 'Committee on Digital Payments', headed by Ratan P Watal deployed by Ministry of Finance has already delivered report on digital payments. They have suggested fiscal incentives to promote digital transactions and a separate regulator to deal with issues concerning payment. Payments and Settlement Act, 2007 will need revision under fast changing digital ecosystem. Unified Payment Interface (UPI) acting as gamechanger has enabled all bank account holders to send and receive money from their smartphones without the need to enter bank account information or net banking userid/ password. RuPay has gained more than 1/3rd market share in total cards outstanding and 18% share in terms of volume of debit card transactions. RuPay is pioneering step as it has lower integration fee with banks and reduce the outflow of precious forex. There is need for incentivizing and strategizing the consumers to use digital accounts. Digidhan is an initiative for promotion of digital payments with lucky draws for consumer and business entity. Beneficiary of government user will receive DBT, scholarship, pension, social transfers and price subsidies from the state as well as central government.
2. Internet Connectivity: The first question to be asked by marketers on digital India: Is the quality of Internet connectivity good enough to go for consumption online? Current internet penetration in India is 34.8 % of the total population. (source). Connectivity issues and the power scenario in the country often impact transactions in India. The Cost, Speed and Reach are three major factors influencing spread to tier 2 and 3 cities in India. The introduction of 4G in the Indian markets is expected to be the next game changer but the prices of broadband connections as well as data charges for 3G/4G are quite high. Unless 3G/4G comes at par with 2G rates, one can't expect digital initiatives like these scaling up. Also, the failure of digital transactions is highest with 2G connectivity. With improvements in connectivity and reduction in cost, the market is set to explode with innovation.
3. Role of Banks: 24*7 and 365 days banking will come through the change in financial services in India. Promotion of (e-KYC) information previously captured during enrolment for Aadhaar, and available electronically to banks or enrolling institutions will reduce a lot of paperwork and time for the banks. A waiver on debit card fees having no credit risk must be promoted among customers. Instead of Surcharge fees and Convenience fees, promotional discount and incentive on current account with some interests will promote people to move towards digital footprint. The presence of multiple players and increase in e-commerce volumes has helped rationalize payment gateway charges to 2.5-3.0% that used to hover around 4-7%. Saral Mukherjee on Livemint has correctly argued : Benchmark for the merchant discount rate (MDR) for debit cards should be the NEFT/RTGS/IMPS fees rather than credit card fees. If the IMPS charge for transferring up to Rs1 lakh is Rs5, why should debit card use cost 1% of transaction value? Card-based transactions also leave an audit trail. Since MDR on debit cards is a cap and not a floor, banks could have proactively reduced MDR to spur adoption.
4. Role of Market: The old existing business models for the merchants must be molded such that digital transaction will reduce their time and cost of conducting business. The move to cashless transaction can originate from the retail consumer but needs to involve wholesalers, distributors and manufacturers in the supply chain. E-commerce firms are doing 70% of business through cash on delivery in India. Cash transaction increases another level of risk to the supply chain in the form of cash handling and higher rates of return of products. There is need to have push for digital payment infrastructure. With easier availability of capital through online lending will be a catalyst for MFIs to digital payments, both as a way to repay the loan, and accept consumer money. The future of rural banking and microfinance is sachet sized cashless transactions! This will reduce costs, minimize ticket sizes and volumes will go up!
5. Last Mile Connectivity:The network of Banking Correspondent agents will be utilized in the cash-lite economy. Agents are working on low profitability due to the low levels of transactions and high operational expenditure. Agent dormancy, or inability to deliver service, has a corrosive effect on trust, which is the bedrock for any system of digital financial services. Any initiative in digital services must pay attention to the business size and frequency that will come through use of micro ATMs, mobile money and mPOS terminals. There is a report by microsave on long road ahead for digital economy for all. The agent must be well prepared to handle behavioural traits like habit of using cash with compelling value proposition, offers and anti-fraud procedures in explaining the digital services to the rural customer.
6. Consumer Protection: More secured online payment systems is the primary concern of the consumer. The failure rates of transfer/payment, grievance settlement, fraud management, integration support and lead time are the evolving areas required for consumer protection in digital economy. Ease of use, honest pricing, individual data protection and cyber security are all required for customized end product and fintech providers will have chance for innovative solution. The financial service providers must be transparent in process of customer recourse, complaint management and dispute resolution.
7. Digital Financial literacy: Digital financial literacy program needs push from government in creating awareness and customer protection. The conception of financial literacy is packed with stereotypes of the poor as ignorant and in need of moral lessons on savings, consumption and credit. The attention must be paid for entertainment and engagement rather than learning module in design of mobile app, advertising and training material. There is need of persona or mascot for digital product that can target the early adopters.
8. Convergence: A digital ecosystem will prosper with the amalgamating schemes and campaigns. According to the EY report, penetration of POS terminals is only 693 per million of India’s population, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China and Russia, each of which has around 4000 terminals per million people. India’s POS landscape is characterized by a large skew in favor of urban locations-more than 70% of the POS terminals are installed in the top 15 cities contributing to over 75% of the total volumes at POS.There is 12.5% excise duty and 4% special excise duty on swipe machine imported from two manufacturers--Ingenico and Verifone. Manufacturing of Swipe machine must be linked with Make in India campaign. This can be done by promoting India an electronics manufacturing hub. This is what economist Atul Kohli called state-directed development, not simply private sector expansion. There is need for integration with Smart City for piloting schemes such as online payments for home utilities (electricity, water, gas and taxes) and municipal taxes.
9. Role of Development Sector- The development sector is least prepared for the change with digital India. They need to tap into informal sector through pilot scheme and CSR activities. Example, a pilot can be done by altering the flow of wage accounts in the informal sector from cash to digital through community mobilization and focusing on migrant workers. NGO as partner can increase outreach and capacity building of SHGs can be better done through their medium.
According to a 2014 study by Tufts University, The Cost Of Cash In India, cash operations cost the Reserve Bank of India (RBI) and commercial banks about Rs 21,000 crore annually. This shows India as cash intensive, even for a developing country. Internet usage and penetrations, smartphone penetration, e-commerce growth, GST implementation, new banking licenses, tax reforms and the evolving cashless payments landscape will take India towards cash-lite economy. Given the evolutionary stage of the digital market, both old and new business will be bound to make mistakes and business models are likely to evolve. The future lies in identifying business models and incentives for transitioning merchants and consumers to go digital.
