Paying The Digital Way
Akodara village in Gujarat's Sabarkantha district was barely inconvenienced when 500 and 1000 rupee notes were demonetized in November 2016. This is because in India's first digital village, most transactions of amounts ranging from Rs. 10 up to Rs. 5,000 happen through SMS, with the money going directly from the buyer's bank account to the seller's1.
This hamlet of 1,200 is a small yet a significant example of the digital revolution taking place in India. Digital payments - which refer to cashless payments in legal tender, executed via credit and debit cards, online fund transfer, mobile wallets and prepaid instruments - are a central figure in this revolution, where the government is surprisingly, the lead catalyst.
Over the past couple of years or so, the Indian authorities have gone into digital overdrive. First, the Jan Dhan Yojana added more than 250 million new bank accounts, which now directly receive wages and social security benefits, and being Aadhaar enabled, support mobile based payments via various mechanisms, such as wallet, UPI (Unified Payment Interface) and USSD.
When the government demonetized 86 percent of the currency in circulation overnight on 8th November 2016, one of its goals was to make the country a cashless economy. With cash sucked out of the system, digital transactions soared from 672 million in November 2016 to 958 million a month later2. IMPS transactions in March 2017 exceeded 67 million, well up from 26 million a year ago. Prepaid Instrument transactions also registered a huge increase, going from 72 million to 342 million in the same period3. Incidentally, the Finance Minister had set a target of 25 billion transactions through UPI, USSD, Aadhar Pay, IMPS and debit cards for the year 2017-184, which is now revised to 30 billion by December 20175.
Another game changing initiative is the introduction of the Unified Payments Interface, which is completely transforming a fragmented mobile payments landscape by enabling money to crisscross seamlessly, securely and instantly between bank accounts and a variety of digital payment instruments.
And let us not forget the India Stack with its four technology layers (presenceless, paperless, cashless, consent), which, by allowing any private company or entity to access it for various legitimate purposes, is offering behind-the-scenes support to digital transactions. A great example is eKYC - a quick, online and paperless authentication of customers - that any company or agency can perform by validating their information in the Aadhaar database.
Even the introduction of a unified Goods and Services Tax regime, which requires all transactions and reporting to be made online, will make an indirect impact in favor of digital payments.
Recently, Amitabh Kant, CEO, Niti Aayog, dramatically said that ATMs, credit cards, debit cards and POS machines would be redundant by 2020, when all Indians will transact by thumb in under 30 seconds6. While the truth of that remains to be seen, the wheels of government machinery have been turning to create the right conditions for this ambitious target. Hence the National Payments Corporation of India has been entrusted with building the infrastructure for digital payments, RBI has been tasked with enabling the necessary clearing and settlement mechanisms, and commercial banks have been told to accommodate Aadhaar-enabled payments. There are also incentives in store, such as 100 mb of free data per person per month in rural areas, and Rs. 1,000 off on smartphones sold to those below the income tax bracket5.
While these are welcome initiatives, the country is nowhere near done. For illustration consider the number of non-cash payments per person per annum in India (11), China (26) and Singapore (728)5. India needs to continually multiply digital payments adoption in the coming years to get anywhere close to potential. Using digital payments for regular purchases and remittances is important, but it is not the entire answer. The country needs to digitize a host of other transactions, especially large ones like real estate deals, which work on cash to evade taxes. This calls for holistic digital thinking, starting with digitizing land records and putting them on a distributed ledger, such as Blockchain, and forcing all commercial exchanges to take place digitally. At the same time, there is also a case for using digital payments in large volume, micro transactions, such as agricultural loan disbursal, and crop insurance purchase. When all these pieces fall in place, no target will stand for long.
