After the demonetization, now the talk of the town is about digital payments. There are reports in the media that the Central Government and the RBI are deliberately delaying making more cash available in the market so that people get used to digital payments instead of the old methods of cash payments. Well, that is good for the nation, if we can move to “less-cash” economy if not to the “cash-less” economy.
A less-cash or cash-less economy will substantially solve many problems facing India in one stroke. It:
- will reduce black money;
- will reduce corruption;
- will drastically reduce fake currency;
- will mean transparency in transactions;
- will make elections more honest and transparent;
- will reduce the pendency in court cases if digital payments are used instead of cheques (remember, about 15-25% of pending cases are cheque-dishonour cases – see here);
- will mean more taxes for the Centre and the States if the tax rates are kept intact;
- may ultimately result into reduced taxes due to increased tax compliances;
- will lead to more rule-based economy rather than being a crony-capitalism;
- will lead to more growth in economy;
- will have many other direct and/or indirect benefits.
We have several options for a digital payment system. Currently, people can use:
- direct payments / transfers from their accounts through RTGS / NEFT;
- payments via debit cards and credit cards;
- payments via digital wallets such as PayTM, MobiKwik, PayUMoney, SBI Buddy, Vodafone M-pesa, PayZapp (by HDFC Bank), and now, JioMoney (by Reliance), and many more.
Of course, instead of using cash, you can also pay by cheques and bank drafts, which are old methods of payment and are transparent ways of transferring money, though these methods are not digital.
Now, there is another method which is being talked about, namely Aadhaar Enabled Payment System (AEPS) – see here and here and here and here and here.
As per these reports, the Aadhaar number is all set to become an alternative for all online and card transactions, which require password and PIN. The Unique Identification Authority of India (UIDAI) is developing a mobile app that can be used by shopkeepers, merchants or individuals for receiving payments. Using Aadhaar Enabled Payment System, online transactions can be executed between two people having bank accounts linked with Aadhaar by just feeding the 12-digit unique Aadhaar number in the mobile set equipped with the Aadhaar-enabled app which will be used for authenticating biometrics – fingerprints or iris of the person making payment.
One main issue with most of the digital payment methods is that either the customer or the merchant has to pay fee or service charge for transferring the money. For example, the merchant to whom you pay by debit or credit card may have to pay 1% to 3% processing fee or service charges for the transfer. Even with a payment back such as PayTM, while no payment is charged for a transfer of money from a customer to merchant, and while the merchant can transfer such money to his bank account free up to ₹ 1 lakh in a month, there would be charges to be paid by the merchant if the amount to be transferred by the merchant to his bank account exceeds this limit in a month. Even for RTGS and NEFT, a small fee is required to be paid for transferring money from one account to another.
So, digital payments do involve some charges to be paid, generally by the merchant, and in some rare cases by the customers (for example, for payment of power bill to Tata Power beyond the limit of ₹ 5000, the processing fees/charges are collected directly by the Issuer Bank / Payment Gateway etc. from the consumer).
However, no such additional charges are required to be paid when you pay by cash. Therefore, at present, there is a disincentive to make payments by digital payment methods, and this disincentive is either to the customer or to the merchant. Even if the disincentive is to the merchant, he would be generally reluctant to go whole-heartedly to accept digital payments from all customers since it may imply a straight 1% to 3% cut in his earnings in the form of service charges payable to the digital payment service provider (i.e., the bank or the payment bank).
There are reports that Government wants to make cash transactions more expensive and incentivize people to pay digitally. For example, see this report, which quotes Niti Aayog chief executive officer Amitabh Kant, who is heading the committee of secretaries on digital payments and is part of the panel of chief ministers on the issue, as saying that work is in progress on a policy to make cash transactions more expensive and incentivize people to pay digitally.
However, the moot question is whether the likes of PayTM or JioMoney, or for that matter, even SBI Buddy, will allow completely free transactions to all customers and merchants up to any limit? What will they get in return for giving such free services? Why would they do it? Will the Government pay them?
So, by shifting to digital payment system, as against the present day cash system (or even cheque system), will it not be costly for the merchants and/or the customers, since ultimately the merchants will transfer these charges to the customers in one or the other – direct or indirect manner? At lower levels, the costs may not be much. But, for a merchant whose daily collection is, say, ₹ 1 crore, he may have to pay ₹ 1 to 3 lakh per day and up to about ₹ 1 crore per month, merely for the digital payment services! This becomes a big hurdle then in the way of people voluntarily and whole-heartedly accepting the digital payment methods.
So, what is the solution?
There are basically two options.
First is for the Government to compensate the payment-banks and banks (who provide digital payment options) corresponding to the quantum of money transferred through them.
Second is for the Government to introduce its own digital payment system in the form of a Government-sponsored digital wallet. Or, in fact, even the Aadhaar Enabled Payment System (AEPS) itself can become the completely free method to transfer money digitally from one bank account to another. It appears that at present, there is no fee for using AEPS, but one does not know about future.
However, the present AEPS model requires that the customer must have a bank account to use Aadhaar enabled payments. A true digital wallet may not need even a bank account. For example, PayTM digital wallet does not require a bank account. The question may then be how would you get money into your PayTM wallet? The answer is simple. Someone else can transfer money to your PayTM wallet from his own PayTM wallet, which can then be used by you to pay / transfer to others. Similar facility is available in other digital wallets.
While the Government has made sincere efforts to ensure that every family in India gets at least one bank account, and the Jan Dhan Yojana led to opening of about 25.68 crore Jan Dhan accounts as on 23 November 2016 (see, here), the fact remains that still many people in India do not have bank accounts. Therefore, a digital wallet may perhaps be preferable over a bank account being used for digital payments. Or, may be as an additional method. Moreover, a digital wallet with comparatively less balance may be safer to use for making small payments, rather than exposing your bank account (with bigger balance) for every payment of a small amount, such as a payment of ₹ 50 to an auto-rikshaw driver or to a vegetable vendor.
Do we need a smartphone for using digital wallet? Not necessary. For example, see this report, as per which Goa is likely to become the first cashless state by 31 December 2016, and there is a mention in the report that even a feature phone (in contrast with a smartphone) can also be used for making digital payment: “One has to dial *99# from their mobile phone, not necessarily a smart phone, and follow the instructions to complete the transaction”. This is possible due to the Unstructured Supplementary Service Data (USSD) based Mobile Banking, which is *99# – National Unified USSD Platform (NUUP). It only requires a bank account and any mobile phone on GSM network and it can be used even if there is NO Internet on the phone. It can be used for payments up to Rs 5000 per day per customer. See, here, for some basic details of NUUP.
In view of these reasons, there is a need for the Government to sponsor or introduce its own digital wallet (which need not necessarily require Aadhaar authentication, since the same may not be available on every mobile phone in the absence of fingerprint or IRIS scanner features). This MUST be completely FREE to use for customers as well as for merchants. After all, it is in the interest of the Government to introduce digital payment systems for the benefits that will accrue to the nation (as mentioned in the beginning). In any case, at present, the Government spends considerable amounts of money to print currency notes and to replace the soiled currency notes. Then, there are costs for transporting currency notes (nowadays even the IAF fighter planes are being used for transporting them) and to store them in RBI, banks, ATMs, etc. The cost of maintaining a free digital payment system should be much less than printing, storing, transporting and replacing currency notes.
A Government-owned digital payment system will also allay fears of manipulation or unreasonable benefits to private entities such as PayTM, (which, in fact, also faces the allegation of being controlled by Alibaba, a Chinese company), etc.
Some people also raise doubts whether semi-educated or uneducated people would be able to use digital payment system. It is like this. At present, there are about 105 crore mobile phones in India as against the population of about 130 crore. We daily see poor and uneducated people also using mobile phones. They may take help of others to use digital payment methods. After all, human relationships run on trust. In any case, do the uneducated people not use the currency notes? In fact, using a digital payment system may be much safer than using currency notes, since it has auditable traces. For example, if an uneducated woman shows her Aadhaar number card to a vegetable vendor, who has a micro-ATM (or PoS machine), and asks him to deduct ₹ 65 for the vegetables purchased by her, and then uses her fingerprints to authenticate her Aadhaar number on the micro-ATM of the vegetable vendor, now if the vendor deducts ₹ 85 instead of ₹ 65, then he leaves a trace of the wrong amount deducted from the account of that woman and he would not be able to escape his liability for the same. Isn’t it better than the wrong cash payment of ₹ 85 made by by that uneducated woman by mistake, which cannot be proved (i.e., whether she paid ₹ 85 or ₹ 65 in cash)? It has to be understood that our cash system runs on trust basis. Similar trust can be developed in the digital payments as well, in due course.
In the worst scenario, our first aim should be “less-cash”, rather than “cash-less”. So, let ₹ 100, ₹ 50 and other lower denomination notes continue to be in vogue. These lower denomination currency notes can be used by everybody, including poor and/or uneducated people who are more comfortable with currency notes vis-à-vis the digital payment systems. But, the higher denomination notes, such as ₹ 500-1000-2000 should either be completely demonetized or should be kept in very limited circulation so that people are compelled to use digital payment systems instead of currency notes for their day-to-day transactions.
In this regard, I am of the considered opinion that while demonetizing ₹ 500-1000 currency notes on 8 November 2016, the Prime Minister Shri Narendra Modi should not have introduced the new ₹ 2000-500 notes. He should have declared that people should deposit all old ₹ 500-1000 demonetized notes in banks and then use their bank accounts for making bigger payments and use ₹ 100-50 or other smaller denomination notes for smaller payments. This would have reduced expectations of getting new notes from banks and ATMs and should have led to no queues. In any case, all is not lost even now. As the reports in media suggest (as mentioned in the beginning of this article), the supply of the ₹ 2000 and 500 notes is likely to be kept deliberately at much less level than as required. This will persuade or rather compel people to change their habits and start using digital payments instead of using cash, at least for the transfer or payments of bigger amounts. Small payments may continue in both formats, digital payments or in cash, as per the convenience of the person concerned. So, without further demonetisation of newer currency notes of ₹ 2000 or 500 which may become controversial, keeping their supply in limited numbers (but, declared in a transparent manner) may also serve the purpose.
So, let us move towards a less-cash society. For this to happen, the Government must introduce its own digital wallet and/or digital payment system which should be completely free to use for everybody, be it the customer or the merchant.
