Landing a leapfrog
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Cyclone Vardah came and went with a whoosh, taking many of Chennai’s trees, roofs and fishing boats with it. It also knocked out parts of the telecommunications network. As the flow of electrons stopped, so did the flow of funds. Restaurants, petrol pumps, and shops all started turning away the cashless. ATMs stopped working, even if they had cash to dispense.
Lesson No.1: Cash is robust. Its value is maintained by a social fact, a shared idea we can carry around like a biometric. Unlike a biometric, however, the idea only needs an abstract institutional infrastructure to be useful—no immediate networks are required. Digital currencies have many virtues, but transactions require information networks to be functional here-and-now or at least soon enough to reconcile accounts. “Digital financial services are only as resilient (sic) as the physical infrastructure upon which they are built,” cautions a 2016 UN paper extolling the value of digital finance for moving money quickly in post-crisis situations.
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The rhetoric around demonetisation has focused on one attribute of cash: that it can be kept and exchanged secretly. This secrecy, the logic goes, fuels corruption, tax evasion, terrorism, trafficking and other anti-social behaviour. The framing has held up through the pivot from demonetisation-as-battle (against black money) to demonetisation-as-catalyst (for leapfrogging to digital payments). Even as Union finance minister Arun Jaitley announced on Saturday that the retired cash would not be fully replaced and that digital currency should be ready to take its share of the market, he underlined the dangers of tax evasion and criminality in cash-heavy economies.
The user-experience of paper money, however, involves more than just concealability. It involves trust, a particular but salient version of security, tangibility, and the ease of reaching into a pocket and handing a rupee across the table. Any truly competitive substitute store of value and medium of transaction will need to match the broader range of attributes that people value about cash.
Think of it this way: Banning paper books might help the e-reader industry in the short run even as it reduces the amount of reading taking place. But in the long run, merely locking up books can neither drive reading levels back up to where they should be nor ensure that people stay happy with their Kindles and Kobos over time.
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Building a sustainable less-cash society will require more than the shove of demonetisation. It will depend on an unprecedented speed of infrastructure development, skilful regulation of a new industry, and concerted efforts to build and maintain trust in invisible cash. Much of the public debate has looked back at the demonetisation shock; but it’s time to look ahead at the challenges involved in recouping the return on such “boldness” (to borrow again from Jaitley’s speech). All are surmountable; none are trivial.
First, the fragility and everyday limitations of the underlying information network infrastructure need to be addressed. Digital India, onward, faster—and differently. Some aspects of the quest for private efficiency can create public vulnerabilities to natural disasters. Tower-sharing, for example, concentrates disruption risk in a single place. Network topology—the arrangement of nodes and connecting lines—determines the effect of a particular cut on outages. Balancing pressure to build out infrastructure with incentives to limit such vulnerabilities is a significant policy challenge.
Second, we need to ensure that the payments industry remains competitive enough to promote close attention to user needs, and responsible enough to invest aggressively in security that the market only demands when it’s too late. Policy is moving fast on this front—the Watal committee was given a year from August 2016, but submitted its report earlier this month. Mooting an independent regulator, however, is far from having an independent regulator. It’s even farther from having the kind of collaborative, iterative, adaptive regulator that seems to be emerging in the literature as the “best practice” for overseeing digital payments systems. This kind of open, explicit collaboration between industry and government in shaping regulation could be a breakthrough for other sectors as well, but it is no small feat in an era of deep suspicion about business-government links.
Third, trust. Evidence shows that levels of trust in the banking system can be at least as big a determinant of cash holding as the proportion of people with bank accounts. Distrust can be triggered by a history of economic crises, social experience of exclusion and discrimination, or even just unreliable access to banks and savings. Logic—though not yet evidence—suggests that adoption of digital payments would operate similarly. Trust is also hard to build and easy to destroy. The odds of a major breach or fraud in some part of the payments industry are high, given the rapid growth on top of legal and physical infrastructure that is still under development. The political and commercial climate around digital payment also creates few incentives to report and thus enable learning from smaller escalating attacks. Establishing a credibly private and open-minded forum for reporting small breaches would be an important step in maintaining defences if it has not already been done.
Rising to these challenges will require collaboration and open communication, two social practices in short supply. India has committed to a leapfrog, and has already taken off on the trajectory. It’s up to us now to land well.
Jessica Seddon is managing director of Okapi Research & Advisory and writes fortnightly on patterns in public affairs.
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