Riding the tide in cashless payments
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There is a tide in the affairs of men,
Which taken at the flood, leads on to fortune;
Omitted, all the voyage of their life
Is bound in shallows and in miseries.
On such a full sea are we now afloat …
Brutus in Shakespeare’s Julius Caesar
Rarely do we witness an entire nation getting involved in a project such as the demonetization of Rs500 and Rs1,000 notes with individual pain but promise of national gain. While demonetization gives a significant push towards a cashless economy, additional measures are needed to incentivize and sustain the transition.
To perform a cashless transaction, both the buyer and the seller should be able and willing to use the cashless payment channel. Consumers today have a plethora of cashless payment options from banks, mobile wallets and e-commerce firms but most merchants still deal in cash, and the primary reason for that is lack of acceptance options at various stages of the supply chain. The move to cashless transaction can originate from the retail consumer but needs to involve wholesalers, distributors and manufacturers.
If wholesalers and traders are reluctant to switch to the new payment systems, then substantial disruption of the supply chain would occur. To ride the tide of cashless payments, it is thus imperative to provide incentives to the trader to switch.
On 23 November, the government announced a waiver of service fee for debit cards till 31 December. This is a very welcome move but the waiver needs to continue for at least a few years. Even if reintroduced, card-related fees should come down substantially. This is particularly true for debit cards, since they involve no credit risk and the 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? The MDR is either absorbed by the merchant or passed on to the consumer and hence deters the adoption of the cashless channel, particularly for merchants working with wafer-thin margins.
A second deterrent is that the sale proceeds may not be immediately deposited in the merchant’s account, exposing the merchant to working capital difficulties. Card-based transactions also leave an audit trail and a merchant does not want to invite the taxman home.
While the waiving of debit card service fee would reduce friction, it would not incentivize a trader to go cashless since cash payments are costless. This is where bold changes are needed. Banks need to review the concept of the current account. A current account gives the merchant several facilities like overdraft, limitless number of withdrawals and deposits, etc. but does not offer interest like a savings bank account does. When the concept of the current account was created, there were no computers, let alone advanced telecommunication and payment gateways. A visit to the branch was a necessity for any banking transaction and a higher number of transactions implied costly printing of cheque books.
In that world, it made eminent sense to offer a zero interest current account with the added convenience of unlimited transactions. Today, the current account is at best an anomaly and at worst, a living fossil. When a merchant can do an RTGS or NEFT transaction, for which he pays separately, what added benefit does a current account provide? Note that the overdraft facility is neither automatic nor costless for the merchant. In exchange for these “conveniences”, the trader is denied 3.5% interest available in a savings account.
It is time for the government to not just push the trader towards cashless transactions through demonetization, but also pull him in by offering him an economic justification for routing transactions through the current account. The current account, in its current form, should cease to be current!
Imagine a world where current accounts offer interest. Instead of the merchant being a bottleneck to the transition to cashless economy, he would become its biggest champion. Consumers using a debit card or mobile wallet for the first time may need a lot of hand-holding. Communication aimed at that segment is best handled if the firms get merchants on their side. A merchant who understands that the GST rollout and the surgical strike against black money have fundamentally changed the business landscape may start seeing value in the decrease in cash handling effort that the cashless channels make possible. An added pull of an interest-bearing current account could just be the tipping point to cashless supply chains.
Since MDR on debit cards is a cap and not a floor, banks could have proactively reduced MDR to spur adoption. They did not, and it was the government which waived it. In the past, banks have been more willing to issue a card rather than to invest in a point of sale terminal. If banks want to ride the tidal wave unleashed by the Prime Minister’s demonetization move, they need to reinvent themselves now.
It is during the next few months when the customer is inconvenienced by lack of cash in ATMs that consumers would enquire about cashless payment options. Ironically, the more banks strive to fill up their ATMs, the more this inconvenience declines. Wallet start-ups and payment banks are free to go on an aggressive merchant sign-up drive while traditional banks are busy attending to the queue outside their branches. True, a smartphone is required for a mobile wallet, but that barrier is bound to erode. For incumbent banks, a defence of the share of merchant transactions needs to be mounted now. If not, they would only watch themselves being disrupted by mobile wallets and payment banks.
Banks and wallet start-ups need to take a supply chain orientation and look at the merchant not as a mere source of fee income but as a partner in this transformative journey. The merchants’ worries and apprehensions need to be addressed, the current account should be interest-bearing, the MDR, if at all reintroduced, should be reduced to a flat fee, transaction reconciliation-related headaches eliminated, and the cash receipts synchronized with the merchants’ accounting systems. It’s a tall order, but if these firms only depend on the charisma of the Prime Minister to ride the tide, then they may just find themselves in the misery of the shallows.
Saral Mukherjee is associate professor at Indian Institute of Management, Ahmedabad, and works on issues related to supply chain management.