Going cashless a utopian dream

A month into demonetisation, it is now clear that we cannot transform India into a cashless economy just by taking cash out of the system

Rahul Matthan
Published14 Dec 2016, 01:36 AM IST
Customers with NFC-enabled smartphones should be able to configure their mobile devices to function as ‘soft’ stored value cards that can be used at merchant PoS terminals to transfer cash. Photo: iStockphoto
Customers with NFC-enabled smartphones should be able to configure their mobile devices to function as ‘soft’ stored value cards that can be used at merchant PoS terminals to transfer cash. Photo: iStockphoto

If you want an illustration of how hard it has been to implement a digital payments infrastructure in India, you need look no further than the long queues outside our ATMs ever since the demonetisation announcement. Each person standing in line at a cash machine has a debit card that can be used to make electronic payments. And yet, we stand there, willingly enduring inconvenience to fill our pockets with whatever cash we can coax out of the machine.

We do this because we know that, even in the most affluent sections of society, it is still virtually impossible to function without cash. The fact is, our goal of living in a country powered by digital payments will remain a utopian dream so long as there remains even a single transaction that cannot be concluded without cash.

In an earlier article, I had argued that the single biggest hurdle standing in the way of India going cashless is the merchant who remains unconvinced of its benefits. Their most obvious concern is the investments they need to make in order to participate in the digital economy. Apart from having to buy point-of-sale (PoS) machines and an Internet connection, they need to get used to paying MDR (merchant discount rate) charges of between 1% and 3.5% on each transaction. These costs have a significant impact on profits and, particularly for low-margin businesses, could make digital payments completely unviable. When compared with cash—which has no transaction cost—it seems almost pointless to change.

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But it isn’t just the costs that merchants worry about. India’s digital payment infrastructure depends on online authentication, and given our sometimes patchy network coverage, transaction approvals can take a while to come through. In areas where connectivity is poor, there is even a risk that transactions just won’t go through. Merchants worry that customers will either be unwilling to wait for the time it takes to get an approval or else shop in some other store if their transactions fail to go through. This sort of delay can be fatal for businesses that depend on high volumes of sales. In comparison, cash transactions are quick, offline and, being legal tender, never run the risk of not going through.

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As the government sits down to design the roadmap to take our country cashless, we need to keep in mind that any system we come up with will have to be, at least to start with, as closely equivalent to cash as possible.

Merchants do not like to pay transaction fees. If this is unavoidable, the government should ensure that they are not required to pay any more than a nominal flat fee for low-value transactions or a low percentage of higher-value transactions. Where possible, customers should be incentivized to share the transaction cost with merchants.

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Any system we roll out should be capable of functioning offline to reduce our reliance on our over-burdened networks for authentication. One solution would be to encourage the use of stored value instruments from which merchants can directly withdraw cash to settle the payment transaction even without Internet connectivity.

Customers with NFC-enabled smartphones should be able to configure their mobile devices to function as “soft” stored value cards that can be used at merchant PoS terminals to transfer cash. If approval-based workflows are unavoidable, we could explore the integration of USSD authentication to reduce our reliance on the Internet.

Above all, any solution we adopt should be simple. Cash transactions require no technical knowledge whatsoever. To the vast majority of consumers, the process of operating a digital wallet, chip and pin credit card or even using one-time password as a second factor of authentication is technically challenging and a reason in itself to avoid electronic payments. Too often, those of us engaged in formulating technology policy forget that the solutions we recommend are going to be used by Luddites. Any digital payments solution we devise must therefore be intuitive and require minimal technical expertise.

No matter what we come up with, we will need to roll out PoS terminals capable of supporting these new technologies. Rather than ask the banks to recall the existing machines and replace them with new ones, the government should promote the concept of a “soft-PoS”—smartphone apps that can be installed on mobile devices so that merchants can use their existing handsets as PoS terminals. Given the ubiquity of smartphones, this is a cheap (and portable) option that will come at no extra cost.

While it may not have been the reason why the government chose to demonetize, it is now clear that we cannot transform India into a cashless economy just by taking cash out of the system.

To do that, we will need to deploy intuitive, cash-approximate solutions that merchants will be comfortable actually buying into.

Rahul Matthan is a partner at Trilegal. Ex Machina is a column on technology, law and everything in between.

His Twitter handle is @matthan

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