Indian merchants do not want to go digital

Notions of customer preferences and concerns over tax liability explain the low rates of digital payment adoption in India according to a new study

Over the last few years, digital payments have been given a big push by the government. But even after drastic measures like demonetization, the rate of adoption of digital payments remains modest in India. A new research study by Carly Trachtman of the University of California, Berkley and others argues that the low rates of adoption are driven by demand-side factors rather than supply-side factors. Supply-side issues such as inadequate or expensive infrastructure and limited access to the internet are considered barriers to digital payments. However, the authors find that merchants do not go digital because they believe customers do not want to make digital payments and they are concerned that records of mobile payments might increase their tax liability.

Using survey data from 1,003 small scale store merchants in Jaipur, Rajasthan, the authors find that 60% of the merchants surveyed had not adopted digital payments of any kind - even though most firms had the ability to do so. For instance, 97% of merchants already had a bank account, 79% had an internet-accessing device, 55% had internet access and nearly 100% could afford the related usage fees.

Interestingly, the authors also show that even among current digital payment users, digital payments transactions are low in terms of volume, with around 80% of their transactions still being done in cash.

The authors thus suggest that simply lowering the costs associated with adopting digital payment technologies is unlikely to boost digital payments in India. More important will be increasing customer demand and incentivizing digital payments, the authors argue.

Also Read: What explains low adoption of digital payment technologies? Evidence from small-scale merchants in Jaipur, India