“Faceless, Paperless, Cashless” is one of the professed roles of Digital India. As India is heading its growth towards a digital system it’s leading to a cashless economy.
What is a cashless economy?
A cashless economy is where transactions occur via cards, payment wallets, and other digital modes, replacing traditional payment modes such as cash or coins.
Need for a cashless economy.
•Cost Reduction: cashless system brings down the cost associated with printing, storing, and transporting cash. This also eases the statutory burden for the Reserve Bank of India (RBI), as the regulatory authority.
•Risk Reduction: The risk of money getting stolen or lost is minimal. Digital transactions always help curtail black money practices that negatively impact the country’s growth. The chances of the flow of black money and illegal transactions are reduced when a transparent and rigid digital system is established. Even if the card is stolen or lost it is easy to block a credit/debit card or a mobile wallet remotely. It is also a safer and easier spending option while traveling.
•Convenient: The ease of conducting financial transactions is probably the biggest motivator to go digital. With the advent of digital modes, one can avoid queues for ATMs, transact 24*7 and save time. Additionally for service providers, with the emergence of e-KYC, it is no longer necessary to know your customer physically as the payments model has overcome limitations related to physical presence. For instance, if you want to send money to your family residing in another city, you don’t have to go through the hassle of visiting the bank to initiate the transaction. A simple NEFT or IMPS from your phone does the job.
•Tracking spends: Spending done via mobile, or computer applications can be easily tracked with a simple click. This allows users to keep track of all their spending and manage their budget effectively. Cashless transactions have one major benefit: they bring transparency and accountability to the monetary system. Digitizing monetary transactions helps banks recognize customers and track money flow. This helps to reduce financial fraud and crimes such as tax evasion and counterfeit money in the economy.
•Increase in tax base: Traders, small businesses, shopkeepers, and consumers regularly use cash as a means to avoid paying service tax, sales tax, etc. However, in a cashless economy where all transactions will be done through organized channels, through banks and financial institutions, they can be monitored by the government and proper actions could be taken against the evaders. This will result in more transparent transactions which in turn lead to a fall in corruption in the economy of the country.
•Containment of parallel economy: In a cashless economy it is easier to track the black money and illicit transactions, unlike a cash-based economy in which money does not come into the banking system. In the case of digital transactions, it is easy to track and monitor suspicious transactions as all the records are available with the banks.
•Financial Inclusion: At present, India’s low-income households have access to credit through informal systems, through relatives or private lenders. Forcing them to shift to cashless payment platforms instantly formalizes this world of informality and includes them in the formal economy.
•Discounts: A lot of e-commerce websites offer huge incentives in terms of discounts, cashback, and loyalty points to the customers for making digital transactions for shopping online.
•Ease of international transactions: Earlier, engaging in international transactions was troublesome due to the absence of facilities such as net banking and plastic money. Government initiatives to regulate digital payments have eased up the process of international transactions for people living within and outside the country.
In the last few years, India has taken some eventful steps for the whole nation aimed at the greater good of the economy. The basis for this was always working towards a ‘cashless society ’The government is prioritizing security, regulations, and restrictions to make digital payments seamless, safe, and user-friendly. The ambitious mission of the government of India to drive India towards a cashless economy was boosted with the announcement of demonetization on November 8, 2016. A system where no physical cash is in circulation is a cashless system. Payments are made through credit and debit cards, bank electronic fund transfers, or virtual wallets.
Since the late 20th century, India has been slowly but steadily moving towards a cashless economy with ATMS, MICR, debit cards, and credit cards. Today, you have mobile wallets, recharge vouchers, UPI, NFC payments, QR codes, etc. Come to think of it, India has performed really well on the digital adoption front.
Yes, India is ready for a cashless economy. It is emerging towards a digital economy:
- The government approved a proposal, under which there would be no charge for BHIM, UPI, and debit card transactions up to ₹2000.
- Demonetization has given an impetus to e-wallet services. According to a report “Securing the cashless economy”, by Pwc, India witnessed
- 3X increase in the download of a leading mobile wallet app within 2 days of the demonetization announcement.
- According to TRAI, as on 30 September 2016, 82 out of 100 citizens in India owned a mobile phone. The evolution of the telecom ecosystem, with significant reduction in call and data rates, along with the prices of smart phones, is propelling the shift to a cashless economy.
- Banks and related service providers have invested highly to improve security and ease of cash transactions.
Challenges in Transitioning into a Cashless Economy
1.Extreme dependency on cash
Decades ago, since the barter system faded away, people have been leveraging the cash-based system and currencies have come into the picture. Giving up such a strong habit is not easy, even if people are convinced of the advantages of using digital payments.
2. Fear of Cybercrime
With increasing reliance on the internet, the ease of transactions has increased. However, digital payment methods have also opened avenues for online fraud. A recent report by Microsoft revealed that on average, an Indian consumer lost Rs. 15,334 by falling prey to online scams in 2021. The most common payment channels for these consumers were bank transfers and credit cards.
As of now, there are no stringent laws or legal processes that can help eliminate online fraud. Add to this, the risk of data theft that banks can face, which can uncover the financial information of thousands of users and can lead to massive security breaches.
3. Unconvinced population
The government runs several campaigns to educate and inform people of digitization benefits, yet a large percentage of the population lacks faith in the cashless financial system. Convincing this section of citizens to go completely cashless is an uphill task.
Even though connectivity technologies in the country have improved significantly, the penetration of high-speed broadband is still weak in many regions across the country. Most metropolitan cities also face connectivity issues, let alone rural areas.
5. Digital Illiteracy
In India, financial illiteracy and the hesitance to digitize are the biggest barriers to transitioning to cashless payment transactions.
The internet and smartphone penetration in the country is still catching up. Most of the population in tier 3 towns and villages are not tech-savvy enough to easily navigate digital payment functions. Switching from a cash-based to a digital medium can be difficult for people, who require a deeper financial understanding and more time to adapt to such transactions.
Government Initiatives for Cashless Economy in India
The government is taking several steps to overcome the above challenges and establish a cashless economy. Let’s understand more about these initiatives:
Demonetization: The government implemented demonetization in 2016 to curb the circulation of black money. Demonetization was one of the most radical steps taken in this direction. It led to greater use of payment modes like digital wallets and also led to a sharp spike in online sales.
Pradhan Mantri Jan Dhan Yojana: Financial inclusion is one of the primary reasons why India is unable to develop rapidly. Addressing this cause, the Pradhan Mantri Jan Dhan Yojana was one of the most renowned and successful initiatives by the government, to eliminate the challenges of financial inclusivity across the country. The aim was to offer banking to each household, by allowing them access to all services such as bank accounts, credit facilities, pensions, and more.
Direct Benefit Transfer (DBT): The DBT scheme was launched to provide financial benefits to individuals, such as subsidies directly in the beneficiaries’ bank accounts. This included benefits such as LPG subsidies, old age pensions, and scholarships, helping the rural population to move towards the digital system efficiently. This encouraged people to entrust banks with their money, while also addressing concerns of financial knowledge and literacy.
Aadhar Enabled Payment System (AEPS): Another government-launched digital payment mode is the Aadhaar Enabled Payment System. This leverages the Unique Identification Authority of India (UIDAI) number of individuals, to help them transfer money seamlessly. It enables people with Aadhar Cards to easily perform financial transactions at point-of-sale centers.
Financial Literacy Centres: Financial education programs were also held in government-led literacy centers. These centers aimed to educate more people in the country regarding the benefits of a cashless economy for the community.
Becoming a cashless economy may have certain challenges and concerns, but they do not outweigh the positive points. With the right strategies and implementation, India can easily pace up to becoming an efficient cashless economy.