Can we do without cash?

It will take some effort to implement, but once there is widespread adoption among the merchant community, consumers will willingly change the way they shop.

It is hard to overstate the benefits of digital payments and the extent to which a widely deployed electronic payments system will affect the Indian economy. Apart from the obvious impact on corruption and the parallel economy, as more and more enterprises begin to integrate digital payments into their business, the resulting transparency will change the way we think about regulation and compliance. Done right, a full transition to a digital payments economy will rebuild the reputation of the Indian legal system as being consistent and predictable.

Successive governments have tried — and failed — to achieve widespread acceptance of electronic payments. Despite the general easing up of regulations on the use of credit and debit cards and the introduction of legislation to facilitate the use of digital wallets and other payment systems, the vast majority (by volume) of financial transactions in the country are still conducted with cash. The launch of the Unified Payment Interface (UPI) last week brought renewed hope that we would finally take to digital payments.

I’m not immediately optimistic.

The fact is that consumers already have everything they need to go digital — and they have had it for quite a while. There are more than 650 million debit cards in circulation in the country today. Last year, the Reserve Bank of India reported a 63% increase in the use of debit cards at point of sales (PoS) terminals. But those numbers make false promises because, on average, each Indian concludes no more than six non-cash transactions in a year. It is ironic, but very few of those 650 million debit cards will ever be used for anything else other than withdrawing cash from an ATM.

If you look at the other side of the equation, even though as much as 80% (by volume) of household purchases take place in neighbourhood stores, only a minuscule fraction of those vendors are equipped to process card payments. While we have an estimated 30 million retail merchants in the country, there are just 1.2 million PoS machines in operation.

Consumers are clearly not the obstacle — most of them already have what they need in order to move to cashless payments. The real bottleneck is the merchants who are either unwilling or unable to accept payments in any form other than cash. Rather than trying to get more customers on the digital bandwagon, we would do better to focus on bringing the merchants on board.

One of the features of the global credit card systems is that merchants (and not customers) shoulder the cost of the transaction. Each time a customer swipes his card to purchase a product, the merchant pays a percentage of the sale (the Merchant Discount Rate or MDR) to the card company. Given the wafer-thin margins on which most Indian merchants operate, they baulk at having to share their meagre profits with the card company (even though they recognize that accepting card payments could boost the volumes of their sales). Add to this the price of a PoS machine and the total cost to the merchant can become prohibitively high — particularly for those who deal in low-value, high-volume products. If we want merchants to willingly adopt cashless payments, we will need to devise solutions that offer cheaper PoS machines and charge lower transaction fees.

This is where UPI can play a part.

The beauty of UPI is that it is deeply integrated with the Aadhaar authentication framework. It should, therefore, be theoretically possible to adapt a smartphone equipped with an iris camera to function as a PoS terminal. At the end of the day, all that your card-based PoS machine does is scan the information stored on the chip embedded in the card, compare it against the records maintained by the issuer bank and confirm that you are who you say you are. Smartphones that can biometrically authenticate you against the Aadhaar database will do a far better job at this — and, at the same time, eliminate the risk of cloned cards and identity fraud.

Once the purchaser has been authenticated, UPI will allow the merchant to directly “pull” the sum owed from out of the customer’s bank account and credit it to the merchant’s account. Given UPI’s relatively low transaction charges, even vendors who operate with the narrowest of margins will not object to coming on board.

It will take some effort to implement, and may require a few regulations to be amended, but once there is widespread adoption among the merchant community, consumers will willingly change the way they shop. Done right, the UPI-based mobile payments system could well become the norm.

We should resist the urge to build for consumers as we have done so many times in the past. Or else UPI will become yet one more good idea that failed to fire.

This article was first published in The Mint under a column called Ex Machina on the interface between law and technology.

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