‘Oh, what a tangled web we weave…when first we practice to deceive.’ – Walter Scott, Marmion
After sounding the bugle for ‘War on black money’ on the night of 8th November, the Generals appear to have changed the tack, hardly three weeks into it. Prime Minister’s ‘Mann ki Baat’ and the RBI Governor’s interview on 27th November emphasised the need for ‘Going cashless’ with less cash. It is interesting to note that the Government’s press release and the Prime Minister’s speech announcing demonetisation harped primarily on the issue of ‘black money’ and terror funding through counterfeit notes. There wasn’t much about ‘Going cashless’ then. There is an obvious shift in the narrative. While one can agree to the fact that there exists a (close) association between ‘cash’ payments and ‘black money’, it needs to be recognised that they are not the same. Curbing black money and encouraging ‘cashless’ payments are two different objectives. The means and methods to achieve those objectives would have to be different. Leaving aside the political motives of the party in power, the new objective and policies of the government need to be assessed based on the ground reality and the consequences.
There are estimates that ‘black money’ in the form of currency notes does not exceed 6% of the total ‘black money’. It is naïve to think of ‘black money’ existing solely in the form of cash bags without taking cognizance of its creation and circulation as a complex, dynamic process. Notwithstanding such naivety, ignorance or political designs behind the narratives, one should understand as to what has prompted the government to change the tack.
The old high denominations notes in circulation as on 8th November amounted to Rs.15.44 lakh crore (Rs.8.58 lakh crore in Rs.500 notes and Rs.6.86 lakh crore in Rs.1,000 notes)1.The Economic Times reports that deposits in the two high denomination notes reached Rs.9.85 lakh crore by 3rd December2. Further on 8th November, the total amount of actual cash with the RBI as CRR was Rs.4.06 lakh crore according to the weekly bulletin of the Central Bank. This cash, as per bankers, is usually sent mostly in large currency notes. That means, already Rs.13.9 lakh crore has already reached the RBI and commercial banks in India. We still have 30th December as the end date for the deposit of old high denomination notes. With this, the previous estimates by some that around Rs.3 lakh crores would cease to exist with the current demonetisation would not stand true. That means the ‘black money’ in the form of old high denomination notes that ceases to exist may not cross Rs.1 lakh crore. On the other hand, the CMIE estimated that the cost of the current demonetisation exercise would be around Rs.1.28 lakh crores3. What a monumental achievement! After all the suffering enforced on the people, making them stand in long queues for hours and days shunning all productive work and regular tasks in the name of proving one’s patriotism and after all that avoidable loss of lives, the war on ‘black money’ has yielded a sum that is less than the cost involved! Was it a mountain or just a mole hill?
The government says that cashless payments are the key to development and to curtailing corruption. JAM (Jan Dhan accounts, Aadhaar number and Mobile phones) is being touted as the panacea for all ills and issues. India is a country where the majority of the work force is in the informal sector and where 85% of retail payments are carried out in cash. The promise of leap frogging overnight in to a ‘cashless’ state from such a reality through an arbitrary governmental action is to fool people. They find it easy, as they did during the elections. They promised to credit every account with Rs.15 lakh with the money brought back from Swiss banks. The money is yet to see the light!
Payments – A new, profitable business
Payments is now being considered as a profitable business across the globe. There are many types of payments. At a domestic level, there are person to person (P2P) payments, consumer to business (C2B), business to business (B2B), government payments to/ from people, businesses and employees etc. Then there are cross border payments involving currency exchange. A multitude of payment instruments (credit cards, debit cards, prepaid cards, cheques, ACH/ECS, fund transfers (NEFT, RTGS), e-wallets) are available to various sections of people with the expansion of banking services and technology development. These payments are in turn facilitated by channels like ATM, PoS internet banking, mobile banking. There are networks and clearing houses enabling smooth processing and settlements between various entities, banks and financial institutions. Dependent primarily on the banks, the payment processing was considered as less attractive a decade ago. Boston Consulting Group (BCG) estimated that s the payments accounted for 35% revenues and 40% of the expenses. With the changes in way the banks are managed (technology and operations), this is now changing. The BCG estimates that the payments industry reached US$1.1 trillion in year 2015 and it is expected to double by the year 2025. It is no surprise that India assumes significance as an ‘emerging market’ in the eyes of large enterprises, banks and IT companies.
The concrete conditions obtaining in India are unique and more complex. Banking sector focused on metropolitan cities and urban areas, a large majority of people lacking access to / familiarity with financial services and large chunk of work force in the informal sector, characterize the conditions. The ‘economic reforms’ in 1990s have further exacerbated the situation. A RBI report in 2011 admitted that the banking business is concentrated in the six metros (46% of total deposits and 56% of total credit). 5,210 bank branches in rural India were closed down for not being ‘profitable’. Two bank branches were shut down on each working day and it should be noted that 5,960 bank branches were added in the six metros during the same period4. Those were also the days when they advertised ‘India shining’. Of the total ATMs, only 18% were in the rural areas (RBI Report, 2015). Various models like Banking Correspondents, Local Area Banks and the recent Small Banks and Payment Banks have been introduced to absolve the mainstream banks of their responsibility towards rural areas. It should be noted that the recent Payment Banks model involves Telecom companies (Airtel, Vodafone), Microfinance companies (FINO) and other enterprises (Reliance, Sun Pharmaceuticals).
It is in this context that the problem of meeting the payment needs of people involved in the large informal sector comes in to picture. Be it a construction worker from Srikaulam district working in Chennai or a restaurant worker from North Eastern states working in South Indian cities, a daily wage labourer from Bihar working in Mumbai or Delhi, they need their earnings to be remitted to their family members. On the other hand, there are government payments to NREGA workers, pension payments to the elderly etc. There is this question of ‘last mile delivery’ of payments to reach the beneficiaries in the remote areas and of making money out of the fees for the processing of such payments. This is an ‘untapped’ opportunity and an interesting problem to be solved actively by the consulting companies, Startups, Telecom companies and microfinance companies. The ‘Visionary’ leader obviously has to be deft in sniffing a ‘profitable’ business avenue.
Who is going to benefit from the payments business?
Despite the well-known impediments hindering the growth of non-cash payments, India is projected as a key market for payments. The World Payment Report 2016 indicated, ‘China and India will likely have continued to spur transaction growth in Emerging Asia, as regulatory intervention, increased card penetration and increased mobile payments contribute to non-cash transactions’. A 2009 McKinsey report stated, ‘India’s payments industry ranks fifth among Asian countries by revenue. As the payments infrastructure develops, we anticipate greater intermediation by banks to spur revenue growth by about 17 percent CAGR, delivering annual revenues of around $45billion by 20155’. In a similar vein, the Boston Consulting Group and Google July 2016 Report mentioned, ‘India now represents one of the largest market opportunities for payments.’ It estimated, ‘The total payments on digital payment instruments to be in the rane of USD 500 billion by 2020, up from the current estimates of approximately USD 4—50 billion…with a transaction fee on these transactions in the range of 0.50 to 0.75 percent for B2B and 2 percent for P2P, the Indian digital payment industry could be worth approximately USD 5 billion in revenues by 2020’6.
It is in this context that much of activity is visible in the digital payments space in India with an eye on the market opportunity and potential. It is hard to miss the excitement between the two parties, when Microsoft founder Bill Gate met India’s IT minister on 16th November to discuss about Microsoft’s collaboration with ‘digital India’, just days after the announcement of demonetization. The Business Standard reported, ‘The meeting, which went on for 45 minutes, was attended by senior officers of the IT ministry as well as Gates and members of the Bill and Melinda Gates Foundation. Sources said Gates was interested in getting into the business of e-payments in India as he wants to streamline the digital payments system for economically weaker sections in India. Industry experts said Microsoft was anyway providing back-end support to a number of payments bank in India, which are set to launch in the next few months. The ministry has requested the Foundation to be part of the digitising process’7. To connect the dots, one should only remember that Bill and Melinda Gates’ Foundation launched Better Than Cash Alliance with a partnership of governments (including that of India, which joined in September 2015), companies, and international organizations that accelerates the transition from cash to digital payments. The Alliance is funded by the Bill & Melinda Gates Foundation, Citi Foundation, Ford Foundation, MasterCard, Omidyar Network, United States Agency for International Development (USAID), and Visa. They build the door and Opportunity knocks!
The example of cashless payments in the ‘developed countries’ is being presented as the model. Sweden, Norway, Finland and Singapore are touted as models worthy of emulation. Firstly, these countries haven’t reached such a stage overnight through hurried, arbitrary policy decisions. The other aspects that need to be factored in are social and cultural environment, payment behaviour and habits of various strata of people. While credit card payments are prevalent in the US and the UK, debit card and cash payments are prevalent in countries like Germany, Italy, Spain and Portugal. It was observed that Debit cards gained prominence over credit cards after the crisis in the US. John C. Williams, President and CEO of Federal Reserve Bank of San Francisco noted that, ‘Since the start of the recession in December 2007 and throughout the recovery, the value of U. S. currency in circulation has risen dramatically. It is now fully 42% higher than it was five years ago’8. He further noted that, ‘In the six months following the fall of the investment bank Lehman Brothers in 2008, holdings of $100 bills soared by $58 billion, a 10% jump’. And this is continuing.
It is also wrong to view the (lesser) cash use as a percentage of GDP as a marker for ‘development’. While in India it is at 12%, the average cash use as a percentage of GDP is 15.4% in West European countries9. The situation in the developing countries will be different as their needs are different. The average Year-on-Year Growth in Currency in Circulation for 2009-2013 in the BRICS Nations (Brazil, Russia, India, China and South Africa) stood at 11%, while the Global Average was at 8.9% during the same period. In case of Euro system the average was at 4.5%. The average annual growth rate of cash in circulation is more than three times higher than the average global economic growth (as estimated by the World Bank). Thus the cash demand is increasing more than three times faster than economic growth rates10. One has to take the specific socio economic conditions, growth and needs of the people in each country in to consideration. With such an utter disregard for the specific conditions in India and the needs of people in making policy decisions, how can one claim an ‘Indian’ perspective?
Impediments to cashless journey
MasterCard published a study ‘Measuring progress toward a cashless society’ based on its analysis of data from 33 countries in 2013. The study measured nations’ progress by looking at three factors, the Share of cashless payments, Trajectory of cashless payments in the past five years and Readiness for cashless payments. India is part of the 33 countries in the study. The share of cashless payments in India was a mere 2% (Singapore had the share of 61%). With regards to the Trajectory of cashless payments in the past five years, MasterCard results were indexed across all countries on a scale of 1–100. India’s index was just 11 (China 100). The Readiness for cashless payments was assessed based on four prerequisites –Access to financial services, Macro-economic and cultural factors, Merchant scale and competition and finally Technology and infrastructure. India scored 29 under this category (Canada 91 and Sweden 89)11. MasterCard also noted, ‘Even in the most cashless countries on Earth, like France and the Netherlands, cash still accounts for 40% or more of all consumer transactions. In many emerging markets, the cashless share of consumer transactions is effectively negligible’. Yet another report from VISA listed the following as the key impediments to the growth of digital payments in India – an informal labour market and large shadow economy, a large remittance-based economy, high propensity to save in cash, gender imbalance in the use of digital payments, high cost of acceptance infrastructure and insufficient focus on financial literacy12.
What were the consistent efforts by the government to overcome such impediments? What results would be achieved with such lack of readiness and deficient infrastructure? The rural areas, backward areas and the informal sector, which have been subjected to utter neglect all along, are hard hit by the current reckless, rash decisions. Who is liable for the fraud that can occur as the vast majority lack financial awareness and there is a deficient environment riddled with vulnerabilities? The recent security breach involving 32 million debit cards in India is a case in point. Most of the banks stated that the breach occurred outside of their systems13. The onus will be on the cardholders if an unauthorised transaction occurs after the banks have alerted the customer. Another important aspect to be consider is the absence of any regulatory mechanism on the usage of customer data obtained by various entities through mobile phones and telecom companies. Who will be responsible for misuse of data related to payments and customer behaviour in an environment where consumer privacy and sensitivity towards confidentiality of data are considered as inconsequential? The digital / cashless payments can only spread through concerted efforts to overcome the impediments. The impediments can be overcome through policies that take peoples’ needs in to consideration and through measures that are sensitive to the issues faced by the vast majority. An alternative method would be to forcibly thrust arbitrary, ill-conceived decisions in an irresponsible manner. That the government chose the latter option is evident. And the people are suffering the consequences. There will be a day when people strike back.
4 Kavaljit Singh, ‘Financial Inclusion’ in India: Ambitious but Ambiguous Plan, Global Research, October1, 2014
5A strategic review of India’s emerging payments market, McKinsey on Payments, September 2009
6Digital Payment 2020 – the making of a $500 billion ecosystem in India, BCG, Google, July 2016
8 Cash is Dead Long Live Cash, Federal Reserve Bank of San Francisco 2012 Annual Report
9 Global Cash IndexTM, Q2, 2016
10 Recent Global Cash Demand, Produced by the ATM Industry Association, Mike Lee, CEO, ATMIA, October 2015
11 Measuring progresstoward a cashless society, Exclusive insights from MasterCard Advisors
12 Accelerating The Growth of Digital Payments in India, A Five-Year Outlook, VISA, October, 2016