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Cashless Economy - Benefits and Prospects

 30th Jan 2017    21:17    Nikita 


In the present scenario, when the entire nation is debating Prime Minister Narendra Modi’s initiative to make India a cashless economy, there are still many who don’t even know what actually this thing is. A cashless society is an economic state where the transactions don’t require money in the form of physical notes, rather they are conducted through electronic channels such as debit and credit cards, electronic clearing, and payment systems such as Immediate Payment Service (IMPS), National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS).

The trend towards the use of non-cash transactions and settlement began in 1990’s when electronic banking evolved and since then it has shown an appreciable increase in the number of users, most of them belonging to countries like USA, UK, Brazil, etc. By 2010, digital payment methods were widespread in many countries, with examples including intermediaries such as Paypal, digital wallet systems operated by companies like Apple, Contactless and NFC payments by electronic card or smartphone, and electronic bills and banking, all in widespread use. However, India is one of those nations where the use of cash still prevails. The need for in hand cash can be analysed by the long queues in front of the ATMs and the economists being busy estimating the extent to which economic growth will be hit by the ongoing drive to replace the high-value banknotes with the e-transactions.


‘Why would one go for online transactions?, this might be the first question. The hyperconscious elements have an opinion that online payments are risky and it may lead to money loss. But of course, every coin has two sides. There are a lot of benefits associated with online transactions which easily overdo the defacements of the system. The transaction costs are coming down and will further go down. Once a substantial part of transactions is cashless, it would bring down the cost of printing, managing and moving money around. Further, the cashless economy automatically solves the problems of cash out on long holidays, the risk of carrying currency notes, etc. Further, the lesser use of cash strangulates the grey economy, prevents money laundering and increases tax compliance. Increased tax base would result in greater revenue for the state and greater amount available to fund the welfare programmes. Lastly, Cash being material, can be prevented from circulation but electronic channels alleviate this friction and increase circulation of currency. 

One should not ignore the darker side of this system. Rising transaction volumes can lead to performance bottlenecks as inefficient processing limits capacity and degrades the customer experience. With increased cashless payments, the number of attackers has also increased. Attackers can steal and misuse data, leading to painful disclosures, adverse publicity, and fines. Hackers can often easily dupe users accessing online payment systems and banking systems into revealing their account information after receiving official-looking e-mails. But again, e-mail is pretty easy to forge. And even an intelligent user may have difficulty discerning an official e-mail from a forgery. A number of e-mail-based online banking frauds are currently circulating the Internet. PayPal, MBNA, eBay, Citibank, and a number of British banks are popular targets. 

Context of India

Talking about the context of India, it continues to be driven by the use of cash. Less than 5% of all payments happen electronically. In India, the ratio of cash to gross domestic product is 12.42% of GDP, which is one of the highest in the world. It is 9.47% in China or 4% in Brazil. Further, the number of currency notes in circulation is also higher than in other large economies; India had 76.47 billion currency notes in circulation in 2012-13 compared with 34.5 billion in the US. 

The main reason for cash being preferred by Indians has been the non-availability of the internet banking services to the remote locations. Further, a part of the population constitutes of the technical illiterates who don’t know the use of smartphones, tablets and other such devices, as a result of which they are away from this trend of going cashless. The perception of the consumers is yet another barrier. The benefit of cashless transactions is not evident to even those who have credit cards. Cash, on the other hand, is perceived to be the fastest way of transacting for 82% of credit card users. There are restrictions on using bank accounts to refill digital wallets. Even the RBI Governor Urjit Patel, who appeared before the Public Accounts Committee looking into demonetisation and its impact on monetary policy, told the panel that the country’s infrastructure is not ready for a cashless economy. 

So, at this point in time, when it's needed to pace up with the world, we need to work on promoting the cashless system. The first and a major step can be to enable better banking services. The services should be user-friendly and should not require deep technical knowledge. Another prerequisite is a robust payment mechanism for digital transactions through NEFT and Real Time Gross Settlement Services. An integral part is played by the telecom industries in carrying out cashless transactions. Hence we need the expansion of these exigents. Smartphones should be more accessible. The private sector can be a driver for this. For the wheels of commerce to run smoothly, the act of paying for a product or service by a credit or debit card must remain easy, efficient and safe. 

So, come entrepreneurs, make India a cashless economy!