INDIAN INSTITUTE OF MANAGEMENT, AHMEDABAD

Pervasive use of E-Payments in India - Challenges and

Solutions

A report submitted to
Instructor: Prof. Apurv Nagpal
Academic Associate: Shuchi Mishra

In partial fulfillment of the requirements of the course

Written Analysis and Communication II (2016-17)

By
Pranav Jain (16244)
Sarthak Mehra (16303)
Section: E

On
February 26th, 2017
ABSTRACT
Since demonetization back in November 2016, the talk on digital India and going cashless has
achieved new heights. With everyone trying to wonder when India will become truly cashless,
we analyze if it is a distant reality or an achievable milestone.

To deal with high currency to GDP ratio among comparable nations and a high cost of cash,
India needs to lower its dependence on paper currency, which currently accounts for majority of
the transactions. Reduced dependence on cash would save many costs and help towards
attracting greater investments. However, as this paper shows, certain challenges need to be dealt
with to gear the country towards a cashless mode. The paper also suggests a few
recommendations that if incorporated could ease the path to achieving the dream of a cashless
economy.

Target Audience: The motive of this paper is to inform policymakers, particularly bureaucrats
of the challenges that lie ahead in transforming India into a Cashless Economy.

[Word Count: 157 words]

AN OVERVIEW OF THE PAYMENTS SYSTEM IN INDIA
The major means of payment used in India are cash, cheques, credit/debit cards, internet and
mobile banking, Aadhar Enabled E-payment System (AEPS), Unified Payments Interface (UPI)
and Unstructured Supplementary Service Data (USSD) services. An e-payment is a mechanism
of paying for goods and services without the use of cash. E-payment methods include payment
systems such as debit and credit cards, E-wallets like PayTM, internet and mobile banking
solutions, etc.

Of all the aforementioned services, cash accounts for the highest proportion of payments (78%)
made in the country, which is significantly higher than other developing economies (BCG-
Google, 2016) . Further, Indias cash to GDP ratio of about 12% is the highest among
comparable countries (Ministry of Finance, December 2016). A high cash usage implies a high
cost, regarding the cost of printing, the cost of maintaining currency chests and opportunity costs
of the time and effort spent while making the transaction. The total cost of cash has been
estimated at 1.7% of the real G.D.P. of India. These costs are borne by households, businesses,
banks and the Central Bank. (VISA, October 2016)

P ro po rtio n o f va rio us pa yme nt me tho ds

7%
25% 28%
13%
39%
3%
2%
27%
Card
13% Digital Other Paper Currency Cash

4% 2%

78%
69%

44% 47%

B r a zi l China Ru s s i a Ind ia
(BCG-Google, 2016)

The main reasons for such a high use of cash in the country include the tendency of Indian
households to hold a major part of their savings in cash, a significant shadow economy and a
large informal/unorganized sector, inadequate financial literacy, particularly in the rural areas and
costly infrastructure, among others. It seems that cash has a predominant place in the Indian
household; according to the Indian Consumer Household Survey 2014-15, about 40% of the
savings of urban India and 27% of those in rural India are held in cash (VISA, October 2016).
The shadow economy, defined by McKinsey in its report Forging a path to payments
digitization as one that is not taxed, monitored by the government, or included in the GDP is
estimated to be about 26% of GDP (McKinsey, March 2013). The Jan Dhan Yojana, launched by
Prime Minister Narendra Modi, has managed to penetrate the rural areas but it has not been able
to encourage people to switch from cash to e-payment methods. Approximately 24% of the
accounts opened under the scheme have zero balance (Department of Financial Services). The
two main reasons for this seem to be the inadequate financial literacy in rural areas and the
reluctance of the market to adopt the necessary devices, which reinforces the resistance of the
rural people to switch to digital payment methods.

The mission of transforming the country into a cashless economy has various benefits as covered
in the subsequent section.
WHY E- PAYMENTS?
From a macroeconomic perspective, the attempt to go cashless holds much potential, as the cash
which was being used in payments, could be deposited in the banks and can be loaned to
businesses or the government (via reserves kept in RBI), thereby promoting investments.
Another major benefit of using e-payments is the savings regarding the transaction costs and the
time and effort made for transacting money.

Therefore, it is important for the government to promote the use of e-payment methods, so that
they can attract investment opportunities from abroad, and therefore improve the growth
prospects of the country.

(RBI, 2017) (Bloomberg+Mint, 2015)

The subsequent sections below recognize various challenges that exist acting as roadblocks in
Indias path to adopt the e-payment model completely. It further goes on to explore some
suggestions and recommendations that the country can undertake to overcome the obstacles and
achieve the dream of becoming a cashless economy.
CHALLENGES
1. TECHNOLOGICAL BOTTLENECKS OF AN UNDER-DEVELOPED ECONOMY
a. Security threat
The possibility of theft and fraud has always hovered over this industry with a number of
cases rising at a CAGR of ~22% across 2013-2015, with a significant risk of PINs getting
stolen, shared and misused.
140
130.83

120

100 95
87.65
77.96 80
80
68

60

40

20

0
2012-13 2013-14 2014-15

Cases Reported (hundreds) Amount Involved (INR crores)

(Indiastat.com)

b. Server downtime
The current IT infrastructure in the country is not entirely efficient. Hence, there are
multiple occurrences where payment fails, but the amount is deducted, and it takes
considerable time for reconciliation of funds
c. Lack of availability of smartphones
With a smartphone penetration of merely 20% (TimesofIndia, 2016), access to various
tools (like BHIM and IMPS) of e-payments gets restricted for a majority of the
population and hence, making smartphones available to people becomes imperative.

d. Internet Infrastructure
Low internet penetration in India at just 13% (ElaraCapital, 2016) has a large impact in
restricting the uptick of such financial solutions.

2. UNFAVOURABLE ECONOMICS OF CURRENT PAYMENT STRUCTURE

 a. Amount restrictions
Most e-payment solutions today, have various restrictions on the amount of money that
we can transact via them. These options thus are not very handy for big-ticket
transactions.
b. High merchant discount rate
There is a significant cost of upto 1% for transactions over Rs. 2,000 (RBI L. ) that the
merchant incurs for every sale where he accepts cards for payment from his customers.
This high-cost impacts margins that the seller makes, and thus acts as a deterrent towards
acceptance of cards.

3. FINANCIAL ILLITERACY AND WIDESPREAD CORRUPTION

a. Financial illiteracy
E-payment solutions are at very early stages in the country; hence, most people are either
unaware or are skeptical of using non-paper modes of transaction.
b. Parallel economy
A large part of Indian trade still happens in cash, due to the apprehension of people
towards showing all transactions in official books. This leads to large-scale prevalence of
cash in the economy.
c. Unorganized Sector
Some industries in India have a substantial proportion of unorganized sector where wages
are paid in cash only, and hence that money never enters the online portals, thereby
deterring people from using electronic payment methods.

SUGGESTIONS AND RECOMMENDATIONS

1. REMOVING THE TECHNICAL BOTTLENECKS
a. All transactions occurring over the online platform should adopt the One-time Password
(OTP) model to avoid misuse of PINs and thereby thefts. Additionally, strict security
guidelines and softwares need to be introduced that can make card scheming and e-frauds
difficult.

b. The technical infrastructure of the country needs to be strengthened manifold. Uptime of

the technology networks should follow six-sigma standards of quality management.
 Moreover, penalties should be imposed on financial institutions that do not maintain the
necessary standards.

c. Smartphone availability is a huge concern that restricts the successful implementation on

any e-payment platform. To tackle the same, low-cost smartphones should be introduced
through Make in India initiatives.
Alternatively, people should be encouraged to use USSD facility under which
transactions can take place electronically via GSM network, without accessing the
internet, and hence using basic feature phones as well. (CashlessIndia.com)

d. Bringing India online has been the mission of the Indian government since long. This
mission needs to be accomplished, and the government needs to make available internet
at all locations to have a digital payment ecosystem flourish. Providing low-cost, high-
speed internet hence should become a strategic priority as is mentioned in the fiscal
budget for 2017-18. (Finance-Ministry, 2017)

2. MAKING THE MODEL FAVOURABLE

a. A mechanism needs to be introduced under which big-ticket transactions can also be
incurred via the electronic modes of money transfer. Additional security features like grid
verification of debit cards should also be introduced simultaneously.

b. Merchants need to be encouraged to use the card and other e-payment methods for
transactions. The government could follow examples of Canada and South Korea where
discount rates have been rationalized to promote such transactions at merchant outlets.
Tax incentives such as reduction in VAT or service/income tax for merchants accepting
cards should be introduced (FederalBank-KansasCity, 2015). The loss incurred due to
removal/reduction of discount rates and the introduction of tax incentives can be
compensated for by a reduction in the use of cash leading to cost of cash reduction and
more white money in the economy.

3. CREATING AWARENESS AND CONTROLLING CORRUPTION

a. Campaigning through TV advertisements or local camps is the best way to deal with
financial illiteracy and to make people aware of the benefits of e-transactions.
Additionally, demos need to be provided on how to use the online portals.
(IndianExpress, 2016)
 b. Cash transactions should be disincentivised by imposing heavy charges on depositing and
withdrawing cash from the bank. Income tax department can further become more
vigilant and integrate Aadhar card with PAN numbers and mandate all cash transactions
to have compulsory quoting of PAN.

c. Getting rid of unorganized sector is a separate issue that the government needs to deal
with. However, from the respect of cashless transactions, education to weaker sections to
accept payment in e-forms and providing cashback and other discount schemes could
serve our immediate purpose.

FINAL THOUGHTS
As it stands now, India is laden with several challenges that come in the way of achieving
widespread e-payment use. Therefore, for now, the goal of making India a cashless economy
seems like a far-fetched dream. However, several solutions and recommendations can be
implemented in the near future to reduce the amount of cash utilized in the economy.

[Word Count: 1485 words]

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