The Indian government hopes its abrupt decision to remove 86 per cent of the country's currency in circulation will spur the country to a move towards a cashless economy.
While the government is urging citizens to use plastic, it appears the availability of card payment systems is currently limited to only a small fraction of the merchant network in the country. That is likely to put a dampener on consumption in the coming months and cause even more pain to small traders and consumers alike. India has been a largely a cash-dominated economy with over 95 per cent of all transactions taking place in cash.
When it comes to card payment infrastructure, India has one of the lowest number of card swiping machines or point-of-sale (POS) terminals per capita in the world, according research by EY. The penetration of POS terminals was only 693 per one million people, compared to similar emerging countries such as Brazil, which has 32,995 terminals per million people and China, which has about 4,000 terminals. And most of these card machines – about 70 per cent -- are located in the top 15 cities in India contributing to over 75 per cent of the total volumes at these terminals.
According to Mastercard, which provides payment processing products, only about 1.4 million merchant locations across India were accepting cards as of October, accounting for only about five per cent of all personal consumption expenditure in India transacted on cards, said Porush Singh, Country Corporate Officer, India and Division President, South Asia, Mastercard. That compares to about 50 to 55 per cent share that cards have in the total personal expenditure volume in developed markets, he added.
The reasons behind the low adoption of card payment machines are varied, ranging from the high-cost of the payment card machines, to a consumer preference for cash, black money, and the lack of a strong government push until now to drive cashless payments'
The reasons behind the low adoption of card payment infrastructure are varied, ranging from the high-cost of the payment card machines, to a consumer preference for cash, black money, and the lack of a strong government push until now to drive cashless payments, according to Singh. That is set to change, however, with the new demonetisation move somewhat, though.
While the cost of setting up a typical POS machine varies from merchant to merchant, about half of the total cost is the price of the machine ranging between Rs 4,000 and Rs 8,000. But with more low-cost options coming to market that require only a QR code and a sticker, more merchants are likely to adopt alternative, cheaper, payment methods, experts hope.
"[POS] is expensive. It can cost between $70 to $150 but a QR code sticker is the cost of printing a paper," said Singh. Mastercard has recently launched Masterpass QR, a QR code-based mobile payments product that consumers can use to pay by both a smartphone or a feature phone. Mastercard, which has partnered with RBL Bank, hopes to expand its market share among India's untapped merchant market for more card payment products.
However, there are barriers to low-cost options as well. That is because a large number of digital payment options available on the market require a smartphone. And currently, India's smart phone penetration is only about 250 million, meaning the vast majority of the population doesn't own a smartphone and will admittedly find it difficult to jump on these digital wallets instantly. But the consumers who do have smartphones are already flocking to online wallets.
Indeed, in the past few days, mobile wallet companies have reported record sales. One mobile wallet company Paytm claims to have seen a 700 per cent jump in overall traffic and 1,000 per cent growth in the amount of money added to the Paytm accounts in the two days just after the demonetisation move to withdraw Rs 500 and Rs 1,000 notes was announced. Other mobile wallet companies like Freecharge and Mobikwik are also celebrating.
India is estimated to have issued 25.9 million credit cards and 697.2 million debit cards as of the end of July, according to data by the Reserve Bank of India.
Another barrier to a mass migration to cashless is technology upgradation needed by banks and payment companies.
Just days after the currency ban was announced, many cardholders across India complained of sporadic server outages with malfunctioning credit cards machines at supermarkets and convenience stores. While none of the banks and payment companies have come forward to point to where the technical glitch lay, it became clear that the technology backbone is perhaps not as robust to support even the existing number of cards in the country. India is estimated to have issued 25.9 million credit cards and 697.2 million debit cards as of the end of July, according to data by the Reserve Bank of India.
India also suffered a massive debit card breach in October affecting 3.2 million debit cards and several banks, which showed the vulnerabilities of banking networks.
Mastercard's Singh warns the move to digital is typically not rapid and tends to be slow 'journey.' Even in advanced markets, the move to digital wallets has been slow, he said, pointing to Australia's example where it took about two and half years for people to embrace mobile wallets. As for security, he is optimistic that advanced biometric security features such as iris scans for mobile payments will ultimately give confidence to consumers in the future.
Many other experts are also optimistic that the government will drive more people and merchants to consider digital options in the long-run. Additionally, the government's move to scrutinise large cash transactions and demanding PAN cards and IDs will only further discourage cash transactions.
And ultimately, the mobile-savvy consumer who is leading more and more digitally-led lifestyles, will also drive change.
"The consumer is getting digitally connected and driving choice at merchants," said Singh, adding the second revolution is with fin-techs (financial technology) companies "that will have a large opportunity."