In stark contrast to the US or the UK where 50-70% of retail payments are electronic, in India that number is approximately 3%. Banks have made a conscious effort to encourage the adoption of electronic payments, both with incentives for acceptance at the merchant end and also for consumer. However, old habits die hard, and cash continues to remain king.
So what can be done to change the pace of adoption?
While there can be some pretty radical views, below are three high-level areas, including some carrots and sticks, which I believe will move the needle in India.
1) Simplified process for debit card acceptance
Implementing minimal KYC (know your customer) for debit card acceptance could go a long way. A key reason why merchants don't accept electronic payments is that they are simply not allowed to. The hurdles associated with KYC documentation and the approval to get a point-of-sale terminal that can process card payments are numerous, time consuming and unbelievably tedious. I can understand the concern around credit cards, where the merchant and consumer could collude to game the system (making a more thorough KYC necessary). But credit cards serve only a small percentage of the population, about 20 million consumers at best. Debit cards should be for the masses and the aim should be to eliminate all friction for accepting them.
"Ultimately, nothing will change until we make the merchant tell the consumer, 'We prefer electronic payments', and get the customer to say, 'I prefer playing electronically'."
The whole process needs to be significantly simplified and a Telco-like model can be followed. Companies have introduced ultra low-cost POS terminals but the trouble in activating them is holding back the industry. When a merchant is allowed to accept cash, there is no reason to not be allowed to accept funds debited from cards directly into their bank accounts.
2. Incentives for consumers and merchants
It is important to think of a few carrots that will drive adoption. The top three that come to my mind are:
- A tax-rebate for consumers if they spend money electronically, say for a five-year period. South Korea did this successfully and we can follow suit. This initiative will also incentivise more consumers to file taxes in India.
- A tax rebate for merchants for all non-cash transactions recorded electronically - again addresses two problems in one shot.
- Eliminate any other friction such as surcharges - whether for fuel, train tickets, utility bills etc.
3. Make cash less convenient
While carrots incentivise people to follow a certain behaviour, in some cases a few sticks are also required to drive them in the right direction. A few quick ideas that can work are:
- Make cash more expensive and inconvenient in several key segments starting with government payments such as utilities, IRCTC, etc. For example what if cash transactions at a petrol bunk cost the customer 2.5% more than card payments? What if consumers had to pay 2% more on their electric bill if they paid cash?
- Ban cash at certain locations - especially when the transaction value is greater than say Rs 1000. Why does someone want to pay cash at a five-star hotel or at an airline counter?
- No tax exemptions for cash transactions - business expenses, for example, should only be done electronically and companies should not be able to claim tax benefits for cash transactions. And perhaps increase luxury tax on businesses when transactions are done in cash.
Ultimately, nothing will change until we make the merchant tell the consumer, "We prefer electronic payments", and get the customer to say, "I prefer playing electronically". And this has to happen in earnest and immediately if India has to rapidly move to a cashless economy! There are companies waiting in the wings to invest in fast-tracking this adoption - the government just needs to demonstrate its seriousness in making this happen.
Many reading this article will argue, "We live in a democracy - and we cannot impose such harsh constraints on people". But if we go with the assumption that electronic payments are right for all of us, action is our only option. A solution needs to be found and I'm open to any and all suggestions.