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India going cashless: Too fast, too soon?

India going cashless: Too fast, too soon?

By Dr Moin Qazi

India is currently in the midst of an attempt to modernise its financial services. As individuals move into the electronic financial space, the year 2017 becomes an important milestone. It marks India’s epochal transition from a cash economy to a cashless, digital one.

The right steps in the right direction

The innovation of the Aadhar is perhaps India’s singular contribution to accelerating development through biometric technology in the social sector. In its World Development Report for 2016, the World Bank lauds the Aadhar system, stating that “[a] digital identification system such as India’s Aadhaar, by overcoming complex information problems, helps willing governments promote the inclusion of disadvantaged groups.”

The number of monthly payments made digitally has increased 24 times from $15 million in November 2016 to $359 million in March 2017. The government’s BHIM app, a UPI-based mobile application, launched by Prime Minister Narendra Modi in December 2016, was downloaded 23 million times during the last five months.

Furthermore, the Indian financial technology market is forecasted to touch $2.4 billion by 2020, a two-fold increase from the current market size of $1.2 billion. As per a Google BCG report, India has the second largest number of mobile subscriptions in the world, with over 1 billion users. Approximately 240 million of these consumers use smartphones. This number is projected to increase to over 520 million by 2020. Low-cost Internet-based transactions and business efficiency owing to technological advancements are expected to kill physical banks in the next five or six years according to NITI Aayog CEO Amitabh Kant.

It’s not all an upward sloping curve

The digital medium is now seen as the most potent tool for narrowing the divide between the wealthy elite and the ever expanding middle class. However, there are several challenges peculiar to India that may constrain a full-scale digital transition in the foreseeable future. On the surface, this transition may not appear to be profoundly deep. But as it pans out, the tectonic shift will have much wider implications; policy executors will have to contend with diverse and exponential societal changes. A report released in 2016 by industry body Assocham estimated that as many as 950 million Indians did not have any kind of internet access yet.

An unavoidable paradigm shift

The race to digitalisation, therefore, cannot be a sprint. India culturally believes in cash and a paradigm shift in thinking will need time and resources. It will actually involve a migration to new social and cultural patterns and habits. There are marked demographic and class issues built into India’s cashless transition. The tech class will have to get a better grasp of the impact on the ground. India speaks 438 languages, according to The Economist, each with multiple dialects and scripts.

Geographical and cultural diversity have large-scale implications. The aversion of the “other India” to digital finance is connected to a larger aversion to everything that has to do with technology. This stems from a lack of trust in and comfort using technology. Women often face additional barriers: limited access to mobile phones, lower literacy levels, less confidence in using technology, and restrictions on travel or social interaction.

Need for governance with a difference

Changing the financial framework is also not enough. Consumers will have to walk that extra mile if they want to reap the harvest of these new financial tools. The new revolution will have better chances of success if it is driven less by financial punditry and more by empathetic governance. People take to new technologies when they see clear benefits, have greater confidence in the markets and services, find it convenient and can afford it. The painful reality is that providers too often focus on short-term incentives at the expense of long-term consumer trust and loyalty.

Understanding the service providers

Managing the agent network is the most critical post-launch success factor. Agents conduct the cash-in and cash-out functions, enabling customers to convert cash into electronic money and back again in convenient locations. In the eyes of the customer, the agent is the face of the company. This means that the agent can either build or destroy trust and credibility. Many providers focus on building their agent networks as fast as possible, without careful attention to the agents’ business case and profitability. Experts suggest three key tenets in managing an agent network: (1) grow the customer base and the network in tandem; (2) understand agent economics and risk — the business case for agents is not that simple and (3) only enrol agents who have the right skills and dedication, and prepare to train and retrain.

Building inclusive digital economies requires the collective action of the government, industry, financiers, and civil society. Before speeding ahead, we need to build the infrastructure, align the policies, and create the tools that will enable the poor to comfortably board the digital train.

Featured Image Credits: Pixabay

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