Insights into the dilemma of Cash vs digital transaction
Who will outright assert that digitalization of economic transaction or services is bad? And who would say that for each small transaction swiping your debit and credit card is a convenient option. There is no dilemma in deciding how to carry our economic transactions. Both the systems-cash transaction and digital transaction- have their own advantages and disadvantages. All in all it seems rational and logical to allow both the modes simultaneously with a predominance of digital transactions. But the lure of making political capital out of demonetization and digitalization by the government and protest by the opposition for the same lure has confused people. One group insists that is good and other says it is bad. Theoretically and practically both the groups have their own justifications. But people are confused.
It all started with the promise of the Prime Minster Narendra Modi to bring back black money stashed in safe havens in foreign countries to India and credit Rs. 15 lakhs to the account of every Indian. When Modi government came to power, the opposition parties started reminding about the promise. Not only that, they also tried to take up propaganda against the government by telling the people that this government was not doing anything against the black money contrary to its electoral promise. The situation took a satirical turn in August 2016, when the Prime Minister’s Office was directed by the CIC to respond to an RTI applicant who sought to know when will Rs 15 lakh, as promised by Narendra Modi during 2014 General Elections, be deposited in his account. The direction came in connection with the plea by one Kanhaiya Lal from Jhalawar district of Rajasthan who had filed an RTI application with the PMO seeking to know the status of his representation to Prime Minister Narendra Modi. Lal had also asked the top office that “at the time of election, it was announced that black money will be brought back to India and Rs 15 lakh will be deposited in the account of each poor, the complainant wants to know what happened to that.”
Now Punjab and UP elections in the offing, the present government announced demonetization with an aim to display its sincerity in curbing black money and to pre-empt the possibility of opposition exploiting its inaction on black money in the election campaign. Government demonetized Rs. 500 and Rs. 1000 currency note since midnight of November 8, 2016. But the preparedness to address the side effects of demonetization was not assessed properly and so due to lack of preparedness of the government, the exercise worsened the availability of cash to the common people as well as SMEs and cash based economic activities. The opposition started making a political capital of unplanned and hasty decision of demonetization of Rs 5000 and Rs, 1000 notes, which formed about 85 per cent of the total circulation. Then came a phase when government tried to justify the step as ‘initial pangs’ while the country is going to adopt ‘digitalization’ of economic transactions. Former Finance Minister P Chidambaram Charged Modi Government with “waging a war against poor of the country” and “breaking back of 45 crore daily wage earners by taking the decision of demonitisation”, which according to him was as “absurd and thoughtless move.” He accused the Government of “changing the narrative” and “shifting the goal-post” as the “original announcements of fight against black money, blocking terror fund and flush out counterfeit currency are now replaced by digital and cashless economy.”
It is interesting to see what the current trends in the world are and why India should also try to proceed in the direction of digitalization. But simultaneously it needs to be understood that such changes cannot be ‘forced’ and without adequate digital infrastructure and financial inclusion this would prove counterproductive.
When money was created it was recognized that it has remarkable advantages over the barter exchange in which there were problems of “double coincidence” and “storing value” for future use. Now when the world has already spent about 500 years since money was introduced first time in its present form in England, the form of money has extended to plastic money (debit card and credit card) from paper currency and metallic money. Progressing further, now we have e-wallets and many other platforms for ecommerce, offering a trilateral interface among banks, consumers and retailers. The most nascent way of payments has been offered by what is known as bitcoins. No doubt with the new inventions and innovations money as a medium of transactions has varied faces and interfaces. The use of cash has been decling in some economies, while it is still predominant medium of transaction.
Cash is power. Wherever one goes and whatever one does, cash is synonymous with power and freedom. Transactions are handy in cash if they are routine and small kind. But cash has its own problem if the transactions are relatively big. There are threats of thieves and snatchers. Carrying bundles of cash is also difficult. Every time one needs money, one has to access banks or ATMs, leading to waste of time and energy. And ATMs are also prone to thieves. Net banking, cashless payments through debit and credit cards or e-wallets are safer, quicker and they do away with the requirement of frequently visiting banks or ATMs on one hand and the fear of theft or snatching on the other. It is also said that cash transactions beget black money faster. Digital transactions are less prone to generate black money, because they can be better monitored by formal banking system and tax authorities.
Digital economy also reduces the cost of transactions in an economy. It also eliminates middle men in case of services and welfare programmes, so it reduces chances of corruption by eliminating bribes and commissions etc. Ideally, therefore, it seems that digital economy is better. But digital economy has its own hassles. There are chances of hacking, theft of passwords and stealing of money by cyber criminals. Also in recent Indian experience, since e-wallets are operated through mobile numbers, many instances have been observed in which women’s mobile numbers go into the hands of unsocial elements who harass them.
The first recorded paper-money transaction took place in 7th-century China and, although banknotes were not issued here until the Bank of England was founded in 1694. Now the UK is moving away from cash. Promissory notes issued by central banks world over “promise to pay the bearer.” Cash transactions are almost quaintly anachronistic. The paper itself has only nominal intrinsic value, of course, and it serves as a “proof” that the carrier has wealth totaling the number written on its face.
However, after the internet revolution since 1996, there has been substantial growth in cashless or digital transactions in the world. The world is today using the digital means of economic transactions wherever it is easy and secure. Finland has the highest amount of non-cash transactions in the world, per head, and Norway is also very high. Scandinavian countries are early adopters of innovations, such as internet banking. Last May, according to the UK Payments Council, the value of card transactions overtook cash for the first time in the UK. In this country, at least for those with a comprehensive view, the appetite for new ways to pay is vivacious. Contactless, online, mobile, e-wallets, apps, bitcoin- the U.K citizens use each of these methods. Even countries in Africa have adopted mobile payment systems, such as M-Pesa, which in some respects are more sophisticated than those available in Europe and North America. Across the developing world, technology is seen not just as a conduit for faster payments, but also a bulwark against fraud. In Africa, for example, a quarter of people who have a mobile phone have a mobile wallet. Conversely, in many countries in Western Europe the reliability of cash-based transactions has not reduced in any great way. And so it’s not the same story globally.
• Finland: The use of cash in the pioneer in digitalisation
• The use of currency as a form of payment is dwindling in Finland,
• The Bank of Finland has calculated that if the current trend in using debit and credit cards continues, the use of banknotes in Finland will dry up completely by the year 2029 at the latest.
• Yet, demand for a robust currency supply is growing strongly in Finland, and the Bank of Finland, which reserves the sole right to print banknotes and coins in Finland, reports it has put over 14 million euros into circulation.
• At the same time, the number of banks distributing banknotes has been cut by nearly half in the last 15 years, from 1,600 to 850 nationwide. Likewise, the number of ATM machines has also fallen; from 2,500 twenty years ago to 1,500 today.
• Finnish residents have preferred using payment cards in retail shops. The latest figures show that 7 out of 10 customers use a card, while only 13 percent tend to pay with cash. The remainder says they use a combination of both.
• Measured in euros, card payments account for 42 billion in sales, while cash is used in transactions worth 16 billion. These figures account for 70 and 30 percent of total sales, respectively.
• But if the residents of the country are using less and less cash, where are all the banknotes going to? Bank of Finland says just a tiny fraction of the currency at large is being held in banks and ATMs, saying a full 95 percent is held by the public.
• Digital Agenda for Finland 2011-2020 is geared to promoting growth and productivity throughout society.
• Digitalisation has advanced at a remarkable pace in all areas of life, from the workplace and education to service use and leisure activities.
• Services are now spreading to interactive platforms, monitors and touch screens making them accessible wherever and whenever they are needed.
• Total Transaction Value in the “Digital Payments” segment amounts to US$7,553m in 2016.
• Total Transaction Value is expected to show an annual growth rate (CAGR 2016-2021) of 12.9 % resulting in the total amount of US$13,874m in 2021.
• The market’s largest segment is the segment “Digital Commerce” with a total transaction value of US$7,290m in 2016.
• From a global comparison perspective it is shown that the highest cumulated transaction value is reached in the United States (US$645,876m in 2016).
The world is going digital, but not all at once. A new study by MasterCard revealed that 85 per cent of payments in Japan were made with cash, compared with 48 per cent in the UK. The varied picture from country to country is due to a number of factors – cultural, infrastructural, and demographic and so on. But the differences are not straightforward; that is to say that it’s not as if the biggest economies lead the pack and developing ones bring up the rear.
True, transaction in cashless mode or digital mode is increasing by its own momentum and not by force in many countries. According to European Central Bank data for 2015, seen in the value terms, in cashless transaction, the UK leads at euro 21.27 billion, France euro 18.6 billion, Germany euro 17.99 billion, Netherlands euro 6.4 billion, Spain euro 6.28 billion, Italy 4.79 billion, Sweden euro 3.9 billion, Poland euro 3.87 billion and Belgium euro 3.44 billion.
But this should not be taken as indication of dominance of cashless transactions in all the European countries or developed countries in other continents. It is very important to note that the developed countries still do prefer cash transaction to a great extent. Seen as proportion of total transactions, the cash transactions in the USA stands at 46 percent, Netherland 50 per cent, Canada 52 per cent, France 55 per cent, Australia 65 percent, Germany 80 per cent and Austria 80 per cent. All of them might have different reasons for doing so according to prevalent public perception and preferences. But digitalization in these countries has not taken a forced route. Because of convenience and safety reasons, digitalization in these countries has grown with its own pace.
In Japan, where technological opportunities are usually seized upon with gusto, cash is still favoured by the majority of people. The amenability to digital transaction may depend on cultural and demographic differences, and maybe a lack of a credit economy, mean card payments have discriminated against and thus consumers remain accustomed to using cash in many parts of the world. This explains why two near neighbours such as Germany and Sweden can have such wildly different adoption rates. Germany, the engine room of the European Union and the world’s fourth largest economy, should be positively buzzing with electronic payments, but it isn’t, not at all. Around 80 per cent of transactions in Germany are still made by exchanging cash.
While analyzing the reasons for adopting digitalization we need to see beyond convenience or safety. Research by the Bank of Japan showed that Japanese consumers see convenience as the main benefit of e-payments, while in the UK people use digital medium of payment as the value safety, time-saving, and the ability to pay online and better anti-fraud features. Broadly speaking, the Germans are sceptical about making card payments while it is the second nature in the UK. Germanic thriftiness and love of privacy could be the two main drags on e-payment pick-up. In addition, using cash means customers will only be able to spend the money in their pocket. Germany is a nation known for priding itself on its thriftiness, avoiding debt and shunning credit cards.
Sweden’s head start in the field began in the 1960s, when banks persuaded employers and workers to use digital bank transfers for wages as a matter of course, with credit and debit cards receiving a boost in the 1990s when Sweden’s banks started charging for cheques. Cards are now the main form of payment: according to Visa, Swedes use them more than three times as often as the average European, making an average of 207 payments per card in 2015. So keen are Swedes on electronic payments that the government has created policies to discourage transactions using banknotes. When it comes to innovation in this area, Scandinavian countries are blazing a trail. Here, pressure to update comes directly from the government and the financial system itself.
According to central bank the Riksbank, cash transactions made up barely 2% of the value of all payments made in Sweden last year – a figure some see dropping to 0.5% by 2020. In shops, cash is now used for barely 20% of transactions, half the number five years ago, and way below the global average of 75%. And astonishingly, about 900 of Sweden’s 1,600 bank branches no longer keep cash on hand or take cash deposits – and many, especially in rural areas, no longer have ATMs. Circulation of Swedish krona has fallen from around 106bn in 2009 to 80bn last year.
Apart from consumer choices, it is accessibility and availability of technology that counts in digitalization. It should be noted that in Sweden, it is not just consumer preferences, but the very technology that’s on offer. In Northern European markets, shoppers prefer debit-based payment methods, such as SEPA [Single Euro Payments Area] Direct Debit, which is particularly strong in Germany, or iDEAL, popular in the Netherlands, or open invoice payment methods in Scandinavian markets.
The same is now seen in case of China. It is a hotbed of innovation when it comes to mobile payments, but the methods people use to pay are completely different to the UK. Two e-wallets – Alipay and WeChat Pay – lead the way. With hundreds of millions of users, they are essential for UK businesses to offer in order to reach the critical mass of potential shoppers in the Chinese market.”
In India, the digital journey started in 1996 with the advent of internet and issue of debit and credit cards since the second half of 1990s. Gradually banks started providing value added services including electronic platforms for transaction. This was further accelerated by the advent of ecommerce. Then all of a sudden why there is added compulsion for digitalization. It is because the present government is in a haste to adopt new policies to establish that it can make difficult and fast decisions, which the earlier governments were not capable of. This is a misplaced belief. Every measure takes a reasonable amount of time in preparation.
There is no problem in digitalization as a concept. But there are two things which went wrong- the element of ‘force’ and ‘unpreparedness’. Change is never an easy thing to accomplish; thorough planning and bold decision-making are required to effectively take advantage of information and communication technologies. Reforms never happen by accident or impulses. We need proper planning and strategy for success of measures against black money and measures for digitalization. The major part of black money in India is reportedly either stashed in the safe havens in foreign countries or in real estate, gold and bullion and also frontal fake companies within India. It is far better to stop the generation of black money at its sources of generation. Demonetization would sterilize for sure black money lying hidden by tax evaders as well as fake Indian currency in circulation, but it is a very small part of the total black money. Also digitalization is something which needs proper infrastructure and platforms to people to shift from cash to digital payments and with security. Progress has taken place and this government has expedited the process, but in any case forcing adoption of digitalization may boomerang if it eats into sales of retailers, employment in the SMEs and leads to inconvenience to common men, including farmers in day-to-day transactions.
Government needs to appreciate that to accomplish digitalization, the country’s digital operational environment needs to be expanded and updated to meet requirements and modern standards. The manufacturing sector – as well as society as a whole – should heed the solutions the internet of things has brought into improving both products and business. India now has a chance to become an international safe haven of data if it successfully implements digitalization. This requires the right kind of expertise, smart regulation regarding data protection, cyber safety, taxing and data cables, as well as a bold attitude towards coming up with new solutions. Rather than fighting, the government, opposition and people should encash this great opportunity. At present access to internet, digital infrastructure and mobile technology is not adequate in India. We need to work more in this direction.
