Cash still king: e-payments growth is slowing

The rise in electronic payments after demonetisation has received much attention. Most of the attention has been self-congratulatory and premature. A close look at Reserve Bank of India statistics offer a mixed picture, indicating that while they are increasing in value and volumes, they are unlikely to offers an alternative to cash anytime soon despite the strong push by the government, slow pace of remonetisation and non-functional ATMs in many rural and sub-urban areas.

The preoccupation of the banks in the public sector with their non-performing assets means that they have little time or resources to invest in digital payments. The inability of the public sector banks, which have last mile connectivity, comes at an inopportune time, when the uninitiated customer is willing to experiment with digital payments due to their supposed convenience.

A cursory glance at RBI representative data on electronic payments and RBI bulletins indicate that post-remonetisation and attendant improvement in cash availability, an overwhelming number of people have simply moved back to cash. Electronic transactions peaked in March 2017 and have continuously declined since then. The biggest beneficiaries of the government's push are pre-paid instruments, the Unified Payments Interface (UPI or Bhim), IMPS and, to an extent, RTGS and NEFT.

During the period November 2016 to November 2017, electronic transactions in totality increased by 48% in terms of number of transactions and 29% in terms of value. Amongst these, IMPS transactions more than doubled, UPI increased to about Rs 9,640 crore and prepaid instruments increased by about 55% to Rs 3,140 crore.

Mobile payments have witnessed extreme volatility and increased by 19% in volume, but declined in value from November 2016 to September 2017. In contrast, debit card usage has been tepid, growing by 18% in volume and 36% in value. The biggest beneficiaries are NEFT and RTGS, which have grown by 32% and 38% respectively since demonetisation.

Further, the rate of growth in electronic payments is declining, indicative of larger problems. This is indicated in the growth of electronic transactions since they peaked in March 2017. Total electronic transactions grew at the rate of 9% to the present, while in the case of card transactions at point
of sale (PoS) terminals, the growth was a paltry 4% and 6% respectively in terms of volume and value. UPI, too, has witnessed a slowdown in the pace of growth, which is obvious considering the larger base that it had to contend with in recent months.

The biggest beneficiaries in digital payments, RTGS and NEFT, have grown thanks in large measure to the Goods and Service Tax (GST), indicating that businesses are increasingly using the services. While RTGS and NEFT grew 4% in terms of volume in the period March-November 2017, they grew by 15% and 13% respectively after the introduction of GST. Interestingly, electronic payments witnessed sharp spurts closer to deadlines for filing GST returns.

Unresolved bottlenecks

The causes for the slowing growth in digital payments are largely structural in nature. The problem is mainly due to the lack of digital payments infrastructure and lack of incentives to consumers. None of the outstanding infrastructure issues have been resolved. Though RBI does not release digital payments data for rural areas, it is clear that the lack of infrastructure, accompanied by the slow pace of remonetisation, is most acutely felt by the bottom half of the population, especially in the small towns and rural areas.

Though in aggregate terms the increase in the total number of PoS machines to 2.9 million at the end of September 2017 from 1.13 million in March 2016 seems high, in reality, it means an average of less than one for every 10 business establishments in the country. Moreover, these PoS machines are overwhelmingly installed in the large cities and occasionally in the larger towns. Little wonder that debit card usage was tepid despite the total number of cards issued growing by nearly 40%.

However, this does not mean that people in small towns and rural areas do not intend to use electronic payments, especially debit cards. The problem is that there is no place where they can use it due to lack of infrastructure. A recent trend is the increased adoption of digital wallets by the younger generation. This adoption has been helped by aggressive marketing of digital wallet services in rural areas.

Digital payments require a certain level of education, awareness and comfort in using technology. The attempt by the government to thrust digital payments is increasingly leading to digital exclusion in rural areas, especially among the elderly and those without education. The banking sector has been unable to take up any meaningful or sustained mass education programme. As a result, though there is a strong push to go digital, a combination of factors inhibits its growth.

A third reason why digital payments have not been embraced in earnest, especially in rural areas, is because transacting with cash is still the cheapest option for the consumer. There is no incentive or compulsory benefit for a consumer in rural areas to use electronic payments.

On the contrary, using a debit card leads to hefty charges in the form of merchant discount rate. This is a powerful disincentive for customers, especially among those transacting small amounts. Installation of PoS machines is unattractive to most rural merchants because of high recurring costs. Merchants who have installed the occasional PoS machine in rural areas and small towns lament that, at best, an occasional customer uses her card to transact with them. This is a further disincentive to others.

Thus, unless these three structural issues are resolved, it is likely that digital payments will only grow incrementally, rather than dramatically, anytime soon. On the contrary, it may even be argued that the expansion in electronic payments has already witnessed its peak.

(The writer is an independent researcher based in Andhra Pradesh)

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