Perspectives from ISB

By Minal Agarwal, Manager, ISB-Centre for Business Markets

Are cash transactions going to be obsolete and be completely phased out? Is COVID-19 going to erode the cash system ultimately? If not eliminate the use of cash, will it speed up the process of moving towards a cashless economy? Life is certainly not going back to normal post-COVID-19!!

To avoid transmission of disease through the physical transfer of money, governments in major countries are encouraging cashless transactions. Luckily, we are in a time where the infrastructure required for electronic transactions is already in place. This may not have been possible even a decade back.

Many countries are moving very rapidly towards a cashless society. Sweden is planning to become the first cashless society in the world by 2023.

Over the last few years, all purchases in Sweden have been made electronically by Credit card, Debit card, Contactless chips, and Pin card with magnetic strips. Over 80% of the Swedes use cards or mobile apps to make their payments. More than half of Sweden’s bank branches no longer accept cash deposits or withdrawals. The Government in Sweden encourages citizens to adopt a cashless economy. In 2012 they introduced a mobile application ‘Swish’ for electronic payments. The application is used by over half of the population in Sweden. Digital payment has been so widely accepted that Swedes no longer carry cash.

Children are also becoming part of this transition; many Swedish bank have started issuing cards to citizens of age six or older with parental permission, which translates to more than 97% of the population. Cash accounts for less than 2% of the total value of all transactions in Sweden.

The Central Bank in Sweden is testing the introduction of its own digital currency ‘e-krona,’ a currency that could accelerate the country’s cashless society. The e-krona pilot scheme is planned to start in 2020 and could be implemented throughout the country by 2021.

The USA is also making rapid strides towards a cashless economy. Between 2000 and 2015, a non-cash transaction in the USA has grown by almost 400%. A study done by Javelin Strategy and Research, showed that mobile payments in the USA are expected to grow from $180 Billion in 2016 to $410.5 billion in 2020. Some of the widely used modes of digital payment include Apple Payment and Google Wallet.

China’s digital payments grew from 4% of all payments in 2012 to 34% in 2017. Hong Kong introduced ‘Octopus Card’ in 1997 and became one of the first countries in the world to initiate a cashless payment.

Singapore government is aiming to make the country cashless by 2025. They launched ‘PayNow’ last year, allowing users to do transactions through mobile phones without disclosing their banking details. Since then, PayNow has recorded 1.4 million registrations with a transaction volume of nearly Singapore $ 900 million. The good thing about PayNow is that the remitter need not keep track of the payee details anymore. As all the data are stored in a central repository managed by a third party.

Over the last about three years, India has done a fundamental shift in moving away from cash subsequent to demonetization. The Government has taken several initiatives to help move in this direction, such as:
1. Promoting payments through Cards, Mobile Wallet, and other digital means
2. Linking Aadhaar card, PAN number, and bank account
3. Ensuring interoperability between various banking systems
4. Introducing Unified Payment Interface
5. Incentivizing users for using digital payments

We have been a cash-reliant economy. We were using cash or some other forms of physical transactions for ages. However, this aspect of the Indian reality has its share of drawbacks. It is cumbersome to print money, transport it, and keep it safe. Deploying cash typically entails additionally costs 0.5% of a country’s GDP every year. This additional cost is not the only incentive to move towards a cashless future. The demand to move into a cashless economy is primarily arising from the younger people who find it to be a very fast and secure means of payment. Moreover, cashless transactions are hassle-free and convenient and fast becoming the new normal.

Digital payments make it easier for the Government to monitor tax avoidance since every single payment gets recorded. Digital payments also help in curbing counterfeiting and acts as a powerful weapon against black markets.

While going cashless is the latest evolution in modern economies, it raises a fundamental question of what the value of money is if it does not physically exist. At the same time, digital payments are prone to the risk of fraud and cyber-crime. Some sections of society find it hard to rely on digital payment. There are sections of the Indian population that are not conversant with and are not very comfortable with the use of Internet banking. People living in remote areas where Internet coverage is patchy may find it difficult to get connectivity that is vital to digital payments.

Particularly challenging from the perspective of the Government is to ensure that as cash phases out of the country, following on the footsteps of developed economies, the vulnerable sections of the society are not left behind.

Some measures which can help to achieve the transition to a Cashless Economy are:
• The Government should focus on developing infrastructure, especially in rural areas
• Developing high-speed Internet access and a vast mobile network in rural areas
• A robust digital banking base
• Educating people on how to make payment through banks and digital platforms, including enhancing financial literacy and awareness among the masses
• Individual drives through schools, colleges, panchayats, etc. to increase awareness about cashless/banking transactions.
• Schools and Colleges can help educate the new generation on the usage and adoption of digital payments
• Linkage of all welfare activities through bank accounts
• Rapid grievance redressal mechanisms as well as responsive systems to address concerns relating to digital payments
• Bringing public transport and services under the ambit of cashless payments
• Incentivizing people to make digital transactions and using mobile wallets for purchases made through e-commerce for a variety of payments such as the purchase of railway tickets, payment for utilities, etc.
• Enhancing Cyber safety and security measures for maintaining the integrity of online data and information, to help reduce apprehension among users about possible frauds
• The technological innovation brought by the Fintech industry and the policy initiatives of the Government must work together for enhanced adoption of digital payments and continuous innovations.