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CASHLESS ECONOMY IN INDIA: CHALLENGES AHEAD
Aslam Hasan, Mohammed Atif Aman, Faizi Weqar
Abstract
In an attempt to curb-out black money, money laundering and to have a sound economy, the
central government of India has embarked on the cashless economy. It is a start of a new era in the
nation with life with digital money. This paper dwelt on the meaning of a cashless system,
explains online banking techniques in India, schemes by government to spread cashless system in
India and highlights the challenges of the cashless economy and electronic payment systems. The
objective of the study is to examine the significant challenges that are faced by Indians on the way
towards cashless. To achieve the objectives of this exploratory type of study personal interviews
will be conducted.
Keywords: cash-based economy, cashless economy, electronic payment system, electronic
payment techniques.
Introduction
In recent past, the term cashless has been a matter of interest among bureaucrats, academicians
and researchers around the world. Cashless economy is a layout, where to make transactions one
doesn’t need to carry cash in physical form as a medium of exchange, but rather with the use of
credit or debit cards or electronically1. It doesn’t mean total elimination of cash but it is just
transformation of economy into an ambiance that minimizes the use of physical cash by providing
alternative channels for making payments. Globally both developed and developing economies
are making great strides in minimizing the use of paper money. Sweden is on the way to be first
cashless economy, as major banks had stopped working in cash. People in Belgium do not
remember the last time when they had paid in cash. Denmark is also in the list where less than
25% of retail transactions are made in cash2. Till date, India continues to be driven by the use of
cash; however the finance minister, in 2016 budget speech, talked about the idea of making India
a cashless society. RBI in its recent publication “Payments and Settlement Systems in India:
Vision 2018”, carved out plans to boost up electronic payments and to enable India to move
towards a cashless society. India holds one of the highest cash to gross domestic product ratios in
the world, and lubricating economic activity with paper costs Rs 21000 crores annually to RBI
(Tufts University, The Cost Of Cash In India). In a step towards development of economy and to
keep an eye over tax hoarders, government of India has launched its campaign “cashless India”.
To make India a cashless society government has also started various schemes like Digishala,
Visaka,Digital Finance for Rural India: Creating Awareness and Access through Common Service
Centers (CSCs) and laid down various steps such as Unified Payments Interface, Unstructured
Supplementary Service Data (USSD) based Mobile Banking, Aadhar enabled payment system
(AEPS), Point of sale, National Electronic Funds Transfe (NEFT), Bharat Interface for Money
(BHIM), Lucky Grahak Yojana and the Digi-धध Vyapar Yojana etc.that will be covered in this
study, but the main aim of the study is to find out the major challenges faced by Indians while
moving towards cashless society.
Review of literature
It was in 1918 when the Federal Reserve Bank used telegraph to move currency for the first time
and with the set up of Automated Clearing House (ACH) in 1972 provided the U.S treasury and
commercial banks an alternative to process cheque, which led to the revolution of e-payment as
Benjamin Graham (2003)3 noted in his work “Evolution of Electronic Payment”. Many
researchers over the world have undertaken research, symposia, seminars, journal articles, and
lectures to evaluate the system of e-payment. Snorckel and Kwast4 used the Federal Reserve’s
1995 survey of consumer finance and analyzed the effect of demographic characteristics on the
likelihood of e-payment instrument usage by households. Carrow and Stanten(1999)5 investigated
preferences of consumers among debit cards, credit cards and cash. In October 2005,
Wondwossen & Tsegaiand G. Kidan (2005)6 completed their work on e-payment challenges and
opportunities in Ethiopia and found; Poor telecommunication infrastructure, Frequent power
disruption, People are resistant to new payment mechanisms, Lack of skilled manpower,
Unavailability of payment laws, and regulations particularly for e-payment.
Balachandher., K.G., Santhan, V., & Norazlin, R (2000)7 studied electronic banking in Malaysia
and found that ATM were most widely accepted and highly utilized channel. Joshua Abor (2004)8
researched technological innovation and banking systems in Ghana and found a positive relation
between them. Studies by; Hunter, W. C., & Timme, S. G. in (1991)9 found that information
technology has appreciable positive effect on banking productivity; cashier’s work, banking
transactions, bank patronage, bank services delivery and customer services.
Researches regarding the issues of cashless system are also done as Wondwosson T & Tsegai G.
Kidan (2005)10 found out that e-payment is surrounded by widespread challenges in Africa. Poor
telecommunications infrastructure, limited readiness by banks, behavioral constraints, inadequate
legal and regulating framework, and low level of credit card access are among the constraints that
have hindered the progress of e-payments. Baraghani (2007)11 examined factors influencing the
adaption of Internet banking. Bassey (2008)12 in his work “Digital Money in a Digitally Divided
World” revealed the challenges to the adoption of e-payment systems in Africa. He categorized
challenges into three categories viz; the infrastructure, regulatory, cultural-cum human
dimensions”. In his view the infrastructural challenges were the most important this comprises of
accessibility, affordability, networks, connectivity and usage. According to Worku (2010)13, e-
payment and e-banking applications carry a security challenge due to highly dependency on
critical ICT systems that may create vulnerabilities and can harm customers. “It is imperative for
banks to understand and address security concerns in order to leverage the potentials of ICT’s in
delivering e-banking applications”. Akhalumeh and Ohioka (2011)14 observed some challenges
with the introduction of cashless policy. Their findings show that 34.0% of the respondents cited
problem of internet fraud, 15.5% cited problem of limited POS/ATM, 19.6% cited problem of
illiteracy and 30.9% stayed neutral - the respondent not been sure of problem been expected or
experienced. Okey O.Ovat (2012)15 found Fraud, Indiscriminate deductions from accounts, high
rate of illiteracy, inefficiency, epileptic public power supply as challenges in Nigeria. Ajayi, L. B.
(2014)16 found lack of unique national identity system, inadequate infrastructure, high rate of
illiteracy and poor sensitization, poor timing and sequencing for both the policy as challenges for
cashless policy.
Research gap
In India the term cashless is not new concept, people were using debit/credit cards, mobile/net
banking, smart cards etc since early 2000, but that was optional or we could say that it was the
outcome of the technological, industrial advancement and socioeconomic upliftment in the
country, and that too was a small proportion as mentioned above just 2% of all transactions were
cashless. But, now there is an all around call to became cashless for that government has also
started various schemes , but in a country where one-fourth of the population is illiterate, 30% of
the population is below poverty and 40% of the population was unbanked till 2006, 43% of the
total accounts are dormant17. These are some pecuniary facts that stimulate us for this study to
find out the challenges that are faced by citizens of Indian while going towards cashless.
Objectives of the study
1. To identify the various challenges faced by Indians while moving towards cashless.
2. To analyze the status of ‘cashless layout’ in rural and urban areas.
Conceptual Issues
•Cash based economy
Cash-based economy is defined as one in which day-to-day payments and business activities are
predominantly transacted in physical notes and coins. These notes and coins are issued mainly by
the central bank of any country duly signed by the Governor, promising the the bearer to pay the
printed amount. These notes and coins are the basic medium of exchange in the country.
•Cashless economy
Cashless economy is a system which aims at reducing, not eliminating the amount of physical
cash (notes and coins) circulating in the economy, whilst encouraging more electronic based
transactions (payment for goods, services, transfers etc). It is an economic system in which
transactions are not done predominantly in exchange for actual cash (Daniel, D. G., R. W. Swartz,
and A. L. Fermar, 2004)18. Some researcher says that it represents the pure state of non-cash
payment systems where no more sturdy coins and notes are printed for circulation by the Central
Bank, for which Claudia and Grauwe (2001)19 says, cashless society is a regime in which currency
issued by the central bank has ceased to exist.
•Electronic payment system
Electronic payment system is an arrangement for making payments electronically via, debit/credit
cards, m-wallets, point of sale (POS), Mobile banking, internet banking etc. It is not a new
phenomenon use of electronic networks for trade began in the early 1970s in the financial sector.
One of the first applications evolved as Electronic Funds Transfer (EFT) - the movement of
money between financial institutions via telecommunications networks20.
E-payments greatly increase payment efficiency by reducing transaction costs and enabling trade
in goods and services of very low value. They may also increase the convenience of making
payments by enabling them to be made swiftly and remotely from various devices connected to
global networks.
Electronic payment methods
A. Banking cards (debit / credit / cash / travel / others): One of the basic and method for online
payment is through cards issued by the bank which are used to withdraw money from ATM
machine and to make online payments. Each card secured by a four digit pin and every time when
we make online transaction we are required to enter the pin and OTP i.e one time password that is
send to the registered mobile number. Banking cards offer consumers more security, convenience,
and control than any other payment method.
B. Unstructured supplementary service data (USSD):The innovative payment service *99#
works on Unstructured Supplementary Service Data (USSD) channel that doesn’t even require the
internet connection to operate as this service allows mobile banking transactions through basic
feature mobile phone. This service is currently offered by 51 leading banks across the country on
all GSM network in 12 languages. ( NPCI)
*99# service has been launched to take the banking services to every common man across the
country. Banking customers can avail this service by dialing *99#, a “Common number across all
Telecom Service Providers (TSPs)” on their mobile phone and transact through an interactive
menu displayed on the mobile screen. Services offered through *99# service include, interbank
account to account fund transfer, balance enquiry, mini statement besides host of other services.
C. Aadhaar enabled payment system (AEPS): AEPS is a bank led model which allows online
interoperable financial transaction at PoS (Point of Sale / Micro ATM) through the Business
Correspondent (BC)/Bank Mitra of any bank using the Aadhaar authentication.
D. Unified payments interface (UPI): Unified Payments Interface is launched by NPCI to
facilitate instant fund transfer between multiple banks via mobile phones. It is built over
immediate payment service IMPS for fund transfer using virtual payment address, account
number with IFSC, mobile number with mobile money identifier, Aadhar number. Each Bank
provides its own UPI App for Android, Windows and iOS mobile platform(s). A mobile banking
personal identification number is required to confirm each transaction.
E. Mobile wallet: mobile wallet is a way to carry digital money in your mobile phone. One can
link credit or debit card information via mobile wallet application to make online transactions.
Instead of using card to make purchases, one can pay with smart phone, tablet, or smart watch. An
individual's account is required to be linked to the digital wallet to load money in it. Most banks
have their e-wallets and some private companies. E.g. Paytm, freecharge, mobikwik, oxigen,
mruppee, airtel money, jio money, sbi buddy, itz cash, citrus pay, vodafone m-pesa, axis bank
lime, icici pockets, speed pay etc.
F. Point of sale: A point of sale (PoS) is the place where sales are made. On a macro level, PoS
may be a mall, a market or a city. On a micro level, retailers consider PoS to be the area where a
customer completes a transaction, such as a checkout counter. It is also known as a point of
purchase.
G. Internet banking: Internet banking also known as online banking, e-banking or virtual
banking, is an electronic payment system that enables customers of a bank or other financial
institution to conduct a range of financial transactions through the financial institution's website.
H. Mobile banking: Mobile banking is a service provided by a bank or other financial institution
that allows its customers to conduct different types of financial transactions remotely using a
mobile device such as a mobile phone or tablet. It uses software, usually called an app, provided
by the banks or financial institution for the purpose. Each Bank provides its own mobile banking
App for Android, Windows and iOS mobile platform(s).
I. Micro ATM: Micro ATM is a small device that is used by Business Correspondents (BC) or
business facilitator to deliver basic banking services to common man via bank cards. They are
basically cash dispenser and cash depositor with a print receipt of each transaction. This enables a
person to instantly deposit or withdraw funds regardless of the bank associated with a particular
BC. The device is based on a mobile phone connection available at every BC. Customers would
just have to get their identity authenticated and withdraw or put money into their bank accounts.
Different types of online transaction techniques:
National Electronic Fund Transfer (NEFT): National Electronic Funds Transfer (NEFT) is a
nation-wide payment system facilitating one-to-one funds transfer. Under this Scheme,
individuals, firms and corporates can electronically transfer funds from any bank branch to any
individual, firm or corporate having an account with any other bank branch in the country
participating in the Scheme. NEFT also enables walk-in-customers to transfer money but upto Rs
50,000 only. Presently, NEFT operates in hourly batches - there are twelve settlements from 8 am
to 7 pm on week days (Monday through Friday) and six settlements from 8 am to 1 pm on
Saturdays.
Real Time Gross Settlement (RTGS): RTGS is fastest possible money transfer system through
the banking channel as settlements are made in real time without any queue time. 'Real Time'
means the transaction is not subjected to any waiting lines and it is settled as soon as it is
processed. 'Gross Settlement' means the settlement of funds transfer instructions occurs
individually or on one-to-one basis without netting with other transaction. ‘Settlement’ means that
once processed transactions final and irrevocable. The RTGS system is primarily meant for large
value transactions. The minimum amount to be remitted through RTGS is 2 lakh. There is no
upper ceiling for RTGS transactions.
Electronic Clearing Service (ECS): ECS is an alternative method for effecting payment
obviating the need for issuing and handling paper instruments for periodic transactions (monthly/
quarterly/ half-yearly/ yearly) like payment of interest/ pension/ salary/ dividend etc. from a
single user source to a large number of destinations.
Immediate Payment Service (IMPS): IMPS is an instant, 24X7, inter-bank electronic fund
transfer service via mobile phones all over India. It is managed by NPCI and is built upon
National Financial Switch network objected:
•To enable bank customers to use mobile instruments as a channel for accessing their banks
accounts and remit funds.
•Making payment simpler just with the mobile number of the beneficiary.
•To sub-serve the goal of Reserve Bank of India (RBI) in electronification of retail
payments.
•To facilitate mobile payment systems already introduced in India with the Reserve Bank
of India Mobile Payment Guidelines 2008 to be inter-operable across banks and mobile
operators in a safe and secured manner.
•To build the foundation for a full range of mobile based Banking services.
Capacity building and awareness program by government of India
Digishala: In an attempt to promote digital payments in the country ministry of electronics and IT
has introduced ‘Digi Dhan Abhiyan’ campaign to enable viewer’s to move towards cashless
transactions. DigiShala is an education and non-commercial free channel about digital
transactions where viewer’s will be informed and educated through demos of various cashless
transaction methods.
Digital Finance for Rural India: Ministry of electronics and IT launched “Digital finance for rural
india: Creating awareness and access through common service centres (CSCs)” under Digital
Saksharta Abhiyan (DISHA) with an objectives to enable the CSCs to become Digital financial
hubs, by hosting awareness sessions on government policies and digital finance options available
for rural citizens as well as enabling various mechanism of digital financial services such as
IMPS, UPI, Bank PoS machines etc.
Vittiya saksharta abhiyan (visaka): India is on the cusp of an economic revolution towards
cashless economy and to bring any major change youth had always played keen role. Visaka is
one such campaign that actively engage youths of higher education institutes, motivating and
encouraging them for cashless economic system.
Research methodology
This study is based on qualitative research method because qualitative research is characterized
by its aims, which relate to understanding some aspect of social life, and its methods which (in
general) generate words, rather than numbers, as data for analysis. Additionally, it seeks to
understand a given research problem or topic from the perspectives of the local population.
Qualitative research is especially effective in obtaining culturally specific information about the
values, opinions, behaviours, and social contexts of particular populations. Some sort of
secondary data has been used in this research that was extracted from various sources viz:
journals, books, e-books, reports, etc.
The data for this study was collected through an interview session. The research population for
this study was all the residents of city Aligarh, with a sample size of 42 respondents, convenient
sampling was used to determine our respondents from both urban and rural regions which
includes all sections of the society i.e. students, businessmen, academicians and service class.
Open-ended questions were asked regarding the challenges they face while going cashless.
Findings
In the light of the study conducted by us the major challenges that are faced by India are:
Education & knowledge: One of the major challenge is lack of basic knowledge among
major population, it is a serious impediment for adoption of cashless society as it hinders
the accessibility of banking services. For citizens to fully enjoy the benefits of cashless
economy, they should not only know how to read and write but also possess basic ICT
literacy
Unawareness: Despite of various awareness and capacity building programs by the
government most of areas are still unaware regarding cashless mechanism especially the
rural regions, where we know that one-third of the country resides.
Lack of infrastructure: Inadequate infrastructure which ranges from network failure and
slow speed of internet which leads to failure or dual payment for same transaction,
incompatibility with modern banking techniques, epileptic power supply which is critical
to efficient electronic payment system will undoubtedly militate against the success of
cashless policy.
Security & Privacy issues: Security and privacy issue seems to be one of the major
challenges in the development of cashless policy in India, people are much concerned
about leakage of personal information, fraudsters and hackers.
Behavioral constraints: Which could also be said as resistant to change, many people we
met fulfill all necessary obligations to be cashless as they are educated, carry latest
gadgets, knows how to use online banking but also they doesn’t want to change way of
living they are happy as they are.
Conclusion
This paper was aimed to find the challenges that are faced by Indian citizens in a move towards
cashless economy, for that we interviewed students, academicians and businessmen from both
urban and rural areas. Government of India has laid much stress on becoming cashless to curb-out
black money and corruption from the nation, for that various schemes and campaigns had also
been launched to aware and motivate peoples. Various digital payment methods were also
introduced to make cashless transaction easy and eco-friendly. Despite of such efforts by the
government, only 17% of the population is making cashless transactions oftenly. Major part of the
population is concerned over security and privacy issues. Lack of infrastructure is also a matter of
challenge for two-third of the population. One of the challenge faced by Indians is lack of
education and knowledge regarding cashless economy.
Suggestions
From this study we would like to suggest that:
•Mere launching of schemes and campaigns regarding cashless doesn’t seems to be
worthwhile. To make these schemes more impactful, some sort of marketing tools should
be applied to make these schemes fruitful.
•Online transactions should be made as cheap as possible, eliminating all sort of extra
charges so that more and more peoples switch from cash based to cashless economy.
•More emphasis should be laid on educating the people in rural areas as major part of the
nation resides in rural areas only.
•All sorts of transactions dealing with huge investment must be cashless so as to keep a
control over black-money.
•Adequate security mechanisms should be put in place to safeguard the interest of
consumers against dubious and fraudulent practices of fraudsters.
Limitations of the study:
Despite of all efforts and dedication towards this study there are some limitations to this research
which are as follows:
•Sample size: The sample size for this study was 42 which is too small for a diversified
country like India.
•Population: The whole research was conducted in Aligarh district, which itself is a small
city as compared to other metro cities of India, therefore there is a possibility that with
large area of population we could have found some more challenges.
•Mood of respondent: As interviews are face to face and verbal method of data collection
therefore it is possible that with mood the answers of respondent may change.
•Lack of prior research on the topic: As cashless economy is a new phenomenon in India,
that’s why not so much of work is being done on its challenges.
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