India Needs to Move Towards Less Cash Economy

Dr. RGS Asthana

Senior Member IEEE

Figure 1: Demonetization India 2016 [13]

Summary

The demonetization of Rs. 500 and Rs. 1,000 banknotes [13] was a policy enacted by the Government of India on Nov. 8, 2016 [1]. It created long queues at banks due to shortage of cash. Further the problem got compounded, due to different sizes of new notes and even ATMs required modifications. India, primarily, being cash run economy, it is a difficult time of the people in rural as well as urban areas and one saw long queues in banks.

India, at present, does not have Internet availability in the whole country. The e-payment facility is also with only few traders, particularly, in retail market as it has so far been cash based economy where payments were taken by traders/merchants in cash seldom to avoid taxes. The government’s efforts have, therefore, been in moving toward less cash economy and use cash where it’s a must and people start using e- payments where possible.

Keywords

Digital connectivity, Communications, Internet of things, Near-Field Communication (NFC), Electronic Commerce, Google Wallet, Cashless Economy, Demonetization, Narendra Modi, Reserve Bank of India (RBI), Radio-frequency identification(RFID), National Bank for Agriculture and Rural Development (NABARD), National Payment Corporation of India (NPCI)

Prelude

Prime Minister of India Mr. Modi [11], announced demonetization of Rs. 500 and Rs. 1,000 notes on Nov. 8, 2016 at 8 p.m. i.e. only with a few hours’ notice [13]. It meant that these notes were no longer legal tender. These notes were the country’s largest-denomination bills and not only accounted for almost 86% of cash in the market but also allegedly the foundation of a huge underground economy [2].

The need to continue business, small vendors and shopkeepers will begin accepting digital cash and people of India -- in need of cash which is likely to remain in short supply for some time; will eventually move toward cashless economy. This will be a great boost to Digital India Mission.

The Government, by a single move of demonetization, claimed to stop counterfeiting of the current banknotes apparently used for funding terrorism, as well as a crackdown on black money in the country [1]. The move was described as an effort to reduce corruption, the use of drugs, and smuggling.

According to Cisco [3], Internet of things (IoT) will have over 500 billion devices connected to the Internet by 2030. However, availability of Internet and communication as on date throughout the country is still a question Mark.

More than 3 month of demonetization is now over and cash availability has certainly improved in India. This was the main aim in Prime Minister Narendra Modi's campaign to move India to a less cash, if not a cash less, society. Demonetization had affected the 86% of the money supply by value that had to cycle through the banks. There is distinct controversy about whether this is all worth it and if we look at this one specific action in isolation perhaps not.

Digital Wallets

As per Wikipedia [4], “A digital wallet refers to an electronic device that allows an individual to make electronic commerce transactions. This can include purchasing items on-line with a computer or using a smartphone to purchase something at a store”. One can also link his/her bank account to the digital wallet to facilitate transactions. The users might also have their driver’s license, health and other loyalty card(s) as well as other ID documents stored on the phone.

How Digital Wallet Works

These are two types of wallets: (1). Client - and (2). Server – side. Client-side wallets are generally maintained by the owner, who downloads and installs a Wallet program and enters all pertinent payment and shipping information which is stored on his computer. When owner wishes to purchase something from an online store, the wallet fills are pertinent information automatically making it a pleasurable experience.

One example of server-side wallet is Visa's V.me digital wallet. All wallet data is stored and maintained by Visa on the company's secure computers and not on the owner’s computer.

On V.me retail site the checkout process is fast. The advantage is that the credit or debit card number information is not revealed online which often becomes a security risk. Therefore, it is obvious that server side wallets are more secure.

Google Wallet [6] is one of the most prominent smartphone apps utilizing the security of Near-Field Communication (NFC) [5, 7]. All of information pertaining to your credit card as well as other cards is stored on Google's servers and not on your phone/ computer. If your device is ever lost or stolen, you can instantly remove access to your account on that device by logging at myaccount.google.com.

Like PayPal or other wallet services, Google Wallet also works online. The checkout process is also executed in seconds as you only need to sign into your password-protected account. At present, United States market has around 150,000 merchants with Wallet-ready payment kiosks. ISIS Mobile Wallet is a direct competitor to Google and is supported by wireless carriers Verizon, AT&T and T-Mobile, as well as Deutsche Telecom. ISIS also uses NFC tech. The infrastructure for NFC is slowly coming up everywhere in world.

PayPal, another wallet service, works at major stores such as Home Depot, Office Depot and about many others. You only need to set up your account online by providing your mobile number and defining your PIN. You are now ready to do online shopping or make digital payments.

Security and privacy of data is a prime concern with Digital Wallets. If you use a smartphone, your data passes through the smartphone's hardware and OS and then also through a specific payment app, and finally, the source of the payment, such as your bank or PayPal account. The more the number of intermediaries in the chain greater is the security risk.

Digital wallets, however, have redundant integrated protections. For both online and offline purchases, your digital wallet relies on digital certificates. Digital certificates are simply attachments to electronic correspondence that verify your as well as recipient’s identity and provides receiver a way to encode a reply.

What's more, smartphones with NFC [7] have encrypted chips specifically designed for managing financial security. NFC is considered fundamentally secure [7] and it’s close to impossible for a hacker to decode NFC data even he has your phone and knows your PIN. NFC does not need battery power as NFC chips can work by deriving power from the magnetic field of NFC terminals. So even if your phone's battery is completely dead, you may still be able to buy groceries and pay for a cab to get home.

Financial Transactions in India

The Reserve Bank of India (RBI) [12] calls every mode of cashless fund transaction using cards or mobile phones as 'prepaid payment instrument' [8]. The instruments can be smart cards, magnetic stripe cards, Net accounts, Net wallets, mobile accounts, mobile wallets or paper vouchers. These are categorized into three types:
Closed: Issued by an entity for purchasing goods and services only from it, these don't allow cash withdrawal or redemption. Ola Money is one such closed wallet offered by say, Paytm and State Bank Buddy.

Open: These can be used to buy goods and services, including fund transfers at merchant locations, and also permit cash withdrawals at ATMs. Visa and Master Card cards fall into this category.

Cashless Modes

Mobile wallet: This is basically a virtual wallet available on your mobile phone. You can store cash on the mobile to make online or offline payments. Vendors offer wallets as mobile apps, which you can download on the phone. Money can be transferred into these wallets online using credit/debit card or Net banking. This means that every time you pay a bill or buy online via the wallet, you won't have to furnish your card details. Wallets can used to pay fees, bills and also for online purchases.

Plastic money: This includes credit, debit and prepaid cards. The prepaid cards can be issued and recharged by banks or non-banks and can be physical or virtual. You can buy and recharge these cards online via Net banking and use them to make online or point-of-sale purchases, even given as gift cards.

Net banking: This is simply a method of online transfer of funds from your bank account to another bank account, credit card, or a third party. You can do it through a computer or mobile phone. Log in to your bank account on the Net and transfer money via national electronic funds transfer (NEFT), real-time gross settlement (RTGS) or immediate payment service (IMPS), all of which come at a nominal cost ranging from Rs. 5/- to Rs. 55/-.

India in urgent need for cashless economy or at least less cash economy

Time to push India towards a cashless future has come as shortage of cash has significantly increased the use of digital modes of payment, but the actual shift will only be visible after the cash crunch eases. People queue up for cash and economists are busy revising figures for economic growth because of demonetization. Reducing Indian economy’s dependence on cash is desirable for a variety of reasons.

India has one of the highest cash to gross domestic product ratios in the world. Cash operations cost RBI and commercial banks about Rs. 210,000 million annually. Also, a shift away from cash will make it more difficult for tax evaders to hide their income, a substantial benefit in a country that is fiscally constrained.

India inched closure a cashless economy with the launch of National Payments Corporation of India’s (NPCI’s) unified payment interface (UPI). NPCI is set up with the support of the Reserve Bank of India and Indian Banks Association (IBA). The new system will permit customers to instantaneously transfer funds across different banks with the use of a single identifier thus avoiding giving sensitive info such as account number and bank information. IMP (Immediate Payments) service is faster than NEFT and lets you transfer money immediately and unlike NEFT, it works 24×7. This means that the online payments will become much easier without requiring a digital wallet or credit or debit card; and as well to make Micropayments and big payments from Rs 1/- up to Rs 1 lac per day.

UPI [15] app is a mobile app so it will work only on Mobile phone. Banks have either integrated UPI app in their existing applications or have launched a new app. You need to download the app and register a virtual ID and mobile pin. ‘Anyone’ (read Customer) can transfer you (read merchant) money using your virtual ID (or VID, you don’t need to give any other detail about your account) – VID uses the IMP service or IMPS; however, you as well as ‘anyone’ will need to authenticate a transaction. Customer can also shop from you using your virtual ID. It may be noted that UPI is the advanced version of IMPS. To use this service your bank has to be UPI enabled. Most Indian Banks are but you need to confirm.

RBI has permitted only banks to become Payment Service Providers of UPI service. Thus, mobile wallets cannot use this service. Mobile wallets like PayTM, Freecharge, Mobikwik, Oxigen and Citrus Pay are not very happy with RBI decision as banks are permitted to exclusively use UPI as of now.

How to be cashless with mobile without Internet connection

Method 1:

Unstructured Supplementary Service Data (USSD) based Mobile Banking:

Prerequisite: Account in Bank and Any Mobile phone on GSM network

Restrictions: Up to Rs 5000/- per customer per day

Step 1:

Visit your bank to link your account number with your mobile. It can be done at ATM and also online.

Step 2:

Get your Mobile Money Identifier (MMID) and Mobile PIN (MPIN) which you will get upon registration

Step 3: You are now ready to make payment

Dial *99# from your phone

Step 3.1: You will see a pop up on your mobile with message

“Welcome to NUUP enter 3 letter of your bank short name or 4 letters of your Bank’s IFSC

Step 3.2

You will now see a new screen with

“Enter your option (1) Balance Enquiry (2) Mini Statement (3) Fund Transfer MMID (4) Account Number (5) Aadhaar Card (6) Know MMID (7) Change M-Pin (8) Generate OTP

Step 3.3

Assuming you enter 4 as option then it would ask you for beneficiary mobile number which you enter then following will appear

“Enter beneficiaries MMID

Enter Amount and remarks (optional) separated by single space”

Step 3.4 Confirmation message as follows will appear:

“Want to transfer Rs xxxx to beneficiary with Mobile xxxxxxxxxx and MMID xxxxxxx for [remarks]”

Step 3.5

Enter your M-Pin and last four digits of your account number Separated by single space

The following message will appear:

“Your account number xxxxxxx1234 is debited amount of Rs xxxx on dd-mm-yyyy and account linked to mobile xxxxxxxxxx (IMPS Ref No xxxxxxxxxxxx i.e. 12 digits)”

Method 2 (payment using Paytm):

Prerequisite: Customers and merchants need to register with Paytm with their mobile number and also set a four Digit Paytm PIN.

Restrictions: Up to 25 transactions per month (if you do more transactions then your account will be blocked till month end and you will not be able to receive any cash back)

Paytm has announced a toll-free number 1800-1800-1234 to enable customers as well as merchants to go cashless even if they neither have smart phone nor Internet connection [14]. To pay, you can enter the recipient’s mobile number, amount and your Paytm PIN to successfully transfer the money from your Paytm wallet to another Paytm wallet.

Currently over a million offline merchants across India accept Paytm payment mode. Paytm service is available and accepted in many taxis, autos, petrol pumps, grocery shops, restaurants, coffee shops, multiplexes, parking, pharmacies, hospitals, kirana shops and more.

Use Aadhaar Card for going cashless [19]

You can use your Aadhaar card to credit or debit money. This is government's efforts to encourage cashless transactions in the country through use of Aadhaar.

To avail the service, cardholders will have to enter their Aadhaar ID number and go through a fingerprint or iris scanner verification for electronic transaction. Briefing reporters, A.B. Pandey, CEO of Unique Identification Authority of India (UIDAI), said that the biometric authentication capacity of Aadhaar will be increased from the current 100 million to 400 million a day.

Aadhaar enabled Services will include:

– Balance Enquiry

– Cash Withdrawal

– Cash Deposit

– Aadhaar to Aadhaar Funds Transfer

Install BHIM UPI app [22]

BHIM app was made available to people on Dec 30, 2016. It was called, ‘Bharat Interface for Money’. It was originally an Android app, developed by NPCI (National Payment Corporation of India). It is now also available for Windows and iOS platforms. This app simplifies money transfer across India.

· Launch appropriate store on your iPhone, Windows or Android phone.

· Search for the BHIM app by National Payment Corporation of India.

· Find the app in search results and tap on it to go to its details page.

· Tap on the install to install the app on your Phone.

Add Bank account

· Launch the BHIM app by tapping on its icon.

Set your language.
Tap on next couple of times and then tap on the ‘Let’s get started’.
BHIM app will send a message from your SIM card to verify your mobile number.
After successful verification, it will ask you to set an app password.
Choose your bank from the list provided by the app.
This app will automatically pick the account on which your mobile number is registered.
Confirm the account by tapping on it and BHIM app will add this account for further use.

How to send money

· Tap on the send option which is on the home screen of the app.

· Enter the mobile number or VPA of the Beneficiary.

· Tap on the verify button to verify the mobile number or VPA.

· BHIM app will show an error message if the mobile number or VPA you entered is incorrect. If you entered valid details then app takes you to the payment page.

· Enter the amount and remarks and tap on Pay to send money.

· Your money will be sent instantly and both you and beneficiary will receive a confirmation message.

How to Request Money

· Tap on the ‘Request’ option which is on the home screen of the app.

· Enter the mobile number or VPA of the person to which you are requesting.

· Tap on the verify button to verify the mobile number or VPA.

· If the details are valid, it will take you to the request money page. Else the app will show an error message.

· Enter the amount, validity and remarks and tap on ‘Request’.

· Your request will be sent instantly and that person will receive a message.

How to Scan & Pay

· Tap on the ‘Scan & Pay’ option which is on the home screen of the app.

· Scan the QR code of the beneficiary with the in-app camera.

· BHIM app will read the details verify them and take you to the payment page automatically.

· Enter the amount, validity and remarks and tap on ‘Send’.

· Your money will be sent instantly.

· Both you and beneficiary will receive a confirmation message after the successful transaction.

Note: You can also save the mobile number or VPA for future use. For this select the option ‘Save for future’ while sending or requesting money. The main power of the BHIM app is that after initial setup i.e. linking of your bank account, it can be used offline through USSD as well. You need to dial '*99#', access the menu and make or request payment, all without requiring an Internet connection considering that you need Internet.

Problems in Going Cashless [9]

A large portion of the Indian population is still outside the banking net and not in a position to reduce its dependence on cash. According to a 2015 report by PricewaterhouseCoopers, India’s unbanked population was at 233 million. Even for people with access to banking, the ability to use their debit or credit card is limited because there are only about 1.46 million points of sale which accept payments through cards.

Second, about 90% of the labor force in India produces nearly 50% of the output in the country. This manpower mainly works in the unorganized sector. It will be difficult for the informal sector to become cashless.

Third, people in India have preference for cash transactions. This is so as merchants do not like to keep records in order to avoid paying taxes and shoppers find cash payments more useful for umpteen reasons.

It’s now possible that a large number of Indians move straight from cash to mobile wallets. However, technical issues include the availability of reliable Internet and communication throughout country when there are problems in making electronic payments even in metro cities because of poor connectivity.

Implementation of the goods and services tax (GST), for example, should encourage businesses to go cashless. Government will need to play its role — not necessarily by creating cash shortages — but by incentivizing cashless transactions and discourage cash payments. India will not become a cashless economy in near future, but its high dependence on cash will reduce substantially.

It is understood that Government is ready with the Payment of Wages (Amendment) Bill [10] where employers pay wages either by cheque or by crediting into bank accounts. This will be a way forward towards Cashless economy.

Central Government to Incentivize Digital payments [20, 21]

Finance Minister, Arun Jaitley made a large number of announcements to push the digital economy of the country in his Budget 2017 speech incentivizing digital payments. Jaitley announced that a fund of Rs 25000 million is allocated for UPI based payments and other digital payments and cash back schemes for merchants using the government-aided BHIM Aadhaar-based mobile wallet. There will be special bonus schemes for the consumers using it. He said that 12.7 million BHIM apps have already been downloaded. There will also be AadhaarPay, which will be “useful for people who do not have debit and credit cards, and net banking facility,” Jaitley said. Some details including measures announced on Dec 8, 2016 are as under:

· 0.75% discount on digital payments to petroleum Public Sector Units (PSUs);

· 0.5% discount on suburban railway passes from Jan. 1, 2017 and free accidental insurance up to Rs 10 Lakhs on railway tickets bought online;

· 10% discount on toll tax paid on National Highways using Radio Frequency Identification (RFID) Tag [16] or Fast cards in 2016-17. Electronic Toll collection system implemented in all toll plazas along with facility to pay by credit/debit/prepaid cards. It shall be expanded to cover more lanes and develop wider network for distribution of Tags. Electronic tags on vehicles to auto-detect and charge toll tax with no need for vehicle to stop at the plaza. There are 18 toll plazas between Delhi and Mumbai and if one saves say, 10 minutes per plaza the travel time in Delhi to Mumbai journey will be reduced by 180 minutes.

· Two POS devices will be installed in 1 Lac villages with population less than 10000

· No service tax will be charged on transactions of less than Rs 2000/- per transaction

· “Rupay Kisan Cards [18]” will be issued by Rural Regional Banks and Co-operative banks to 43.2 million Kisan Credit Card holders. These will be supported through National Bank for Agriculture and Rural Development (NABARD) [17] by Government.

· Central Government and PSUs will bear transaction Fee / Merchant Discount Rate (MDR) charges for Digital Payments. The state Governments have been advised to do the same.

· Government removes all taxes on PoS machines to push e-payments

· Public sector banks are advised that merchant should not be required to pay more than Rs 100 per month as monthly rental for PoS terminals/Micro ATMs/mobile POS from the merchants to bring small merchant on board the digital payment eco system. Nearly 6.5 lakh machines by Public Sector Banks have been issued to merchants who will be benefitted by the lower rentals and promote digital transactions.

· Rupay Kisan Cards for farmers

· Railway through its sub urban railway network shall provide incentive by way of discount up to 0.5 per cent to customers for monthly or seasonal tickets from January 1, 2017, if payment is made through digital means.

· All railway passengers buying online ticket shall be given free accidental insurance cover of up to Rs 10 lakh. Nearly 14 lakh railway passengers are buying tickets everyday out of which 58% tickets are bought online through digital means.

· For paid services e.g. catering, accommodation, retiring rooms etc. being offered by railways through its affiliated entities/corporations to the passengers, it will provide a discount of 5 per cent for payment of these services through digital means.

· Public sector insurance companies will provide incentive, by way of discount or credit, up to 10 per cent of the premium in general insurance policies and 8 per cent in new life policies of Life Insurance Corporation sold through the customer portals, in case payment is made through digital means.

· 10% discount on card payments.

· All 5.5 lakh Fair Price Shops are being equipped with micro-ATMs/PoS terminals which will enable them for undertaking digital payment transactions and even work as bank correspondents.

· All major 45 archaeological sites having maximum footfalls of tourists have started accepting digital payments covering more than 80% of the visitors.

· To promote a “less cash” society, the Finance Ministry [23] announced in late Dec. 2016 and also ratified in Union budget on Feb.1 2017 that it would provide tax incentives to small traders accepting payments through digital mode. It has, therefore, reduced the existing rate of deemed profit of 8 per cent to 6 per cent for the amount of total turnover or gross receipts received through banking channel or digital means for the financial year 2016-17. Under section 44AD of the Income-tax Act, 1961, for certain assesses carrying on any business (other than transportation, agency, brokerage and commission) and having a turnover of up to Rs. 20 Million, the profit is deemed to be 8 per cent of the total turnover.

· Conclusion

For India to become cashless first then foremost requirement is availability of reliable Internet and communication. Government has to play its due role by making all payments directly into banks and accepting all sorts of payments online. It needs to legislate that all financial transactions including those by merchants will be paid in through cheques or online. However, till infra is in place and Internet is available throughout the country, Government wishes all those who have access to Internet and have smartphones my move to cashless method of transactions so we do move toward cashless economy.

As a major initiative to promote digital payments, Government has given certain concessions as described above. However, this may not be enough as many in country may not have bank accounts what to talk about credit/debit cards or online payments. ATMs do not have enough cash or have technical glitches. Of late, Cash shortage is improving due to all efforts put by the Government so far. The only thing government has not done so far is putting a tax on cash transactions.

Government has come up with an amnesty scheme for black money holders, given incentives for digital payments as well as announced a cash prize of ten Million rupees for the best digital payment maker. This is right strategy; only solution is to raid black money holders and push them to follow law till they understand that there is no way out. This, however, is most difficult action path.

However, this move is a most welcome addition and if not wholly has been partially successful, particularly, among the very people who line up in front f banks. Demonetization will hopefully reduce corruption and also counterfeiting currency putting a curb on other nations who do it and circulate money in India.

References

[1] Indian 500 and 1000 rupee note demonetization

https://en.wikipedia.org/wiki/Indian_500_and_1000_rupee_note_demonetisation

[2] India's Demonetization Could Be the First Cash Domino to Fall

http://www.forbes.com/sites/patrickwwatson/2016/12/01/indias-demonetization-could-be-the-first-cash-domino-to-fall/#3ecc1f5713bb

[3] Internet of Things

http://www.cisco.com/c/dam/en/us/products/collateral/se/internet-of-things/at-a-glance-c45-731471.pdf

[4] Digital Wallet

https://en.wikipedia.org/wiki/Digital_wallet

[5] How Digital Wallets Work

http://electronics.howstuffworks.com/gadgets/high-tech-gadgets/digital-wallet.htm

[6] Google Wallet FAQ