Without an adequate Infrastructure, forcing people to digital transactions, will only boomerang.
Modi's supposed war on black money has failed miserably . Almost all the demonetised notes are back within the banking system. As an afterthought, the Modi government is now extolling the virtues of a cashless economy; as if the demonetisation was a planned disruption to switch to a digital payment system instead of cash. What it seems to be forgotten is that the sine qua non – an essential requirement – of cashless economy is robust, digital infrastructure that can be accessed by all. This, we simply do not have.
What is a cashless or a digital transaction?
Any transaction has two parties. If it is a cash transaction, no party has to know the other; all they need is to recognise the cash as legitimate money to complete the transaction. For a cash transaction, there is also no transaction fee to be paid to a third party. If it is a cashless transaction, both sides have to provide some additional information. The buyer has to provide a source from which his digital money will be drawn, and the seller a destination that will receive this money. The communications infrastructure has to ensure that a connection is established between the two sides. The digital infrastructure rides on top of the communications infrastructure. It has to ensure that the transaction is negotiated and completed within a reasonable time. If it fails or takes too long, instead of cashless transaction being seen as a convenience, it will be seen as a pain. Poorer the infrastructure, more the chances of failures, and consequently alienation from cashless transactions.
The overwhelming number of India's transactions – 97% according to World Bank – are in cash. Credit or debit cards using Point of Sales (PoS) machines are a meagre 3% of all transactions . Even if people do not use credit cards for digital transactions, they still need bank accounts. Only about 35% of Indians above the age of 15 , have bank accounts and less than 10% have ever done any kind of non-cash transaction.
How strong is India's digital infrastructure?
If we want cashless transactions to grow, we need a digital infrastructure that is widely available and can be easily accessed. This essentially means high internet penetration, either through landlines or via the mobile network. When we make a credit or a debit card transaction, the merchant swipes the credit card on the Point of Sales (PoS) terminals and sends the transaction details to the credit card company using phone lines or internet connections. If we do not use credit cards for digital transactions, we can use our mobiles using e-wallets (PayTM), or apps such as BHIM. Therefore, digital transactions need PoS machines or smart phones through which these transactions can take place.
Out of the 3% retail non-cash transactions, fully 96%, (RBI's December 2016 figures) , take place using credit or debit cards. Credit or debit card retail transactions require Point of Sales (PoS) terminals. India has one of the lowest number of PoS terminals (per million people) in the world. There are only about 1,200 PoS terminals per million of India’s population (RBI figures, November 2016) . Compare this to other BRICS countries: Brazil has 32,995 terminals per million, and China and Russia around 4,000 terminals per million people.
Not only is the distribution of such machines low in India, it is also highly skewed. The bulk of the PoS terminals are in the top 15 cities: it is 20 times higher per user than in the rest of the country. Very few exist in the rural areas.
The government has been claiming that mobile based transactions, using mobile wallets such as PayTM, JioMoney, etc., or the BHIM app launched recently by the government, can be a substitute for PoS terminals. However, there are only about 300 million of mobile users, who have smart phones. Most of them are in urban areas, as rural internet connectivity is a measly 9% for rural areas.
All these are reflected in the International Telecommunications Unit (ITU) Information and Communications Technology (ICT) Development Index, which is a measure of the quality of a country's telecom infrastructure. Out of 175 countries, India ranks a poor 138 , slipping three places below even its lowly 135th place of last year. It ranks even lower than a number of countries whose per capita income is lower than India's. This is a very poor basis for building a digital economy.
Aadhaar as a Payment System
Recognising the weakness of the underlying digital infrastructure, the Modi government has been talking about using Aadhaar number and its biometric based identification (finger prints and retina scans) for digital transactions. This is the Aadhaar Enabled Payment System (AEPS). All we need for digital transactions, or so the argument goes, is our Aadhaar number, tied to our bank accounts and our finger prints verified by the Aadhaar system. The consumer or buyer, does not need to have smart a phone; or even a mobile. The seller needs a biometric device – a finger print reader – and a connection to the internet via a mobile or a computer. A buyer can come to a shop, supply his fingerprint, and the system will take care of the rest.
In theory, it sounds simple; till we examine the points of failure in any such system.
As we now know, biometric based identifications failure rates are estimated to be around 30% in the Public Distribution System (PDS) in Rajasthan and Gujarat. People may be unhappy for not receiving rations. But can we imagine the anger if we lock people out of their bank accounts? Because the biometric identification of Aadhaar failed?
Aadhaar authorities accept that there can be up to 2% failures in identification of fingerprints. In practice, UID authorities admit a failure rate of 10 to 15% . These figures may work in some applications, but certainly not when it is for bank transactions involving peoples' money. If the failure rate of identification is around 30% – as we are seeing in the PDS – are we going to deprive 30% of the people out of their money in their bank accounts? And without any redress?
The Watal Committee set up by the Government on Digital Payments, has reported that Aadhaar based verification for money transactions has a failure rate as high as 60% . If 60% of failures take place in Aadhaar based bank transactions, how is it even possible to talk about Aaadhaar as a basis for a cashless economy?
There have also been serious criticisms of the security and privacy violations in the Aadhaar system. Leaving them aside, one problem for which no answer has been forthcoming, is how do we rectify problems within the Aadhaar system? The Aadhaar sytem is completely opaque to the people. If our finger prints do not match the print in the Aadhaar database, how do we correct the database? What happens if my finger prints are stolen? And yes, it is easy to steal fingerprints. It can be done by just taking a picture of my hand with any decent mobile phone. How do I then withdraw such compromised finger prints from the Aadhaar system, the same way I can repudiate or block my credit or debit card?
There is now grudging admission that the biometric system is not foolproof. If there are such a large number of people in the database, the finger print recognition is not easy. Working people may also lose their finger prints: manual work can wear out their prints. The number of manual workers, who do not have recognisable finger prints, is quite significant.
The problem with digital transactions is not just about poor infrastructure. It is also with peoples' inability to understand and use the cashless modes of transactions. All of the existing modes of digital transactions demand some literacy. We need to be able at least use mobile phones, enter various numbers based on prompts, and be able to navigate the new, digital world. In a country that has 26 % adult illiteracy, we will exclude these people from our new, cashless economy.
The Government is talking of the cost of cash, and therefore the benefit of a cashless economy. This is being pushed worldwide by a number of financial multinationals and the IMF-World Bank Brettonwood twins. What they neglect to mention is the additional cost per transaction in such an economy, and who will bear this cost. Digital transactions have a higher cost to the consumers: any digital transaction has a transaction fee, which is paid by the consumer to a third party, e.g., a credit card (Visa, Master Card, RuPay) or a mobile wallet (PayTM is a mobile wallet) company. Reducing cash circulation in the economy, is a benefit for financial companies and the new tech companies with their mobile wallets; the cost is to the people.
If India wants to go cashless, it requires a robust telecom and digital infrastructure. Putting restrictions on cash in order to force people to use digital transactions, is a classic case of cart before the horse.
Without an infrastructure that makes large scale digital transactions possible, coercive measures such as demonetisation or a penalty on cash transactions, will only boomerang. Lest we forget, forcible nasbandi during the emergency has meant that even after 40 years, male sterilisations in India are less than 2% of total sterilisations. Notebandi may do to the digital economy what nasbandi did for vasectomy, making it much more difficult to popularise digital transactions in the future.