By Aanya Makhija and Vedant Gupta
Introduction
India has made significant progress towards becoming a cashless economy due to technological and digital financial inclusion advancements. The pivotal moment in India's transition to a cashless economy was the demonetization of November 2016. The sudden withdrawal of ₹500 and ₹1,000 notes, intended to combat fake currency, compelled the Indian population to embrace digital payment methods with open arms. This initiative aimed to reduce black money and pave the way for a digital economy. This decisive action by the government served as a catalyst and the first step in moving towards a cashless economy.
This bold vision, spearheaded by the government's "Digital India" programme, encourages a dramatic shift away from traditional cash transactions and towards a world dominated by digital payments. Mobile wallets like Paytm, PhonePe, and GPay, along with UPI (Unified Payments Interface) are rapidly becoming the new currency on the streets. A cashless economy comprises no physical cash flow where all transactions are conducted using electronic channels such as credit cards, debit cards, net banking, electronic clearing, and through payment systems like National Electronic Funds Transfer (NEFT) and Immediate Payment Service (IMPS). There are many different types of ways to carry out cashless payments.
Mobile wallet: This is a virtual wallet on mobile phones to store cash and make online or offline payments. These wallets are provided by service providers through mobile apps on phones, allowing individuals to transfer money into the wallets online using a credit/debit card or net banking.
Plastic Money: Includes credit, debit, and prepaid cards. Prepaid cards can be physical or virtual and are issued by banks or non-bank institutions. Such cards are used for three primary purposes; withdrawing money from ATMs, swiping for purchases or payments at shops, restaurants, etc., and making online payments.
Net Banking: Net banking is the process of transferring funds online from one bank account to another, a third party, or a credit card without involving any wallet. Individuals can make such payments through a computer or phone. The transfer of money occurs through national electronic funds transfer (NEFT), real-time gross settlement (RTGS), or immediate payment service (IMPS).
India's cashless economy movement is driven by a set of ambitious objectives. First and foremost, it aims to promote financial inclusion, bringing more people into the formal financial system through digital channels. This can empower those who haven't traditionally relied on banks. Additionally, a cashless economy strives to enhance transparency. Transactions become easier to track, reducing opportunities for tax evasion and fraud. Curbing the circulation of black money, or untaxed income, is another key objective. Furthermore, a cashless system can be a powerful tool to combat corruption. Finally, the ultimate goal is to ensure convenient and secure transactions for everyone.
Over the past few years, the way people make transactions has been revolutionized with the increasing popularity of platforms such as Paytm, Google Pay, and PhonePe, making digital payments even more accessible and convenient. Through programmes such as the Unified Payments Interface (UPI), which enables easy money transfers between bank accounts through mobile apps, the government is promoting a cashless economy in India. Programmes promoting digital literacy and increased internet access have fueled this change even further.
Furthermore, the pandemic boosted the adoption of contactless payments as people sought safer transaction methods. India currently boasts one of the fastest-growing digital payment landscapes in the world, with a growing acceptance of electronic transactions in both urban and rural areas. This change empowers millions of previously unbanked individuals and improves economic transparency and efficiency while also fostering financial inclusion.
A cashless economy holds significant importance as it facilitates easier cross-border transactions, lowers overhead costs, encourages a more reliable and effective tax collection system, and boosts economic growth. It also promotes targeted financial aid, fosters financial innovation, and strengthens overall economic resilience.
Role of Fintechs
Fintech has significantly contributed to the transition towards a cashless economy in India, as there has been a mind-boggling 87% adoption rate. The digital payment solutions pioneered by fintech companies have streamlined and simplified the process of making transactions without the need for physical cash.
“The shift towards a cashless economy continues to gain momentum as more and more people use fintech solutions for their financial needs. As a result of fintech, it has become easier than ever to conduct transactions without cash, which has contributed to a more efficient and transparent economy.”
Fintech companies have played a pivotal role in advancing a cashless economy by offering innovative digital payment solutions that go beyond mere convenience, fundamentally transforming financial lives. For individuals, these solutions reduce costs, especially in rural areas where accessing financial services is quite difficult and in certain scenarios where they don't have to travel to urban areas and enhance security by mitigating the risk of cash-related crimes. For governments, fintech innovations increase transparency by minimising leakages and preventing unknown recipients through improved payment traceability and stringent identification processes. Additionally, these digital systems help curb corruption and black money, thereby reducing illegal activities and boosting tax revenues.
Major players like PhonePe, Google Pay, and Paytm leverage the Unified Payments Interface (UPI) to enable seamless, real-time bank-to-bank transfers via online devices. Companies such as Razorpay and CCAvenue offer robust payment gateway services, allowing businesses to accept various digital payment methods, including credit/debit cards, net banking, and wallets. Collaborations between fintechs, banks, and non-banking financial companies (NBFCs) are also enhancing the reach and efficiency of digital financial services.
The Fintech Renaissance has been a driving force behind India's digital payment revolution, with innovative Fintech companies disrupting traditional financial services through seamless, secure, and user-friendly payment solutions. A key aspect of this transformation is the focus on financial inclusion, empowering unbanked and underbanked populations to participate in the formal financial system. This inclusive approach has significantly contributed to the growth of the Indian economy, making fintech a crucial player in its success story.
Advantages
A cashless economy is very significant, as it brings enhanced transparency, reduced black money flow, improved convenience, and increased economic growth. One of the primary benefits is the creation of a digital record for all transactions, making it difficult to sustain black economies or underground markets that could harm the country. This significantly lowers the chance of black money entering the system and increases the risks for criminals engaging in illegal activities. A cashless economy also reduces the prevalence of criminal activities like drug trafficking, human trafficking, terrorism, and extortion by complicating money laundering. Additionally, it helps curb the circulation of counterfeit currency and makes tax evasion even more challenging, thus expanding the tax base and increasing government revenue for welfare programmes. Digital transactions enhance transparency, scalability, and accountability while also improving market efficiency. The risks associated with carrying and transporting large amounts of cash are eliminated, and the costs of producing paper currency and coins are reduced. Furthermore, the data from cashless transactions can assist the government in planning for future needs, such as housing and energy management, based on spending patterns.
Moreover, with the advent of digital media, one can avoid queues in ATMs, transact 24/7, and save time. With the emergence of e-KYC, it is no longer necessary for service providers to know their customers physically, as the payment model has overcome limitations related to physical presence. Lastly, one can keep track of payments made and manage cash efficiently.
Disadvantages
On the flip side of things, cashless transactions come with notable drawbacks, including security issues, cyber threats, a digital divide and the potential exclusion of vulnerable groups. The increase in online transactions has made life more convenient but has also heightened the risk of online fraud. The current lack of strong laws and legal frameworks to prevent online fraud, along with the risk of data theft, can lead to significant security breaches for banks, exposing the financial information of numerous users. The convenience of cashless transactions can also lead to overspending, especially among the younger population, resulting in the rise of significant unnecessary debt. Identity thefts are also on the rise due to a lack of financial literacy, causing individuals to lose confidential information and hard-earned money. In India, financial illiteracy and reluctance to adopt cashless transactions are major barriers. While internet and smartphone penetration is improving, transitioning from a cash-based economy to a digital one remains challenging for those who need a better understanding of financial systems.
Consumer Adoption Behaviour
Individuals choose cashless payments for various reasons, such as convenience, security, and efficiency.
Convenience
User-Friendliness: Digital payments allow for quick and easy transactions without the need for physical money.
24/7 Accessibility: unlike traditional bank hours, digital payment systems are available at all times.
Financial accessibility: With mobile payment apps and online banking services, finances can be managed from remote locations with internet access.
Security
Lowered Risk of Theft: Digital payments reduce the risk of theft as they minimise carrying large sums of cash.
Enhanced Fraud Protection: Many digital payment platforms feature advanced security measures such as encryption, two-factor authentication, and real-time fraud monitoring.
Digital Transaction Records: cashless payments create a digital trail, facilitating easier tracking and verification of transactions, thus deterring fraud.
Efficiency
Transaction Speed: Digital transactions are typically faster than cash payments, reducing wait times and boosting productivity.
Automatic Records: Digital payments generate automatic records, making budgeting and financing easier to manage.
Services Integration: Integration of cashless payments with investing platforms and other financial services, such as automated bill payments, is a straightforward process.
Incentives and Rewards
Cashback and Discounts: For using their services, many digital payment companies offer discounts, rebates, and reward points.
Loyalty Programmes: Users can benefit from loyalty programmes that provide additional perks and benefits.
Economic Factors
Cost Reduction: Digital payments lower costs related to handling, storing, and transporting cash.
Access to Financial Services: Cashless payments can provide easier access to a variety of financial services, such as loans, insurance, and savings accounts.
Technological Advancements
Widespread Mobile Use: The broad use of smartphones has made mobile payments increasingly prevalent.
Innovative Payment Solutions: Technologies like QR codes, Near Field Communication (NFC), and blockchain are making digital transactions more seamless and secure.
Societal Trends
Evolving Consumer Behaviour: The trend towards online shopping and digital services has naturally led to a rise in digital payments.
Pandemic Influence: Cashless payment techniques gained traction during the COVID-19 pandemic as individuals looked for ways to make payments without physical contact.
Government Policies And Initiatives
Regulatory Support: The government's initiatives to promote digital payments and financial inclusion have encouraged individuals to adopt cashless methods.
Incentives for Digital Transactions: Policies that provide tax breaks or other financial aid are used to incentivize digital transactions and further promote their usage.
The Future of India's Cashless Economy
The future of India's cashless economy is immense, offering numerous advantages, such as reducing the expenses associated with printing and managing cash. This shift not only conserves natural resources but also curtails pollution from the printing process. Digital transactions facilitate better tax compliance since each transaction is documented, leaving no room for tax evasion. Moreover, the efficiency and speed of digital transactions enhance economic activities, supporting smoother operations within people and businesses. India has made significant strides towards a cashless economy, notably propelled by initiatives like UPI and mobile wallets, alongside the rise of fintech startups and advancements in digital payment technologies. The stock market serves as a prime example where all transactions are seamlessly digitised.
Despite these advancements, challenges such as low digital literacy, inadequate digital infrastructure in rural areas, and high transaction costs for small businesses need addressing. Additionally, concerns over cybersecurity and building user trust in digital transactions remain crucial for sustainable growth in the economy.
Nevertheless, with continued investments and advancements in infrastructure, robust cybersecurity measures, supportive regulations, and ongoing education efforts, India is poised to make further strides towards realising its vision of a cashless economy.
How Secure Are Cashless Transactions?
India has made significant strides in building a robust digital payment infrastructure, with the Unified Payments Interface (UPI) being a prime example. UPI allows for real-time bank transfers using a mobile phone, and its security protocols include two-factor authentication (2FA) and end-to-end encryption. Popular mobile wallets and payment apps like Paytm, Google Pay, PhonePe, and others have implemented strong security measures such as biometric authentication, OTP (One-Time Password) verification, and secure encryption technologies to protect user data and transactions. Banks and financial institutions are investing heavily in cybersecurity to protect against fraud and hacking attempts. This includes regular security audits, the deployment of anti-fraud systems, and adherence to international standards such as PCI-DSS (Payment Card Industry Data Security Standard). Websites and apps use SSL certificates to establish secure and encrypted connections between users and servers. This ensures that all data exchanged is encrypted and secure from being corrupted.
Cashless Economy: Success or Failure?
The transition to a cashless economy has achieved notable progress while encountering several challenges. On the positive side, there has been a significant increase in digital transactions, facilitated by platforms such as India’s Unified Payments Interface (UPI), which has revolutionised the payment landscape by handling billions of transactions each month. Convenience and efficiency have increased with the transition towards digital payments, which has also decreased the risks and expenses related to handling cash.
This transition is not without difficulties, though. Problems with infrastructure and accessibility still exist, especially in rural and remote areas with poor internet access and low levels of digital literacy. Strong precautions to shield users from fraud are required as a result of the increase in cybersecurity risks brought on by the growth in digital transactions. The digital gap is still a major obstacle that may cause people who lack access to digital devices or the requisite technical abilities to fall behind. Furthermore, the economy is more susceptible to technological malfunctions and attacks due to high reliance on technology.
In conclusion, the shift towards a cashless economy has achieved notable successes in urban areas and among the tech-savvy population, enhancing security, transparency, and financial inclusion. However, to fully realise its benefits, ongoing efforts are needed to address the challenges of infrastructure, cybersecurity, and digital literacy, ensuring that the transition is inclusive and secure for all sections of society.
Do you think India should go cashless? Leave a comment and tell us what you think.
References
Agarwal, Avantika. “How Fintech Contributes to a Cashless Economy.” LinkedIn, 19 Apr. 2023, linkedin.com/pulse/how-fintech-contributes-cashless-economy-avantika-agarwal.
“Cashless Economy in India - Definition, Types and Advantages for UPSC Economy.” BYJUS, BYJU’S, 6 Mar. 2024, byjus.com/free-ias-prep/cashless-economy/.
“Cashless Economy: Objectives, Importance, Impact on Indian Economy, Advantages and Disadvantages.” Cleartax, cleartax.in/s/cashless-economy. Accessed 20 June 2024.
In collaboration with Metamorphosis
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