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The cashless India jumla as an answer to #demonetisation mess

Vidyut

The government began with focusing on fake currencies and black money as the reason for demonetisation. As deposits started rapidly piling in banks and it looked increasingly unlikely that there was a lot of black or fake money being caught, the goalposts started shifting.

Soon it became evident that the supply of legal notes was nowhere near adequate and worse, going by the capacity to print notes, it would take another 5 to 6 months to return the amount of money withdrawn from the country. Then came disclosures of problems with notes, inappropriate prioritization of the 2000 rupee note, which is available relatively abundantly, but without the intermediate 500 rupee notes, only serves to reduce the limited liquidity with the existing 14% of notes left to people.

Suddenly the talk seemed to turn to a cashless India. Government spokespersons on TV as well as Modi himself have given up all talk of black money and suddenly demonetisation is all about a cashless India (which got rapidly ridiculed with comparisons to the cash-less reality) and upgraded to a less-cash India. This is a terrible idea.

Necessity is not utility

If it were useful for India’s sellers to accept cashless payments by paying a charge on the transactions, they would already be cashless. The government wouldn’t have to recommend it at all. The fact is, cash transactions are highly efficient. They work instantaneously and reliably with no other infrastructure needed – bank accounts, devices, connectivity, electricity to run said devices…. and they are FAST. Taking a note or five from a wallet, handing it over, acceptig change back takes way less time than devices connecting, verifying, blah blah blah. Even swiping a card takes more time. AND unlike cash, you pay a fee every time it is used. Whether it is the buyer or seller charged, the cost will ensure the buyer pays for it. No seller is an idiot.

A few sellers may have adopted these methods in a bid to increase the business the government killed, but it is highly unlikely that they will prefer these methods to cash, if they hadn’t found them useful before. A few businesses catering to buyers likely to own cards may continue, but that is an entirely different planet from cashless India.

To give a very crude example:

Bottom line is that cash works. Starving the country of cash will not work because hoarders will hoard and the government will have to issue adequate cash to keep country running. This kind of deprivation will in fact cause more people to hoard. A domestic example (I’m full of them) – before the demonetisation, I’d been a happy mostly cashless user for over a decade. I live in a small town and yet my maid and grocer are paid with online transfers by the month. I very rarely had any cash other than the notes in my wallet which usually ran out and I lived a day or two on simple credit if needed – since I had no daily expenses as such beyond vegetables. Today, I have over 10 thousand rupees in my drawer – because I know I need to pay the other maid (whom I hired merely because she was desperate) in cash in another week or so, but then people will be crowding to draw salaries. I have also kept enough cash at home, because unlike normal times, when I could hop over to an ATM and withdraw when I needed, there is no telling when I may find an ATM with a queue I’m willing to brave. This is happening everywhere. 20 days of banks giving out money the best they can, and our local market looks like this:

People aren’t even thinking of spending. They will not spend on anything unnecessary, no matter how much cashless you scream, till they feel reassured that they have enough cash for contingencies. That is going to be a long, long way away.

Inadequate penetration of debit cards

India has 24.5 million debit cards, most of them saturated in urban areas, and people often owning several among those who do. My home for example has two adults and 8 debit cards between us. so 24.5 million being the number of cards is unlikely to be anywhere close to actual card users. Further, cash withdrawals at ATMs is most of the use these cards are put to with 88% of transactions and 94% of the total monetary value of all debit card use. Which brings us right back to cash.

Inadequate penetration and extreme difficulty obtaining credit cards

A few days after demonetisation was announced, I got a call from SBI offering me a credit card. The limit was to be from 30 thousand to a few lakh – I forget details. Interested, I agreed. Ignorant of the ways of credit card companies, I expected that they would estimate my limits by my salary or deposits, etc. Turned out that they blocked a fixed deposit and issued a credit card against it for less than the amount of the fixed deposit. Unclear why anyone would use a credit card at all instead of their debit card, in that case. I got several other offers. Curious about this phenomenon, I replied to the offers with varying information about my income. Unsurprisingly, I found that I had to be rich enough to be able to spend the money directly in order to be able to use it on credit at rates that would put a shady rural moneylender to shame. It makes no sense and I don’t think I’ll be using that card. I think this option of going cashless is irrelevant to most of India’s population – other than the corporate salaried class – got more interest out of them if I said I worked in an MNC – which, let’s face it, may be the loudest population of India, but hardly the top empoyment.

Online and mobile banking

Let me narrate here an incident in my home recently. My maid, who pays for her gas in cash and uses her debit card strictly to withdraw money from the ATM as needed, got an SMS from her gas provider saying that she could pay for the gas online. The conversation went something like this:

The fact of the matter is, online transactions are complex and to the internet illiterate are a financial catastrophe waiting to happen. It is far better for people to learn about internet security with Facebook accounts and verifications and email passwords and lost passwords and recovery and hacked Twitter accounts than to begin their internet experience with a high stakes gamble like the contents of their bank account because their government forced them to do it for survival.

Make no mistake, if people don’t have cash and get taken in by this propaganda, very soon you are going to have operators of cyber cafes with passwords to a hell of a lot of accounts as aunties line up their with electricity bills and bank slips containing their login ID and passwords in hand to pay the bill so that their electricity is not disconnected or to charge their Paytm account so they can pay their grocer. And they would not have the knowledge of how to change their password either. They would learn eventually, likely with hard lessons that leave them with nothing to protect, and this is not the way to do it. Too much risk.

Literacy rate in India

India’s literacy rate stands at 74.04% – but this is an illusion. A lot of “literate” people of poor economic status are barely able to read and rarely in English, which is currently required to transact efficiently online, understand bank statements, secure their accounts, change passwords and PINs and more. Some things like using cards or withdrawing cash from ATMs can be done in Hindi or other languages, but even examining transaction slips and more still happens in English. Internet banking is mostly in English.

Computer literacy is even lower. Smart phone usage may be slightly better, but it is still under 30% of the population.

Electrification and internet penetration in India

I am not even going to talk of percentages here. To go cashless, an absolutely uninterrupted electric supply and internet connectivity is non-negotiable. And, to put it very very mildly, we are nowhere near 100%

Business margins

Business margins over every single transaction are absurd replacement to freely exchanged cash. For high value and infrequent sales, it may make sense. To buy your vegetables, Paytm may earn more than the vegetable seller’s profit at the end of the day. Tomatoes are selling at 10Rs a kilo. One kilo is a hell of a lot of tomatoes.

Business readiness

Twitter is currently awash with stories of cashless fails. I had one yesterday. I couldn’t find my debit card, so rather than risk it being stolen and misused, I blocked it. Five minutes later I found it. But while I can block it online, I cannot unblock it using the same security available to my entire bank account with access to online banking. If a thief has access to online banking, they don’t need to unblock cards, they can simply transfer all the funds out. The bank has my phone, my email AND my access to online banking secured with passwords and OTP, yet something as simple as unblocking a card can’t be done within minutes of blocking it and I must go to my home branch 2 hours away. If the card got blocked by someone while trying to pay after two hours of filling a shopping cart, would be a really fantastic cashless experience! This is the country’s biggest bank!

If I was in a city and living cashless as Modi recommends, what was I to do? Beg for money to get home in spite of having plenty? Banks like Bank of Baroda or Indian Overseas Bank don’t allow online generation of PIN for ATM cards – you must go to the home branch. How is a cashless India even possible with the biggest jugglers of money being so primitive?

Other issues like Paytm account blocking in the event of a lost phone being completely abusrd, to inexperienced sellers charging over a lakh rupees instead of over a thousand rupees accidentally and not knowing how to reverse charges. There are plenty of nightmare stories.

Security issues

Internet banking is a lucrative area for hackers, and India is not extraordinary on security. Just weeks before the demonetisation was announced, an ATM hack had defrauded many people of their money. While banks blocked cards and issued new ones, there is no information on any investigation or arrests made. Or, for that matter, for most cyber crimes beyond “objectionable” content on social media, which is usually busted because of a lack of anonymity – a newbie mistake, no hacker into financial systems will make.

There are security issues with banking apps

I’m just going to paste this here.

 

Forget cashless India. Go pre-dawn to some ATM that gives out Rs 2000 notes – they have shorter queues. Do this a few days and you’ll have some cash to use till this nightmare is done.

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