Everybody thinks that credit and debit cards have been leading the rise of non-cash payments, and that’s what coined the term “plastic money”. But in India, it seems mobile phones are the driver of the non-cash payment revolution rather than swiping cards at Point of Sale (PoS) machines.
Demonetization showed little impact on it but the impact of Goods and Services Tax (GST) is far more visible. The latter has served as an important catalyst for digital payments in India.
While the demonetization urged people to move towards digital payment methods such as POS transaction through credit cards and debit cards, Unified Payments Interface (UPI), Unstructured Supplementary Service Data (USSD), Prepaid Payment Instruments (PPI) and Mobile Banking, ATM cash withdrawals overtook in July 2017.
However, it is interesting to see how the trend reversed after implementation of GST. Digital payments saw an increase in its users in a consistent manner.
May, 2018 -Digital payments overtook the value of ATM withdrawals.
It is also interesting to see the changes in India’s retail digital payments space. Credit Card POS transactions accounted for more than 60% of the value of India’s retail digital payments in 2011-2012. This figure has come down to 18.3% in the year ending August 2018. Demonetization has nothing to do with it as this was 17.4% in the month before demonetization.
The reason people are shifting to non-cash payments is not because people are looking for instant credit, but because they find it a better substitute for cash payments.
Mobile phones have played a major role in this
Digital payments space is getting in favour of non-POS methods. They now account for more than twice the value of POS transactions from debit and credit cards.
Rising dominance of e-commerce, increased cash incentives for consumers, and combined incentives have taken away a part of demand from what used to required cash transactions. These were the pull factor, small businesses coming under GST compliance could have been a push factor. Over the counter cash purchases might have become more expensive because of tax-credit chains coming under the GST.
This is a good news for widening of the indirect tax base, although this formalisation also entails a squeeze on incomes of small businesses. However, it is too early to make a pronouncement that a declining importance of cash in retail transaction will be a permanently trend in the Indian economy.
We may witness changes in this trend because of evolution of regulation in the digital payment ecosystem and ‘adaptive measures’ by small businesses which might be losing their businesses. Another takeaway from these statistics is that there were better policy alternatives to demonetization for pushing digital payments.