In today's newseltter, we talk about the advent of cashless economy and explain the hidden costs of carrying cash


The Story

It’s no secret anymore. Covid-19 is changing a lot of our latent behaviour. Hand-washing is quickly becoming second nature. Corporations have suddenly figured out in-person meetings might not all be that important. Strict no-contact policies have replaced the physical touch of good old salesmanship. And most importantly — a lot of people no longer like the touch of cold hard cash.

Across the globe, people have become wary of handling physical currency. And although medical experts contend that cash is still safe to use so long as you keep washing hands, the advent of cashless economy has received a considerable boost.

In India, citizens who absolutely adore cash are now suddenly using digital payments for grocery and online deliveries. In June, the value of transactions on UPI reached an all time high. Electronic Fund Transfers from banks have also rebounded since April. People absolutely do not want to touch cash and believe it or not, that might actually be a good thing.

Because although we like to think there’s very little cost associated with carrying cash, it simply isn’t true. We pay to access cash all the time. We pay for it while we travel to banks, ATMs or other access points that disburse cash. We pay for it when these institutions charge a convenience fee. We pay for it when we queue at the salary office and wait for obscenely long hours. We pay for it when we experience accidental loss or theft and more importantly we pay for it by foregoing better opportunities. After all, cash held at home yields no interest. And slowly but surely, these costs begin to add up.

For instance, residents of Delhi together spend 60 lakh hours and 9.1 crores to obtain cash. That’s not an insignificant sum by any account (if you account for all the time wasted). And that’s not all. We haven’t yet attributed the cost to the government.

Consider the tax gap — the difference between total taxes owed and taxed paid on time. Due to unreported and under-reported cash transactions, the government often  foregoes tax revenues that otherwise would have padded our coffers. Experts contest that the tax gap in India could be as high as two-thirds of overall taxes owed.

It’s no wonder then that the government has pushed so hard for a cashless economy. If anything, transitioning to digital transactions could unlock considerable value for both consumers and the state. However there is a problem.

Check out this chart from the Harvard Business Review

The horizontal axis measures the cost of cash for different countries. As you can see India is on the extreme right suggesting we incur significant costs whilst transacting with cash. But then there’s the vertical axis pointing to the Digital Evolution Index score. It’s a proxy to gauge digital readiness — a measure to give you some idea of how prepared we are as a country to transition to a cashless economy.

And strictly based on the current state of digital infrastructure in this country, it’s safe to say that we still have a lot of work to do. Now bear in mind, this information is dated. It’s from 2016. And we have come a long way since then. However, there are still some fundamental challenges plaguing the country’s digital payment landscape. Around 20% Indians still don’t have a bank account. And although smartphone adoption has certainly increased in India, there’s a good proportion that still doesn’t own devices that support payment apps. Then there’s the trust issue. Despite what the government preaches, Indians still have a problem trusting digital payments and there's a lot of inertia here.

However COVID has offered us the perfect launchpad. If the government is really serious about reducing costs across the board and accelerating the advent of a cashless economy, now is the time to prioritise investments in digital readiness.

Until then…

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