CashlessIndia - Why Putting Cart Before Horse Will Work

On the back of the demonetization of high value currency notes in India, the government has been aggressively pushing cashless payments. Trending on Twitter under the hashtag #CashlessIndia, the initiative has attracted criticism from the blogosphere and mainstream media on the grounds that India is not yet ready for digital payments. The average urban business-sensitive citizen seems to echo the same sentiment, judging by the results of the following poll conducted by Economic Times (see picture at the end of this post).

See MediaNama article titled Cash vs Digital Money: why going cashless is going to be tough in India for a comprehensive coverage of this point of view.

I don’t disagree with this viewpoint. In fact, I'd highlighted a few more hurdles to going cashless in my recent post PSA: Don’t Get Defensive About Not Going Cashless (hyperlink removed to comply with Finextra Community Rules but this post will appear on top of Google Search results when searched by the title):

#5. Reluctance of Banks to Issue Merchant Accounts (aka POS Machines)
#6. Cash-Out Costs & Delays
#7. Card on Delivery Limitations

Attempting to drive cashless payments without overcoming these hurdles is a classic case of putting "the cart before the horse", as Harvard Business Review observes aptly.

Does it mean India should fix these fundamental issues first and only then attempt to go cashless?

No.  

Why not?

Because some of these hurdles won’t go away anytime soon. Take infrastructure for example. Like physical infrastructure like roads, bridges, etc., network infrastructure also has a way of attracting more and more traffic until it becomes inadequate in a vicious cycle, reflecting the German proverb that translates to “The appetite grows as you eat”. Even in the Bay Area, which is the de-facto Mecca of technology, network connections are patchy at times. Core banking, card management & other payment systems break down not so infrequently everywhere in the world, leading to failed payments. That's why waiting for 100% readiness of infrastructure to push digital payments is an exercise in futility. (I've always maintained that a robust business model is the real critical success factor for digital payments but that's a blog post for another day).

Also because a certain degree of jugaad and leapfrogging of technologies has always been a part of the Indian DNA in several areas. For example:

1. I once visited a village in Tamilnadu, a state in South India. This village got TVs first, then the electricity connection required to power the TVs! More on this experience in my blog post Putting the Cart Before the Horse Does Work! (hyperlink removed to comply with Finextra Community Rules but this post will appear on top of Google Search results when searched by the title)
2. As the legend has it, doyens of the Indian IT industry set up their development centers in the Mariwala area of Bangalore in the early 1990s well before there was a paved road to access the facilities. It was only after they staged protests to call the attention of politicians to their employees' plight that the local authority built proper roads in this neighborhood. Had they waited for infrastructure first, IT Services wouldn't be a $140 billion business for India today.

IMO, we shouldn't sacrifice our competitive advantage just to follow the traditional left-to-right, top-to-bottom approach towards nation building.

Good news is, based on the following early indications in the last two months, India can easily achieve 50% reduction in the use of cash without necessarily waiting to overcome the hurdles in front of digital payments.

#1. Debit Card Activation

200M out of the 755M debit cards in India were activated only after the November 2016 demonetization.

What stopped them from being activated earlier?

#2. Card Promotion Campaigns

My bank ran an SMS campaign to promote card use two days after demonetization.

"Dear Preferred Customer: Use your Credit Card even for small value spends such as grocery shopping, refueling and more. Also earn Reward Points on card usage"

Why did this bank have to wait for #CurrencySwitch to stimulate card use when it has been in the card issuing and acquiring business for over 20 years?

#3. If Vaishali Can, So Can Others

This iconic restaurant in Pune started accepting card payments within a week of #CurrencySwitch.

Why was it hung up on cash for 40+ years of its existence?

#4. Factory Worker Salary Payments by Cheques

According to Times of India dated 12 December 2016, the Indian government has made it mandatory for wages of factory workers to be paid by cheques going forward. When I read this, I was, like, duh?

I began my career as a Graduate Engineer Trainee in a factory in 1985. I got my first paycheck by, well, cheque.

30 years later, why haven't cheque - or the myriad other forms of cashless - payments become the norm for payment of wages for factory workers?

#5. Newspaper Vendor Accepts Cheques

Enough of questioning others. Time for introspection.

I’ve always been paying my newspaper vendor by cash. Prompted by the recent cash crunch, I asked him last month if I could pay him by some form of cashless payment. He nodded and pointed to a line in his bill that provides drawee details for cheque payments. I was shocked! His bill has remained unchanged ever since he started delivering newspapers to my home over ten years ago.

Why didn't I notice earlier that he has always been accepting cheques?

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While many people - including me - may prefer cash on occasion for many good reasons, the above examples suggest that there's a vast segment of the Indian population that has shunned cashless methods of payments because, to put it simply, "old habits die hard".

I won't comment on whether a democratic government has the moral authority to force its citizens to shed their old habits and foist a new payment behavior on them. Personally, I've no hassles with cash. I foresee that, in the immediate term, the switch to digital payments will cause a lot of chaos due to failed payments, identity theft and cyberfraud. I'm not one of those people that naively believes that cash implies malafide activity and noncash implies genuine activity.

But, fact is, we have a democratically-elected government pushing cashless payments. Fact is, people are not out on the streets protesting its cashless drive. If we accept the reality as it is, the above examples make me confident that demonetization alone will provide the required stimulus to pump up cashless payment volumes from the present 2% to at least 50%, notwithstanding the underlying hurdles.

I'm not alone in saying this. According to the aforementioned HBR article, “demonetization move is a welcome shock necessary to get a cash-intensive society weaned off its addiction and onto modern systems of digital payments”.

It's only to raise cashless payment modes to levels beyond 50% that overcoming the fundamental hurdles to digital payments would be required.

Ergo, putting the cart before the horse will work to drive #CashlessIndia - for now.