Do you have change?

By Siddarth Gore

Moving from cash to a cashless economy
What is your greatest fear while travelling in an autorickshaw? Besides the fear of getting thrown out during a wild manoeuvre, most people are constantly looking at the meter and hoping that it ends in a round figure. I have known cases where people get down a little before their actual destination just because the meter was showing a nice round number. After all, who would want to haggle over change every time and get in a grumpy mood for it?

Now imagine something like this. You get down from the auto and look at the meter. It is staring back at you with say, a dreadful 37.50 rupees. You prepare to fight for each and every paisa of your hard earned money. But the driver doesn’t seem to care. He whips out his phone and enters the amount on it. He politely asks for your phone at taps his phone on it. Instantly you get a notification on your phone saying that Mr. Autorickshaw-wala is asking for Rs. 37.50. You hit accept by validating with your fingerprint and before you have a chance to look up the rickshaw is off in search of its next client. You have not lost any needless time, money or goodwill in the whole transaction. Is this really possible?

And if yes, then in whose lifetime? The answer will surprise you.

The following two trends will give you an indication of where we are heading and why such a scenario is very likely to be a reality in the next 5 years.

[Source: RBI]

The above graph shows a clear trend. India is moving from paper clearing to electronic transfer of funds. And that too really fast. Also looking at the volume of transactions that are happening on the electronic medium suggests that people quickly adopt a new and convenient technology for small transactions first. Once they are comfortable with the new system they are more willing to move the high value transactions as well. This is pertinent in case of e-Wallet since almost all of the transactions there will be of low value. If these numbers are anything to go by on then they indicate that the adoption of cashless peer to peer transactions will be much higher and faster than that of the electronic clearing systems.

[Source: ADC Asia Pacific Quarterly Mobile Phone Tracker, SAP “The Mobile Consumer” Report]

Smartphones are not essential for mobile payments but are much more convenient and safe. The entry of low cost smartphones is leading to a gain of percentage share for them in the market. This is essential for the establishment of payment systems using mobile phones. Latest smartphones are featuring new technologies like NFC (Near Field Communication) and IRIS scan which can be used very effectively for executing payment transactions in a hassle free, secure and fast manner.

Along with the technology where needs to be a mindset change in the population for it to be widely adopted. On that count too India is in a favorable position. In a recent survey conducted by SAP Indians were found to be the most enthusiastic about new and innovative payment methods in the entire Asia Pacific region. This goes further to show that the India economy is ripe for this pivotal change.

But financial services are a tightly regulated sector and things will not change unless the regulators adapt to the changing needs of the sector. In this respect we are lucky to have a very proactive financial regulator like the RBI. It has not only created the required regulatory framework but also by establishing the National Payments Corporation of India (NPCI), has endeavored to create the IT infrastructure that would be required to make such services accessible, secure and inter-operable between all the players involved.

If you think about the above scenario of the auto rickshaw it is not all that different from doing an electronic funds transfer using NEFT. There are however some key differences which make this kind of a transaction possible. Let us peak under the hood and look at what is involved in pulling off our transaction.

First of all you will need a wallet with some money in it. Only in this case it will not be a physical wallet weighing down your pocket but an e-Wallet which will just be an App on your smartphone. The RBI calls it a Pre-Paid Instrument or PPI but we can continue to call it an e-Wallet for ease of understanding. You have already linked your bank account to this wallet and transferred some money into it for your spending today.

You must have noted that you didn’t need to provide your account details anytime during the transaction. And this is a major difference between an NEFT transfer and it is made possible by the Unified Payment Interface developed by the NPCI. When you tap your phone what you send to the other person can be a “virtual address” along with the name of your w-Wallet provider (also called Payment System Player or PSP). The PSP on the receiver’s phone will send this information to the NCPI using the Unified Payment Interface. The NCPI will map this virtual address to a bank account itself (if the virtual address happens to be an Aadhaar Number) or it will send it to the Payee PSP for mapping to a bank account. After NCPI has both the bank accounts it will do a regular electronic funds transfer (much like the IMPS, or perhaps exactly like IMPS) and notify both parties upon completion of the transaction.

The security aspect is taken care by the fact that the information you share with the other person is not sensitive. It can be a number which is valid only for one transaction so it cannot be misused in the future. The transaction also requires you to validate with a password, a pin or a biometric like fingerprint or iris scan. This information is never stored anywhere and is transferred in encrypted form only.

Screen Shot 2015-10-15 at 2.19.58 am[Source: “The Cost of Cash in India” Fletcher]

The economic impact of this transition is huge. India is predominantly a cash based economy. The above estimates suggest more than 85 percent transactions happen in cash. Besides the obvious transaction costs when it comes to cash dealings like carrying of change, risk of theft, fake notes, etc. there is a huge cost of printing and maintaining the paper currency in circulation. RBI estimates put the figure at Rs. 21,000 crore. All these costs will be reduced by moving to a more cashless economy.

Though the regulations are well thought out keeping the safely and security of users in mind, I would like to point out two areas in which they can hinder the large scale adoption of this technology.

First is the requirement for adding a Payee before you make a transaction. This is a tedious process and completely unnecessary for one time transactions like with an auto rickshaw or a vegetable vendor. Perhaps the PSPs can design some clever user experience in their Apps which will circumvent this issue but making this a part of the regulation might make that option unavailable.

Second is the possibility of offline payments. Currently the system is real-time and both the peers need to have data connectivity for the transaction to be successful. Data connectivity is still ramping up in most parts of the country, especially in rural areas, and cannot be relied upon just yet. For e-cash payments to become truly ubiquitous it has to work without network connection. It is unclear if this is indeed feasible with the currently available technology but recent advances in block-chain algorithms and success of currencies like bitcoin are encouraging signs. Let us hope the RBI takes this into consideration and improves upon its policies and infrastructure.

The success of this mission depends largely on the solution providers for the PSPs and their ability to come up with products which are easy to use and interoperable. RBI has shown great understanding of the market while awarding the licenses of payment banks and small banks to players with diverse backgrounds and expertise. It will bring much needed innovation and funds to this critically important aspect of the Indian growth story.

(Siddarth Gore has over 13 years of experience in the computer industry with expertise in networking and embedded systems. He has a Bachelor’s degree in Electronics and Telecommunication from PICT, Pune and a Master’s degree in Computer Engineering from Boston University, US. He is currently pursuing his Master of Arts in Economics from the University of Pune.)