Prime Minister Narendra Modi on May 22 appealed to the nation for adopting a cashless mode of financial transactions to check illicit businesses and also circulation of black money.

“We have started working on (a project) ‘Bank on Mobile-Universal Payment Interface (UPI) Banking Transaction, which will bring a complete change in the way monetary transactions are currently done. It will become very easy to carryout transactions through your mobile phones (once UPI is rolled out),” he said during his “Mann ki Baat” monthly radio programme.

The Reserve Bank of India (RBI) is working out ways to reduce cash usage in the economy. Reduced cash usage would bring direct as well as indirect benefits. The direct costs of printing, maintaining and transporting currency amount to about 0.2 per cent of GDP and an increase of 5 per cent per year in cashless transactions will save more than Rs. 500 crore annually.

While the direct benefits are more visible, it is the indirect benefits in terms of financial inclusion that are going to be more significant. Apart from reducing transaction costs (mainly the cost of withdrawing and processing currency notes) between two parties, going cashless is perhaps the most effective way of ensuring that a majority of households use the formal banking channels more effectively. This would promote greater financial transparency and literacy, and enable better targeting of households in welfare programmes with reduced leakage.

Switching from a predominantly cash to cashless economy would require developing a network of a critical mass of entities that deal in cashless transactions. Resultantly, buyers and sellers will find it more attractive to switch to cashless instruments (bank cards, mobile payments, cheques, drafts etc.,).

To reduce cash transactions in the economy and boost the usage of cards and point of sales (PoS) terminals, the Union finance ministry and RBI have set up a committee comprising members from National Payments Corporation of India, State Bank of India and ICICI Bank to work out ways to encourage use of plastic money. It would also look at ways to widen the spread of PoS machines and other enabling infrastructure to increase card acceptance for curbing frauds and black money transactions.

RBI data at the end of December 2014 showed 1.05 million PoS machines in the country, whereas there are over 500 million debit cards and about 20 million credit cards. In 2013-14, according to a Boston Consulting Group (BCG) report, the number of cash transactions in the economy was 26 per cent of the total; cheque transactions 19 per cent and 37 per cent were through ATMs or cash deposit machines. Transfer through ECS systems was 3 per cent; NEFT/RTGS use was 4 per cent. PoS accounted for 5 per cent and transactions through the Internet were 6 per cent.

The RBI has said it would soon be issuing a discussion paper on this. This ties in with the government’s focus on addressing the issue of undisclosed incomes. It has taken steps to improve the use of credit and debit cards and has put limits on cash transactions. For instance, quoting a PAN (income tax record) number has been made mandatory for any sale or purchase over Rs 1 lakh.

Apart from checking the flow of unaccounted money, reduction in cash usage is held to improve cost effectiveness for banks. “By digitising processes end-to-end, engaging customers on the digital channel for sales and transactions, and collectively working towards eradication of cash, banks can achieve up to a 30 per cent jump in sales productivity, reduce administrative staff by 10-15 per cent and improve back-office staff productivity by 20 per cent,” said the BCG report.

In India the cash transactions are still prevalent in day today life. For long, the Centre and the Reserve Bank of India have been fighting a pitched battle to push Indian citizens to use less physical cash, and transition to banking channels or electronic platforms for their monetary transactions. But these efforts have met with limited success, with cash still accounting for nearly half of all transactions by value.

The UPI, powered by the National Payments Corporation of India, is yet another attempt by RBI to try and migrate citizens to the electronic mode. UPI essentially leverages on the know-your-client details or Aadhaar number already shared by customers with their banks, so that users can receive as well as initiate payments through a unique ID mapped to a mobile application.

The UPI has two distinct advantages for users over existing payment platforms. One, users no longer need to share personal credentials such as address, bank account number and credit/debit card details with vendors whenever they make one-off payments. Two, as customer details are pre-verified by the bank, the authentication process is quick and seamless, with a single click enough to ensure two-factor authentication for any transaction. The widespread adoption of UPI can certainly prove game changing for e-commerce businesses. The minuscule proportion of Indians holding credit or debit cards, and the general reluctance to share card details online for fear of ID theft, have been major stumbling blocks to consumers taking to online shopping in a big way. UPI, by obviating the need for sharing user credentials on each transaction, may partly address these fears.

However, it would be unrealistic to assume that mere ease of use will persuade millions of consumers to abandon cash transactions for online payments. As mobile payments have grown by leaps and bounds in the last five years, so have the instances of cyber-crime.

An Assocham study in 2015 found that reported instances of cyber-crime had doubled every year since 2011. But users of banking services still lack clarity both on the extent of liability and legal recourse available to them in the event of losses due to cyber-fraud. They also lack a fair and speedy dispute resolution mechanism. Recent news reports have highlighted instances — both of security loopholes allowing hackers to withdraw large sums from customer accounts in a PSU bank, and of hackers tapping into the mobile wallet applications of private banks using duplicate SIM cards.

In the absence of a clear-cut legal framework, service providers have the tendency to either attribute fraud to customer negligence, or hush it up to avoid damage to their brands. The RBI has been suggesting a separate statute and an insurance cover that safeguards diligent consumers from the consequence of cyber fraud. This initiative needs to move hand-in-hand with payment innovations such as the UPI for Indian consumers to gain confidence in a cashless economy.

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P.K.VASUDEVA