Are Digital Transactions Slowing Now That Cash Is Back?

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Back in November and December everyone was talking about digital transactions. One of the major byproducts of HYPERLINK "https://www.equitymaster.com/diary/detail.asp?date=11/17/2016&story=2&title=Regular-Demonetisation-of-Paper-Money-is-a-Stupid-Idea" HYPERLINK "https://www.equitymaster.com/diary/detail.asp?date=11/17/2016&story=2&title=Regular-Demonetisation-of-Paper-Money-is-a-Stupid-Idea&utm_source=5MIN&utm_medium=website&utm_campaign=e-letter&utm_content=5wrap" the notebandi drive was a push towards a cashless, digital economy. There was a notable increase in digital wallet transactions; people couldn't talking about Paytm, Freecharge and other digital payment apps.

The government was also pushing the digital payments in a big way. The BHIM app, developed by the National Payments Corporation of India (NPCI) and based on UPI, has been downloaded 12.5 million times. Not to mention, to boost digital payment numbers the government plans to deploy 1 million new PoS devices (that help with credit card transactions) by March, and 2 million Aadhar Pay PoS machines by September.

With such focus on digital transactions, one would have thought digital transactions would increase even after the post-demonetization period.

But turns out that is not actually the case.

As per the RBI data, digital transactions showed a 10% decline in mid-January, compared to a month earlier, as access to cash got easier. Overall, the number of digital transactions (debit cards, credit cards, electronic transfers, wallets & mobile banking) fell to 923 million in January from 1,028 million in December.

Why such decline?

The answer is greater currency supply. With currency crunch easing some customers are returning to cash. It is important to note that HYPERLINK "https://www.equitymaster.com/diary/detail.asp?date=11/17/2016&story=2&title=Regular-Demonetisation-of-Paper-Money-is-a-Stupid-Idea" HYPERLINK "https://www.equitymaster.com/diary/detail.asp?date=11/17/2016&story=2&title=Regular-Demonetisation-of-Paper-Money-is-a-Stupid-Idea&utm_source=5MIN&utm_medium=website&utm_campaign=e-letter&utm_content=5wrap" India is a country where a bulk of transactions are still carried out in cash.

The other issue is inadequate infrastructure. India has about 350 million internet users, about one-third being broadband users. Apps such as Paytm, freecharge, and BHIM need high-speed internet connectivity. Not to mention, other issues such as crashes and frauds. None of these payment systems is 100% secure. Frauds have gone up in tandem with a rise in digital transactions.

Apart from the above, there is one more reason why cash may beat cashless. Recently, I went to one photocopy shop to give some printouts. I found that if I wanted to pay by Paytm, I'd have to shell out an extra 5% service charge. And in that moment I too switched from cashless to cold hard cash.

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