Could In­dia be the first to get rid of cash?

The Pak Banker - - OPINION - Mi­hir Sharma

lines, though, were its rec­om­men­da­tions that cash trans­ac­tions of over Rs. 300,000 (about $4,500) be banned and that no­body should be per­mit­ted to hold more than Rs. 1.5 mil­lion in cash. While those ideas might sound ex­treme, some de­vel­oped coun­tries al­ready have sim­i­lar laws. Bel­gium, for ex­am­ple, which has the high­est pro­por­tion of cashless trans­ac­tions in the world -- 93 per­cent, ac­cord­ing to MasterCard -has banned cash pay­ments of over 3,000 eu­ros. And in In­dia, pres­sure to move away from cash has been build­ing among politi­cians and reg­u­la­tors. In a ra­dio ad­dress two months ago, Modi tried to per­suade lis­ten­ers to stop us­ing cash.

And even the Re­serve Bank of In­dia, which tends to­wards con­ser­va­tive think­ing about fi­nan­cial in­no­va­tion, has come on­board, set­ting up a joint com­mit­tee with the gov­ern­ment to push cashless trans­ac­tions. The com­mit­tee will fo­cus on re­duc­ing the cost to con­sumers of us­ing credit cards, cur­rently around 2 per­cent of each pur­chase.

Of course, only when the far more nim­ble In­dian pri­vate sec­tor gets in­volved will this tran­si­tion gain steam. And that's the sur­pris­ingly good news. The In­dian gov­ern­ment is also qui­etly and pa­tiently putting into place, over the next five to seven years, the plumb­ing that would let the pri­vate sec­tor lead In­dia into a cashless fu­ture.

Re­cently, the In­dian pol­i­cy­maker and IT bil­lion­aire Nan­dan Nilekani listed some of these changes. Most im­por­tant, per­haps, is the "uni­fied pay­ment in­ter­face" that Nilekani and RBI Gov­er­nor Raghu­ram Ra­jan rolled out last month, which made it eas­ier for In­dian con­sumers to use their mo­bile phones to trans­fer money to each other. Nilekani ar­gues that "this will also shift the busi­ness mod­els in bank­ing from low-vol­ume, high-value, high-cost and high fees, to high-vol­ume, low-value, low-cost and no fees."

Ra­jan, for his part, says "a bank­ing rev­o­lu­tion" will add to what In­dia al­ready has -- "the most so­phis­ti­cated pub­lic pay­ments in­fras­truc­ture in the world." Build­ing on this in­fras­truc­ture, a host of fi­nan­cial tech­nol­ogy star­tups are try­ing to re­duce trans­ac­tion costs for In­di­ans. As one such en­tre­pre­neur re­cently pointed out, merely trans­port­ing cash to and from vil­lages in In­dia cost about $335 mil­lion last year: "We are re­plac­ing that truck of cash".

In­dia's got a long way to go, to say the least. China al­ready boasts fu­tur­is­tic banks where you can set up an ac­count in a minute, with just a mo­bile phone num­ber, your na­tional ID num­ber and a selfie. In the U.S., 80 per­cent of trans­ac­tions are cashless.

But there's good rea­son to sup­pose that cashless pay­ments could be adopted much faster in In­dia than else­where. It's the clas­si­cal ex­am­ple of leap-frog­ging. In­dia's many poor peo­ple and mi­grants still strug­gle to ac­cess its chron­i­cally in­ef­fi­cient bank­ing sys­tem, de­spite the gov­ern­ment's ef­forts at re­form.

If pre­sented with an easy and fric­tion­less way of trans­fer­ring cash, there's no rea­son to think con­sumers wouldn't em­brace it quickly just as most In­di­ans skipped fixed-line tele­phony to go straight to mo­bile phones. Smart­phone pen­e­tra­tion is in­creas­ing faster in In­dia than any­where else in the world.

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