Ninety seven per cent of retail transactions still cash-based, says USAID report

An overwhelming 97 per cent of retail transactions are still cash-based and only 29 per cent of bank accounts have been used in the last three months, as per a new report by the United States Agency for International Development.

The report’s findings assume significance in the backdrop of the government’s stated commitment to promote a cashless economy and switch all government transactions to electronic payments by the end of 2016.

“Only 29 per cent of bank accounts in India have been used in the last three months. The use of electronic payment methods, such as debit cards and mobile wallets, is even lower. While the benefits of digitising payments are clear, what is less obvious is how we can change the everyday behaviour of consumers and merchants in a cash-based economy like India,” a report by the United States Agency for International Development on the barriers to a digital economy said.

One way to curb the flow of black money is to discourage transactions in cash, Finance Minister Arun Jaitley had said in this year's Budget, promising measures to incentivise credit or debit card transactions and discourage cash transactions. The specific measures are yet to be announced.

The Confederation of All India Traders on Wednesday called for the inclusion of incentive schemes for the adoption of credit and debit card payments in the upcoming Budget.

Towards this, the government proposed several incentives for electronic payments such as tax-breaks for the payee and the payer, but hasn’t moved ahead with implementing them so far.

The report recommends several steps the government can take to incentivise electronic payments both on the consumer side as well as from the merchant’s point of view.

“Our research shows that consumers who are paid digitally are more likely to transact digitally. To support this effort, the Indian government should continue digitising benefit transfers, and also consider providing incentives for organisations to pay their employees digitally,” the report said.

This ties into the government’s ongoing push to provide an increasing share of its subsidy payments directly to bank accounts, and the fact that only 11 per cent of Indian consumers used debit cards for their payments.

Another recommendation involves the government implementing digital payments for mass transport, in much the same way as private taxi services like Ola and Uber accept payments from digital wallets.

The report also recommends that the government implement tax incentives for consumers who transact electronically and also for banks to develop flexible and convenient micro-savings products for low-income consumers, since it found that those who save digitally are more likely to spend digitally.

“The up-front cost of trial is a major barrier to merchant acceptance. To encourage acceptance of digital payments, banks and payment players can consider removing upfront fees and device installation charges and move towards pay-per-use models,” the report said.

This, coupled with setting up systems via which merchants can pay vendors electronically, is key since the report finds that the major hindrances to merchants adopting electronic payment systems are that vendors need to be paid in cash and the merchants themselves don’t know how to go about obtaining the electronic payment infrastructure.