For years, industry bodies have predicted a rapid decline of cash in the Indian economy, but while digital payments are making progress, tangible currency offers unrivalled reliability in a country where even basic infrastructure can pose challenges.
The digital wave is breaking across India as everywhere else, and the foremost option for digital payments is currently the Unified Payments Interface (UPI): an instant, real-time payment system that facilitates inter-bank transactions. In July 2020, UPI handled 1.49 billion transactions with a value of 2.9 trillion rupees, compared with 26 trillion rupees of cash in circulation as of August. Digital payment options face a number of issues that may ultimately limit their success.
Industry sources claim the failure rate of UPI transactions is almost 30 percent, and it currently lacks a complaint process for customers. This latter point should be addressed by January 2021, which is the date by which the Reserve Bank of India requires payment system operators to have online dispute resolution systems in place for digital transactions. Concern remains that, should customers lose faith in UPI, it may take a serious hit to its transaction volumes.
Major players in the digital payment space are currently offering strong incentives to customers for using their services, such as cashback and discount vouchers. These may be sustainable to some extent—providing customers are happy for their spending data to be sold by the companies, to fund the benefits—but they may not prove sufficient to retain customers in the long term.
In addition to high failure rates and questions around privacy, most Indians simply prefer cash for domestic expenses, not least because infrastructural challenges can be insurmountable for digital alternatives in rural areas. There is also a reassuring tangibility to banknotes and coins that saw a run on ATMs worldwide when the Coronavirus pandemic began.
To meet continued demand, the State Bank of India is planning to deploy an additional 10,000 ATMs and has extended the hours of its extra-secure, one-time password-based cash withdrawal service, which is now offered 24/7. Other banks have followed suit, adding to and refreshing their ATM portfolio.
Cash will continue to be the king and drive the economy. While digital transactions through UPI continue to grow… the ATM industry has weathered the storm of demonetisation, compliance costs and COVID and has emerged resilient.