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--------------- Print Magazine --------------
  May 2016
  April 2016
CYBER SPACE - by Sanjay Gade

Plastic Money: Sign of Modernising Economy


In India, once in a while everyone gets an aggressive call from banks that try to push people towards getting credit cards. With the Indian economy expanding rapidly at more than 7.5 per cent per annum and the middle-class budding, several financial firms believe and predict that the use of plastic money (or cashless transactions) in India will become very popular. However, according to the recent estimates by the Reserve Bank of India (RBI), the use of cashless transactions through credit card usage among Indians is actually falling. For example, according to the RBI, on an average, the annual number of transactions per credit card in India stands at 11 and it is only 1 in case of debit cards.

According to the RBI, although the number of credit cards increased to a crore during three financial years from 2005 to 2008, the number of transactions through credit cards fell in financial year 2009-10. For example, while purchases of about 25 crore saw the use of plastic money in 2008-09, the figures fell by over two crore transactions in the financial year 2010. Generally, increasing reliance on cashless transactions is seen as sign of a modern economy where there is a strong synergy between the ordinary consumers and its financial institutions. Therefore, in India with a declining trend in plastic money, more emphasis should be placed on use of cashless transactions. Ashish Das, a Professor in the Department of Mathematics at IIT Mumbai has done an indepth analysis of use of cashless transactions in the Indian economy. According to Das, "Transition from the existing cash-based retail payments to cashless payments can occur by promoting payment through debit cards. This will require rationalising costs associated with the use of debit cards, making them more secure and conducting focused financial education programmes for increasing public awareness. This transition would lead to saving currency management costs and generate valuable information on spending behaviour of the masses."

Das offers a number of reasons for the current decline in use of cashless transactions in India. According to him, credit cards offer free and risky credit and thus are an expensive payment mode. However, the product design and promotions in credit card sales are such that the pricing is kept hidden and the users are oblivious of the fact that the cost is ultimately borne by them. On the other hand, debit card is another alternative to cash. Though this mode of payment offers no credit and carries little risk, yet it has been often priced at par with the credit card by the Indian banks - again, a price that is borne by the cardholder. The end result causes a net decline in the use of plastic money.

For both debit and credit cards, the cost of transactions is ultimately passed onto the merchants who agree to accept card payments. If the merchants cannot put a surcharge, then he will add the card transaction cost to the cost of the product, which in most cases will be unknown to the card user at the point of sales. However, in cases where the merchants can put a surcharge, there is a discount on offer for paying cash, which makes using the card an inefficient mode. Also, in India most merchants have small or medium-sized businesses and in this set-up there is a disincentive for these merchants, who have less pricing power due to their low business volumes. In order to incentivise the use of plastic money, Das recommends the proportion of the transaction amount borne by the merchant to be 0.2 per cent with a cap of ` 20. Also, according to Das, unlike credit cards with hidden costs, the use of simple debit cards should be encouraged where such cards should be completely surcharge free. In this regard, the RBI could take steps to organise focused financial education campaigns among merchants and cardholders that promote the use of these cards. Also, the Indian Government might consider providing tax benefits to merchants for accepting card-based payments from card users. For example, an appropriate tax rebate could be extended to a merchant if at least 25 per cent. to 50 per cent. of the value of his transactions is through cards.

It is believed that mobile devices like mobile phones and PDAs could soon be used as plastic money. According to the Telecom Regulatory Authority of India (TRAI), mobile phone usage has been steadily increasing in India and according to a recent estimate India now has 851.9 million mobile phone users. If the government considers promoting the use of the mobile devices as plastic money, then that might just be the thing needed to spur the use and adoption of cashless transactions in India. The "phone-as-card" use might also spur a healthy growth and competition among mobile phone companies offering such services to its end users.

Also, the government could decide to promote the use of "pre-paid debit card" - a debit card that is not linked to a regular bank account, but where the consumer instead pays a bank or merchant some amount to recharge the same amount as plastic money. Banks should be encouraged to issue pre-paid and re-loadable debit cards to non-customers. For example, in the US, big stores like Macy's, Amzon.com and Apple, themselves provide pre-paid debit cards to their customers. People often buy and present gift cards of certain pre-paid amounts as birthday and anniversary gifts. Promoting the use of pre-paid debit card in India would definitely help; however, if the retail stores intend to issue their own pre-paid debit cards to their customers for use in their stores, such cards should have a bank guarantee.

Das feels use of plastic money increases the possibility of card fraud and identity theft. In order to avoid this, cards should have photographs of the cardholder. The information generated through card payments would help track transactions.

Sanjay Gade

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