Advantages and Disadvantages of Cashless Economy

A cashless economy is an economy where financial transactions are made digitally, without the involvement of physical cash. India is progressing at an accelerated pace towards a cashless economy. Here we will discuss what is cashless economy and merits and demerits of cashless economy.

What is a cashless economy?

Definition of Cashless Economy: The cashless economy is an economic system supported by the electronic mode of financial transaction. Cashless transactions are made over digital platforms like net banking, mobile banking, e-wallets, debit and credit cards instead of currency notes and coins.

What is a Cashless Society? A cashless society defines an economic state where all financial transactions are performed through electronic or digital mode between the transacting parties. Digital mode includes all types of debit or credit card, mobile wallet or digital wallet, NFC payment, international payment gateways like Paypal or most advanced bitcoin.

Origin of Cashless Economy

Around 8,000 years ago, Mesopotamians had used a cashless barter system. The tradition of barter system was also found to be active in Indus civilization and later Vedic age. In modern time, the importance of cashless economy was analyzed and implemented by the European economy with an view to bringing transparency into the system. The journey of the cashless economy was started in European economy in the 14th century in form of a cheque, which became popular in the 17th century. The wired transfer service was developed in the 19th century and first executed by the Western Union in 1872. Later, debit/ credit cards, automated tailer machine (ATM) were launched. The digitization of the cashless economy was invented by Michael Aldrich, an English inventor and entrepreneur, who discovered online transaction and online shopping. Cashless transactions are started in 1998 when PayPal introduced an online payment solution through the world wide web. This digital form of cashless transaction becomes popular just in the last 10 years.

Do you Know? The earliest specimen of the handwritten cheque was drawn on 16th February 1659 with an amount of £400

In modern day, Sweden is way ahead of rest of the world in setting up a cashless society. More than 80 percent of financial transactions are recorded through digital mode in Sweden. Finland is not lagging behind, the country is ready for the transition to a cashless society. Canada, UK, South Korea, Australia are the other top performers in impending cashless society.

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* APAC: North America, Asia Pacific (APAC)

* MEA: Middle East and Africa (MEA)

Cashless Economy in India

Indians were among the earliest issuers of coins in the 6th Century BC besides Chinese and Lydians from the Middle East in the world. The Indian economy has gone through many transformations during different times. Various cashless instruments have has also been launched by the Government of India in the recent past. In 2016, the central government took various financial moves to encourage the use of plastic money in the union budget. The Government of India’s Digital India initiative makes cashless transactions popular. The RBI and the Indian government had already made various efforts to promote digital payment modes including prepaid payment instruments and plastic cards instead of liquid cash.

A committee of seven members under the chairmanship of Mr Neeraj Kumar Gupta was also formed in 2016 for minimizing paper cash-based transactions in the Indian economy. As a step towards cashless India, RBI has brought the Vision-2018 for Payment and Settlement Systems in India in June 2016 to encourage and maximize the use of electronic payments and to achieve a cashless society. In addition to this, technology has made a huge development. Electronic payments systems like core banking solutions, mobile banking, prepaid instruments are becoming very popular.

National Payments Corporation of India (NPCI)

National Payments Corporation of India (NPCI), an umbrella organization, is an initiative of Reserve Bank India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for operating retail payments and settlement systems in India. NPCI was founded in 2008. This organization first launched an instant 24-hour×7-days interbank electronic fund transfer service through mobile phones.

Digital India

The Government of India has launched the Digital India program on 1 July 2015. This initiative includes BharatNet, Make in India, Startup India and Standup India, industrial corridors, Bharatmala, Sagarmala for digital locker, e-education, e-health, e-sign, e-shopping and national scholarship portal. For these online platforms, cashless transactions have become popular.

Various Cashless Transaction Methods in India:

Cashless transaction methods are the alternative ways of using cash. Cheques, bill of exchange demand drafts, debit and credit cards, core banking solutions, digital payment methods etc are cashless alternatives.

Cheque: A cheque is a type of document with a monetary value written and signed off by a drawer to a drawee. The monetary value gets transacted to the drawee’s account. In India, cheques were introduced in 1770 by the Bank of Hindustan, which was one of India’s first banking institutions.

Bill of Exchange: A bill of exchange is an agreement between two parties to pay a fixed amount of cash on a predetermined date or on-demand.

Demand Draft: A demand draft is a negotiable instrument, issued by a bank to a consumer (drawer) to pay a certain sum to the specific payee. It is nearly similar to a bill of exchange or a cheque.

Debit card/ Credit card: These are plastic cards used for paying monetary value using a card swiping machine instead of cash for payment. Debit cards were introduced to the cashless economy by the Bank of Delaware in 1966.

RTGS: RTGS means Real Time Gross Settlement. It is used for transaction with a minimum amount of ₹2,00,000 all over the day.

NEFT: National Electronic Funds Transfer (NEFT) is made for a minimum amount of ₹1 and the maximum value depends upon different banks.

IMPS: Immediate Payment Service or IMPS is a real-time online fund transfer facility through mobile banking, net banking, SMS and ATMs.

Mobile Banking: Mobile banking enables a consumer to access banking facilities by cellular phones. This feature is available on all kinds of phones. Recently, mobile applications in smartphones for banking solutions become popular. Besides this, a USSD (Unstructured Supplementary Service Data) cashless method is performed in basic cellular phones by dialing *99#.

Note:*99# is a USSD-based mobile banking service of NPCI launched in November 2012.

Aadhaar Enabled Payment System (AEPS): It is an Aadhaar-based transparent cashless payment method that uses smartphone access and a fingerprint for a transaction. In this method, fund transfer is being performed between bank accounts, compulsorily liked with Aadhaar.

NFC: NFC stands for Near Field Communication. It is a contact-less communication technology which works on the principle of radio frequency (RF) field using a base frequency of 13.56 MHz.

Note: We know that FASTag is used for toll collection from the vehicles. FASTag is a sticker with a unique identification number that uses Radio Frequency Identification (RFID) technology that enables every user to make payments directly from the running vehicle. It is in fact using the Near Field Communication (NFC) technology.

Note: We have mentioned some modes of electronic payment media. National Payments Corporation of India (NPCI) provides the infrastructure to the whole banking industry, both physical and electronic payment system.

Let’s know the services controlled and monitored by National Payments Corporation of India (NPCI).

• NFS: National Financial Switch (NFS) ATM network
• IMPS: Immediate Payment Service (IMPS)
• AePS: Aadhaar-enabled Payment Service (AePS)
• CTS: Cheque Truncation System (CTS) RuPay card payment system
• NACH: National Automated Clearing House (NACH)
• APBS: Aadhaar Payment Bridge (APB) System
• USSD-based mobile banking service
• UPI: Unified Payments Interface (UPI)
• Bharat BillPay
• NETC: National Electronic Toll Collection (NETC)
• BHIM: Bharat Interface for Money (BHIM)
• BharatQR

Cryptocurrency: Cryptocurrency is an advanced and innovative payment tool. Bitcoin, the first cryptocurrency was invented in 2008 by an unknown person or group of people who call themselves or individual as Satoshi Nakamoto.

There are mainly three type of Cashless Transaction Mode

• Point of Sale (PoS)
• Mobile Apps
• QR codes

Types of Payment in Cashless Transaction

• Person to Person (P2P)
• Person to Business (P2B)
• Business to Person (B2P)
• Business to Business (B2B)

Advantages and Disadvantages of Cashless Economy

Now let’s explore the cashless economy advantages and disadvantages. The pros and cons of the cashless economy completely depend on the infrastructure and demographic condition of a country. The effects of cashless economy are different in a developing country like India other than the developed countries like Canada, Sweden or Finland.

Advantages of Cashless Economy

There are multifaced benefits of cashless economy.

1. Transparency: Electronic payments will improve transparency and accountability. The flow of economy with accountable money can only take place in a cashless economy. A shadow economy does not get endurance here.
2. Faster economical circulation: Online payments are too easy and fast for consumers. The circulation of liquid money will get reduced.
3. Healthy economy: A more optimized Union Budget can be produced. Collection of taxes will get increased.
4. Prevention of anti-social activities: Various forms of corruption like a bribe, embezzlement, extortion will be reduced as there will be no black economy in parallel. The generation of counterfeit currency will be prevented. Hence, funds for terrorism will get decreased. Besides, theft, burglary, ransom, blackmailing will become almost impossible to pursue under this system.
5. Reduced Tax Evasion: Every country face the crisis of tax evasion that eventually generates black money, a detrimental impact on the economy. Every corporate sector, medium, small scale business evade tax. But with the implementation of a cashless economy, the problem could significantly be reduced.

According to the report by the State of Tax Justice, In India, around $10.3 billion, or 0.41 per cent of the $3 trillion GDP, is lost in taxes every year to global tax abuse.

1. Eco-friendly economy: There will be no printing cost for paper notes and metal coins. Hence, the environment will not get harmed by cutting trees.
2. Hygienic and touch-free payment system: All payments and financial transactions will become touch-free. The cashless transaction has gained its significance amidst the deadly Covid-19 pandemic. Hence, cashless transactions take care of health and hygiene.

Disadvantages of Cashless Economy

1. Illiteracy: Illiterate poor people may find it a very hard job to do as many of them have no functional bank accounts or the knowledge of using digital platforms for a monetary transaction or the financial ability to buy a smartphone. If the cashless transaction becomes mandatory, it can generate economical inequality due to the clash between the cash and the cashless economy.
2. Increased Tax Rate: Various surcharges and taxes are carried out on online transactions.
3. Cyber Crime: Increasing rate of cyber frauds like hacking, fake mobile applications, fake messages is a serious issue in this perspective.

National Cyber Crime Reporting Portal which operates under the Ministry of Home Affairs, stated that over 2.9 lakh cybersecurity incidents related to digital banking were reported in 2020.

4. Lack of Infrastructure: Poor internet facility in remote villages in India is still an obstacle to digital fund transfer.

5. Physical cash: The basic need for cash will remain unaltered for long years to come in countries like India.

6. Technological failures: Digital economy is completely technology-dependent. If there is any internet or intra-net breakdown, there must be a sudden hit to the payment network. Therefore consumers could face a huge hindrance, especially sectors like health, corporate business, railway, flight ticket booking system could be affected to a great extent.

7. Privacy: Privacy is a factor. The information of biometric data of Aadhaar along with the bank account details should be kept secured. This set of data will give the government enormous power to surveil its people. Any kind of potential misuse of this information will deny the people their fundamental rights and would therefore be catastrophic. As it is to be noted that India has also not yet enacted specific legislation on data protection.

Ways Forward

Cashless Economy can not be achieved any time soon in India. As every coin has two sides, the concept of a cashless economy also represents two sides. The digital transaction makes the system transparent as well as it is impossible to implement in rural India. People lack digital literacy and awareness and thus becoming the victims of cyber fraud. Here are some steps that could be taken to balance the situation and to make the transition into a cashless economy smoother.

• The transaction of more than 3 lakh must be through electronic mode.
• Cash holding more than 15 lakh and above should be reviewed.
• Incentives encouraging electronic transactions.
• It should be mandatory for the seller to deduct tax at 1% wherein cash payments exceed 2 lakh.
• Quoting of PAN should be made mandatory for all sale and purchase of goods and services above Rs 2 lakh.
• Digital literacy awareness campaign should expand their outreach into remote villages.

Conclusion: A cashless economy has the power to achieve greater economical growth for a country. That’s why the government of India is planning to strengthen the cashless economy by promoting cashless transactions, digital literacy to provide cybersecurity awareness among the people. Now with the implementation of Digital India 2.0 we need to be optimistic that it would foster the successful and enduring transition into a cashless society. Stakeholders and policymakers also should focus in creating a facilitative regulatory environment that is consumer-friendly and secured, that would eventually facilitate innovation and growth. India has improved its ranking in IMD World Digital Competitiveness Ranking 2019 (WDCR) from 48th to 44th position. The ranking basically measures the knowledge and future readiness to adopt and explore digital technologies of the people in a country. In a conclusive note, it can be stated that the avenue of cashless economy is indeed twisted and full of hindrances and greatly rewarding at the same time. The government of India must eye on improving infrastructure with an extended vision of companionship of innovation and security.

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