Digital Channels for Payments & Settlements
Digital channels and Digital banking have transformed banking and investments across the globe. Indian banking system too has embraced digital channels for payments and settlements. In fact digital revolution has taken the country by storm. Like in many other countries, payments through digital channels are replacing the physical money transactions. Banking customers today have a range of options like net banking, mobile banking, digital wallets, UPI based applications, ATM based transactions, NEFT /RTGS and more to choose from. In effect, digital banking has become a part of their daily life.
Have digital channels reduced cash based transactions in India?
In India, physical cash has been the major tool for settlements. However, demonetisation followed by the push for a digital economy and the launch of a number of innovative digital channel based products in the Indian market, have helped the country to migrate towards digital banking and cash less economy. For a vast country like India, it is very difficult to measure the actual volume of cash based transactions. However, a recent study by Reserve Bank of India, the banking regulator, on the progress of digitisation from cash to electronics, reveals that the country is shifting towards digital channels and digital banking for transactions. The assessment was made based on data between the financial years (FY) 2014-15 and 2018-19.
How did RBI assess migration of settlements from cash to digital channels?
As there are no accurate measures to estimate cash transactions, RBI relied upon two proxies for the assessment:
(a) Value of Currency in Circulation (CIC) versus Gross Domestic Product (GDP); and
(b) Value of ATM withdrawals across the country
a.Currency in Circulation (CIC) versus Gross Domestic Product (GDP)
Currency in Circulation (CIC) is directly linked to the use of cash as a medium for payments and settlements. CIC increased at Compounded Annual Growth Rate (CAGR) of 10.2% over the past 5 years of assessment. During FY 2014-15, CIC relative to GDP was 12.1%. Based on the growth in GDP, notes in circulation (NIC) ought to be Rs. 26,04,953 crore in October 2019. The actual NIC, however, was Rs. 22,31,090 crore, which indicates a reduction in NIC by over Rs. 3.5 lakh crore establishing increased payments and settlements through digital channels.
b.Cash withdrawals from ATMs
The cash withdrawals from ATMs showed an increasing trend over the 5 year period. However, the percentage of cash withdrawals to GDP remained constant at around 17%, despite increase in the number of ATMs. Further, the CAGR of 9% in terms of volume and 10% in terms of value, the growth in withdrawals from ATM was much less compared to increase in transactions through digital channels (which grew at a CAGR of 61% and 19% in terms of volume and value, respectively). Further, the increase in the number of ATMs too was at a low pace (CAGR of 4% during the 5 years period).
The assessment and estimates by RBI and various other independent agencies like JP Morgan, Credit Suisse Group AG etc indicates that cash still remains as the major tool for settlements and payments, yet there is clear movement towards digital channels and digital banking. E-commerce market in the Asia Pacific region is estimated to grow at a CAGR of 12% till 2021, as per the study of Worldpay. The catalyst for the growth is India and said transactions are settled through digital channels. While cards (credit and debit) have replaced cash in many countries, in India the migration has been to digital channels. What enabled migrations of payment and settlement towards digital channels in India?
