When Modern Payment Systems Are the Problem

> Posted by Ashutosh Misra, Principal Consultant, Interactive Forum on Indian Economy

New modes of payments, such as electronic cards, mobile money, and internet-based payments, are in some cases causing financial exclusion for those who prefer, or are only able to pay in cash. This is the major finding of a study commissioned by the European Foundation for Financial Inclusion (EUFFI) on the impact of new payment systems on financial exclusion in the U.K., France, Italy, Poland, and Sweden.

The report is of interest to India for three main reasons: the Reserve Bank of India’s emphasis on financial inclusion when granting new bank licenses; Indian banks expanding their use of electronic payments and non-branch interaction with customers; the Indian government’s focus on promoting direct electronic transfer of social benefits. The five European nations of the study are smaller than India in size and population, but they’re ahead technologically and in financial services market development. Nonetheless, millions of their citizens are restricted from having a bank account and hence do not have access to many new payment technologies. Also, significant populations are unable to perform transactions using the new technologies or would prefer to use traditional methods. If the new payment systems can be so disruptive there, India has miles to go before electronic payments can become the norm here.

For financial inclusion, access to basic banking services must be complemented by the right to use traditional means of payment, such as cash, if that’s the customer’s desired payment form. The EUFFI study finds that cash is often the only means of payment for those at risk of exclusion, but shows it is becoming harder or more expensive to pay in cash. On the other side of this, many merchants still aren’t able or don’t want to accept cards. An example of this shared in the report is unsuccessful asylum seekers in the U.K. who can get financial support from the government only in the form of plastic payment cards. These cards are credited weekly, and enabled to purchase essential goods from a restricted subset of shops. This inability to pay in cash results in hostile behavior towards asylum seekers in some shops and supermarkets.

Proponents of direct electronic payments of social benefits in India need to ask whether such a system could result in similar financial exclusion here. What’s more, there are many beneficiaries in India who did not have bank accounts prior to the government’s recent electronic benefit roll-out programs. These people may not be savvy in writing checks, filling out deposit forms, and using ATMs and debit cards. In Alwar, for example, bank accounts for more than a third of the beneficiaries were seeded with Aadhar citizen identification numbers without the Know Your Customer (KYC) formalities being completed by the banks. At the behest of the local administration, the banks agreed to first open the account so that the social benefit program’s money transfers could start immediately and then complete the KYC. What happens to the beneficiaries if they fail to meet the KYC requirements? Will the banks stop these beneficiaries from accessing and withdrawing money from these accounts? How will the government then disburse the benefits? It is better that the implementation of the new system is orderly even if delayed, rather than pursuing shortcuts that might put the beneficiaries in a tough spot later. The social benefits program is for 14 government schemes broadly covering elementary education, secondary education, social justice, and medical and health-related benefits.

The EUFFI study reveals the plight of disadvantaged population groups, such as migrants, low-income individuals, those who are over-indebted, the elderly, and persons with disabilities. These groups often face difficulties in using new payment systems because they are not designed in a way that’s accessible, or they are denied access to the new systems because of factors which include lack of digital literacy, income, residential status, and mobility. In India, there are populations which face similar problems. Those who are illiterate and lower-income individuals are especially handicapped. They often end up greasing palms to get a ration card, voter’s card, and now Aadhar card. Their needs must be taken into account as electronic payments and plastic money gain popularity. The financial inclusion drive must not forget that bank accounts cannot be the sole measure of success, and that financial exclusion can take many forms.

As EUFFI states, access to financial services is crucial for being able to fully participate in modern society. Hence, payment services must be cheap, accessible, and transparent for all citizens, especially those who are at risk of being financially excluded. The consumer must have the right to choose the payment method – cash, plastic or electronic. Indian administrators and regulators with a penchant for technology and enthusiasm for strict laws need to keep this in mind when making rules and implementing financial inclusion schemes.

After all, cash has been an effective payment system for centuries. We may regret it if we abandon such a proven tool too abruptly.

Image credit: Ciaran McGuiggan

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