Demonetisation: Promoting digital payments requires more than lucky draws; Paytm loss highlights need

Finance minister Arun Jaitley did well to announce a slew of measures, from a 0.75% discount on sales of petrol/diesel to 10% discounts on new insurance purchases from PSU firms, but promoting digital payments will require a lot more, and the lucky draws—to incentivise users—from NPCI being talked of aren’t going to cut it


Finance minister Arun Jaitley did well to announce a slew of measures, from a 0.75% discount on sales of petrol/diesel to 10% discounts on new insurance purchases from PSU firms, but promoting digital payments will require a lot more, and the lucky draws—to incentivise users—from NPCI being talked of aren’t going to cut it. Though the surge in digital payments after November 8 is very impressive, the virtual draining out of cash from the system necessitated this—so, once the cash comes back, sustaining this will be a challenge, especially given the 1-2% charge for most digital payments. Getting people to move to digital payments requires not just discounts of the type Jaitley announced, it requires merchants to be willing to accept the payments. Waiving the 1-2% merchant discount rates, as has been done till December 31, has been a big help in getting merchants to switch to digital payments, but this is not viable in the long run since, once banks are not allowed to charge for these services, their incentive to roll out Point of Sale devices gets limited—in the same vein, large discounts for cashless payments will certainly dent the profits of PSU insurers and is not a viable solution.

Any reduction in commissions, then, has to be driven by changes in technology. If, for instance, physical swipe machines are replaced by mobile phone apps, this will help cut costs dramatically—otherwise, the only way to popularise digital payments is for the service charges to be defrayed by the government. Similarly, while a Paytm charged 4% each time a merchant transferred money from his wallet to the bank account some months ago, this got reduced to 1% once the merchant underwent a KYC—and the cost of the KYC, in turn, got reduced once RBI allowed an Aadhaar-based eKYC. More important, as the latest Paytm results show, there are very large costs that are not being factored by any of the committees entrusted with the job of promoting digital payments.

In FY16, Paytm’s losses rose four-fold, to Rs 1,549 crore, due to the discounts offered to users, the incentives offered to merchants—Paytm offers them money to use their space for advertising, among others—and the sheer marketing efforts involved. If a merchant has to be converted to being a Paytm user, this involves Paytm’s staffers visiting the merchant several times to make the sales pitch; after that has been done, Paytm staffers spend days at the shop to ensure there are no glitches in the payments mechanism and to work with buyers, to show them how to open an account and transfer money to and from it—the 50% cash-back on movie tickets that most wallets offer has been a big draw for consumers.

The main reason why wallets of banks, or NPCI’s UPI, have not been as successful as Paytm is that they have not been able to make this kind of marketing effort—the flipside, of course, is that banks offer interest rates while Paytm-type wallets don’t. It is these issues of marketing efforts/costs that the various digital-pay panels will have to address.

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