The remonetisation, after demonetisation, is nearly completed. In the market place, the mode of settlement of daily transactions is returning to the pre-November 8, 2016-preferred pattern of cash settlement. As the pressure on people on digitalising settlements has declined, normal behaviour of increasingly resorting to cash has comeback.

However, demonetisation has largely been successful in educating the masses about the benefits of electronic payments and digitalisation. In next few months, with implementation of GST, expected from July 2017, drive towards digitalisation would be strengthened. However, while working in the field, some challenges are becoming apparent, which need to be understood and addressed for seamless transition to digital India.

Last mile worries

The problems for digitalisation are similar to those for expanding financial inclusion: last mile access. The problems are mostly supply side issues rather than demand side factors. The costs incurred by the banks have received much attention while the problems of the merchants have received scant attention. Hence, the expansion of digitalisation of the payments will require efforts to reduce the costs for the merchants.

Random interactions with merchants in urban areas indicates that the major obstacle to the growth of digital payments is the increasing costs for merchants, while in rural areas it is the lack of availability of payments infrastructure. Merchants in urban areas complained that the recurring monthly cost of maintaining the technology infrastructure is growing rapidly and the increase in business volumes is not sufficient to support these costs. A major component of the recurring costs is telephone bills which have more than trebled. A cause for these rising phone bills is because merchants are often charged an STD rate to the city where the banks’ servers are located.

This is ironic at a time when other categories of telecom subscribers are reaping the benefits of telecom revolution and crashing data costs. The completion of remonetisation means that merchants are not keen on customers paying through wallet services due to the high transaction costs.

The only reason merchants are not yet turning away customers paying in digital forms is the general weakness in the business environment in the aftermath of demonetisation.

PoS and more

In the case of rural areas, it is observed that though there is an interest which is reflected in a steady increase in customer enquiries, the actual card usage has been low due to the lack of digital payments infrastructure, fears related to cyber security and lack of knowledge about electronic payments. RBI statistics indicate that the total number of PoS machines in the country increased from 15,12,608 at the end of October 2016 to 22,24,977 at the end of February 2017.

Invariably, as expected, an overwhelming number of these are in urban areas. PoS machine availability in the villages continues to be low, let alone most business establishments in the villages possessing them.

The government departments and agencies in many small towns and rural areas are not equipped to handle card payments or receive NEFT, RTGS or IMPS transactions. The use of wallets has been largely restricted to the more educated youth in rural areas and small towns.

The above discussion clearly shows that digitalisation can have an impact on financial inclusion. There are two ways of adopting digitalisation in banking transactions. In an internet banking model there is essentially a need for an internet, and a robust landline connection. In mobile banking, having a smart phone is necessary. To rapidly digitalise India, probably both methods would be required.

Therefore, there is a need for a committee to understand the problem, become aware of the challenge, and then prepare a road map which would identify geographical areas where one or both the strategies would be required to achieve success. Therefore, there is also a need to have a road-map on digitalisation because there are various factors and challenges that need to be addressed. Some of these challenges, though seemingly mundane, would need concerted effort to address.

These are like numerals in English on all electronic devices which very few people understand, given that only 10 per cent of the population is conversant in English. Similarly, the penetration of smart phones is also limited, especially in rural areas.

Even if there are smart phones in the rural areas these are restricted to only one member in the family which implies that banking activities, private in nature, would be restricted.

Making it affordable

As the government has addressed the issue of smart cities by announcing a list of select 100 cities where technological amenities would be provided in a phased manner, a similar strategy could be adopted for digitalisation. To begin with, on a pilot basis, the government can identify a few cities which have the potential for complete digitalisation. Initially the experiment can be conducted in a phased manner in different but small and homogeneous areas within the city.

Illustratively, a pilot experiment can be initiated in a campus of an educational institution and once fully digitalised can then be expanded to areas outside but around the campus.

Having gained the experience on how digitalisation would work, the government could then extend digitalisation to other parts in the select city, and later expand to other cities. Such small pilots will be useful since our research indicates that overwhelming number of rural residents tend to spend money on purchases within a radius of 5-8 km of residence.

The objective of financial inclusion is to provide financial resources to the consumers at affordable rates. To achieve high level of efficiency and reduce the rates of intermediation, digitalised banking is the best way to supplement and probably even offer an alternative to brick and mortar branch in the near future.

Singh is a professor of economics and social sciences at IIM Bangalore . Ananth is associate professor (adjunct faculty) at the Institute for Development and Research in Banking Technology