First Principles | Stumbling blocks and why UPI has slowed down
While the technology is great, cash is back to being king. What does this mean?
Soon after we applauded the geopolitical significance of UPI going global on these pages last month, the head of research at a European bank got back with an interesting argument: While the technology is great, cash is back to being king, he said. To the analyst and investor who pores over global data, it meant two other things:
- The ATM business in India is a great one to look at now.
2. The India-going-cashless-with-UPI story is perhaps exaggerated.
The cash in circulation in India’s economy has indeed gone up. And this cash must be dispensed. For banks, branches are expensive to set up and manage so it makes sense to have ATMs all over the place. As for UPI transactions slowing down, this is borne out by RBI data which has it that the volume and value of transactions are lower than last year.
Anuradha Rao, former Dy MD of State Bank of India, says, “Depending on your perspective, data can mean different things to different people." While it is certainly true that the cash in circulation has gone up, juxtapose it with anecdotal evidence from the real estate and jewellery businesses where transaction values are high. Studies have it that almost 44% of real estate deals involve cash while 60% of gold jewellery is purchased with cash. These are pointers to how cash lubricates the mainstream economy. If this be a case that people prefer cash then a business case for ATMs exists.
But as she explains, the ATM business is not an easy one to be in. The Reserve Bank of India (RBI) insists on stringent security and compliance on how cash is handled and transported as well as how ATMs are operated. By way of example, the RBI rulebook has it that vans transporting cash must necessarily be accompanied by two armed guards. Certain ATMs are required to be manned around the clock. If an ATM runs out of cash, banks are penalised. Just how to refill it on a ‘just-in-time’ basis is a complex operation. It gets even more complex as ATMs percolate into semi-urban and rural areas where cash must be transported to from a ‘central depot’. Add to this the cost incurred for round-the-clock CCTV surveillance.
There are other rules as well that ATM operators must comply with. Customer complaints are to be resolved between 2 days to 7 days based on ATM logs and CCTV footage. If the bank cannot prove it is correct, it will be assumed the customer is right. While well-intentioned, the number of people across the country who have figured out how to extract money from ATMs is remarkably high.
Then there is the reality of telecom connectivity in India and its robustness on a round-the-clock basis. People in the banking sector acknowledge off-the-record that counterfeit currency is smuggled into the country. This means new security features must be embedded into notes and that increases the cost of printing currency.
If that is the case, the inevitable question is: Why not adopt and push UPI harder? It bypasses all these issues. And since it works, why is growth tapering?
The answer lies in the nature of the ecosystem. Any payment system must be acceptable across all parts of the value chain. By way of example, while vegetable vendors or kirana store owners may agree to accept digital payments from customers, their wholesale supplier must also accept payments via UPI. But as we are discovering now, there are practical issues. Many of them are part of an informal economy and can handle cash, but using apps where numbers must be read and written is a different ball game. The lack of these skills means they cannot use the UPI apps. Some may not have a smartphone. Then there is the telecom connectivity that can play truant in rural areas. The constraints UPI faces in penetrating into the hinterland are very real.
The good news is that the core team that worked on creating UPI acknowledges there is an issue and is already at work on getting it streamlined further.