COVID gives boost to digital transactions even as cash remains king

The pandemic has provided a fresh boost to the digital economy with contactless payments turning out to be an alternative that averts the risk of infection, even though cash remained the most preferred mode of transaction.

Digital payments generate data about consumer behaviour which businesses can analyse to derive insights for crafting coping strategies.

When people started stocking essentials like groceries and went easy on frills as they prepared for long stays at home during the lockdown, HEMA, a Dutch variety store, faced a situation it had never anticipated in its nearly 100 years of existence. It seemed obvious that larger stores would help serve most of the people, but insights derived from the analysis of retail spending patterns did not support that obvious conclusion. It showed that people were frequenting smaller stores in their neighbourhoods than the larger and more distant ones. So HEMA decided to keep these stores open. This would also help the elderly and the vulnerable to shop safely while closing the stores early allowed the staff to restock.

London’s Chief Digital Officer tapped similar insights when he wanted to get a nuanced understanding of the economic impact of the pandemic on the city to enable the government to disburse aid efficiently, direct investment to support those who were most affected and plan the budget better. London does a comprehensive economic survey once every three years, but card and cheque payment data provided reliable insights every few days.

In India, the Reserve Bank of India governor urged the consumers just before the lockdown to begin using mobile banking and cards in order to avoid contact with coins and currency notes and visits to crowded places to withdraw cash.

In a survey of 4,800 consumers and 950 executives from 12 countries including India by Capgemini Research Institute, 82 per cent of Indian respondents said they had made use of touchless interactions during the lockdown and 48 per cent of them expected to continue doing so after the reopening. The lockdown gave consumers an introduction to digital transactions in a way that demonetisation of 86 per cent of India’s currency in November 2016 did not.

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At a recent online panel discussion organised by a financial daily, leaders of fintech companies said the pandemic had accelerated the pace of digitisation and helped in customer acquisition.

But unlike in the developed countries, cash is still the king in India. In April and May when the country was shuttered, cash transactions were 90 per cent less than during the same months last year. Yet they were still significantly higher than the value of card and digital purchases despite the spread of smartphones and ease of identity verification with Aadhaar numbers.

In rural India where 66 per cent of the populace live, only a quarter of them has internet access. The purchasing power of most rural households is also low.

The next 10 years will see profound changes. Google has announced it will invest $10 billion over the next five to seven years in digitisation. With Jiomart entering the online shopping space backed by the financial heft of the Reliance group, e-commerce, which is dominated by the two global heavyweights, will gain traction.

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The digitization of rural India will have multiplier effects. In mid-August, Arya Collateral Warehousing Services launched A2ZGodaam, a portal that makes warehouses across the country searchable. According to Prasanna Rao, Managing Director and CEO of the company, the portal has a list of about 2,000 warehouses in 200 districts with 2.5 million tonnes of produce worth about ₹2,000 crore. The company has verified and certified the warehouses and they are searchable across many parameters like lease rental, insurance status, regulatory-accreditation, distance from regulated market yards or railway sidings, the availability of fumigation services, and so on. About 18 banks will provide financing against their warehouse receipts.

Arindom Datta, Executive Director, Rural and Development Banking, Rabobank Foundation, said such a portal would help prospective buyers discover what quantity of produce is available across warehouses. Since banks look for cash flows, tradable stocks would enable lending. Venture investors believe such agri-technology companies can overcome traditional frictions in the rural economy. In the first six months of this year, 15 start-ups got $85 million in venture capital for farm-to-fork and factory-to-farm linkages. Last year, there were nine deals worth $153 million.

The government wants to double farmers’ income by 2023. For that, commodity and credit markets will have to be de-linked. Only when farmers are free to borrow can they sell freely. Currently, they buy on credit from input dealers, who double up as moneylenders and force them to sell soon after harvest when prices are low.

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A 2018 survey by Nabard, the agricultural refinance bank, revealed that 52.5 per cent of agricultural households are indebted and the average debt is ₹1.04 lakh, which is many times their monthly income. They pay very high interest rates. Apart from expanding their networks and creating novel financial instruments, banks could mine the data available in payment and other platforms to reach out to these borrowers. Jai Kisan, which got Nabard’s first investment in the fintech space, says it lends to rural borrowers at 16-17 per cent while its cost of borrowing is 14-15 per cent. It can operate on such fine margins, it says, because its underwriting expenses are a fraction of that of micro-finance institutions.

Nandan Nilekani, the chairman of Infosys, who drove India’s Aadhaar biometric ID programme, says India will become data rich before it becomes economically rich. By that he meant online transaction data will throw up new business models like flow-based lending of working capital loans to small businesses. Invoice discounting would be possible on platforms that bring together lenders, payment gateways and businesses once open credit enablement protocols are in place. Eventually, hawkers might be able to borrow in the morning and repay in the evening from the cash flows they generate during the day.

(The writer is a journalist and blogs on www.smartindianagriculture.com)