Cashless Economy Risks and Rewards

By Ankit Arora, PGDRM Jan’21-22

Image Source: Forex Bonuses

A cashless economy means an economic system where digital transactions like net banking, mobile banking, digital wallets, and payment through debit cards and credit cards are used to replace the traditional method of payments made via cash or coins.

Why cashless?

1. Reduction in risk of carrying cash
2. Increase transparency
3. Cost reduction
4. Efficient and convenient

Categorizing Cashless Alternatives

1. Wrappers: These are the general mobile applications that are used to transfer money through a mobile number or a user code. For eg: GPay, Paytm, etc.
2. Mobile money: Mobile Money is a new payment system, with money stored as credits on a smart card or on the system provider’s books, but continues to use national currencies. For eg: M-Pesa
3. Credits and local currency: Credits are schemes in which private companies accept money in exchange for an alternative unit of account, which can be spent on a particular platform (such as within an online game).
4. Digital currencies: Digital currency is any currency, money, or money-like asset that is primarily managed, stored, or exchanged on digital computer systems, especially over the internet.

The Cost of Handling Cash

1. The cost of accepting cash as a method of payment for businesses. This includes the cost of transporting cash. Cash in transit companies has varying charging structures.
2. The cost of using cash for the public. For example, paying to withdraw money from an ATM machine includes the costs associated with the ATM network and this differs from country to country.
3. The cost of cash to banks includes the production and issuing of notes and coins.

Image Source: BeMoneyAware

RBI spending: RBI expenditure on currency management was 49.12 billion in the year 2017 and 2018.

GOVERNMENT INITIATIVE

DIGITAL INDIA campaign was launched by PM Modiin year 2015

Launch of BHIM UPI application in the year 2016 to initiate digital transactions

Linkage of e-wallets to pan cards and No service charge on digital transactions

One UPI for all digital transaction platforms

Going cashless as risk mitigant

1. Going cashless is one way to effect compulsory banking
2. Compulsory electronic banking may be seen as a risk management tactic for banks facing the myriad risks arising from NIRP
3. The profit margin on incremental deposits is the product of the interest margin between deposits and assets, the increase in deposits, the effective re-lending multiplier

Risk in E-payment

1. Threat to financial information: There are many cases of leakage of financial information such as card details, internet banking passwords, and UPI pins. This leads to theft of money from your bank accounts.
2. Crash of e-wallets: There are many applications such as Swiggy, Zomato, Uber, Ola, and many others that provide us the benefit of e-wallets but there is a potential risk of wallet crashes or and govt. regulation that stops the use of e-wallets.
3. Phishing attack: It happens many times that you make online payments and suddenly a mail or a message has been received saying click on this link for availing offers or cash back. Through this hackers hack your banking details and empty your accounts.
4. Excessive reliance on technology: It’s not a king of threat but a potential operational risk, as many times we all have faced some issue in online payments saying bank servers are down or payment is taking time these are the issues due to server of bank or digital payment platform.
5. Lack of infrastructure: Infrastructure makes global commerce possible. But while some countries are upgrading their physical infrastructure. But if we specifically talk about India then rural parts are lacking far behind.
6. End to the right of private life: We slowly accept a trade-off between convenience and privacy. Are we aware of this? One argument is that only people who have something to hide would want anonymity. There needs to be a strong legal and regulatory framework to accompany a cashless society and is probably necessary anyway.

Swot Analysis

Strengths

• Convenience: Integration of wallet into digital devices/services,
• Consumer and political power,
• End of cash making/handling costs on taxpayer,
• Perceived social fairness if tax,
• Compliance may improve, and fraud may reduce.

Weaknesses

• Financial exclusion, some will have difficulties with the transition,
• Potential unreliable access to infrastructure and technology (physical and cognitive),
• Financial and technological literacy, Inc. budget management,
• Hidden agendas (suspicion),
• Mistrust in banks,
• Attachment to the social value of cash.

Opportunities

• Financial inclusion,
• Financial and technological literacy,
• Bank competition may mean lower consumer costs,
• More payment choices, inc digital currencies,
• New payment methods may dis-intermediate banks.

Threats

• Financial exclusion/unaffordable technology,
• Loss of freedom, digital enslavement, dystopian world,
• Loss of free means of payment/Forced consumption of private services,
• Hidden agendas (repression),
• Change won’t live up to promises,
• Mistrust in banks,
• Negative Interest Rates and wallet erosion through fees,
• Money loss through collapsing schemes,
• Security of transactions and data (Inc. biometrics),
• Increased debt,
• Lack of interoperability, inconvenience,
• Loss of sovereignty.

Get the full study here:  Cashless Economy- By Ankit

Disclaimer

This report has been produced by students of Global Risk Management Institute for their own research, classroom discussions and general information purposes only. While care has been taken in gathering the data and preparing the report, the student’s or GRMI does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. References to the information collected have been given where necessary.

GRMI or its students accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this report. This report does not constitute advice of any kind.

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