As the country moves towards a cashless environment after demonetisation, the initial awe and confusion have given way to a flurry of concerns. Will the emphasis on online transactions provide convenience and tangible benefits or just add to stress and additional charges?
To incentivise the move towards a cashless economy, the government has come up with a rash of discounts and freebies on digital transactions. But will these be substantial enough and, along with other benefits, counter the higher risk of identity theft once the currency notes are back in circulation? What are the gains and drawbacks of financial digitisation? Here's a look at what may be in store for you.
ADVANTAGES OF GOING CASHLESS
The ease of conducting financial transactions is probably the biggest motivator to go digital. You will no longer need to carry wads of cash, plastic cards, or even queue up for ATM withdrawals. It's also a safer and easier spending option when you are travelling. "The benefits are enormous if you leave out the low-income group, which will face a huge challenge," says Kartik Jhaveri, Director, Transcend Consulting. "For the rest of the country, it is constructive and simple.
It will be especially useful in case of emergencies, say, in hospitals," he says. Adds Jayant Pai, Head, Marketing, PPFAS Mutual Fund: "You have the freedom to transact whenever and wherever you want. You don't have to be physically present to conduct a transaction or be forced to do so only during office hours."
The recent waiver of service tax on card transactions up to ₹ 2,000 is one of the incentives provided by the government to promote digital transactions. This has been followed by a series of cuts and freebies. It's a good time to increase your savings if you take advantage of these. For instance, 0.75% discount on digital purchase of fuel means that the petrol price in Delhi at ₹ 63.47 per litre can be brought down to ₹ 62.99/l with digital payment.
Similarly, saving on rail tickets, highway toll, or purchase of insurance can help cut your costs. Add to these the cashback offers and discounts offered by mobile wallets like Paytm, as well as the reward points and loyalty benefits on existing credit and store cards, and it could help improve your cash flow marginally.
"If all transactions are on record, it will be very easy for people to keep track of their spending. It will also help while filing income tax returns and, in case of a scrutiny, people will find it easy to explain their spends," says Manoj Nagpal, CEO, Outlook Asia Capital. "Besides the tax, it will have a good impact on budgeting," says Pai.
The written record will help you keep tabs on your spending and this will result in better budgeting. "Various apps and tools will help people analyse their spending patterns and throw up good insights over a couple of years," says Jhaveri. Controlled spending could also result in higher investing. If the same amount of cash does not flow back into circulation and people continue to use mobile wallets and cards, it is also likely to bring down the latte factor. This means that the ₹ 10 you spent on candy or chips, or that regular cup of coffee office is likely to take a hit since you will be short of loose change and smaller currency notes. There's a lesser chance of budgetary leaks and unaccounted for spends sneaking into your budget at the end of the month.
If stolen, it is easy to block a credit card or mobile wallet remotely, but it's impossible to get your cash back. "In that sense, the digital option offers limited security," says Pai. This is especially true while travelling, especially abroad, where loss of cash can cause great inconvenience. Besides, if the futuristic cards evolve to use biometric ID (finger prints, eye scan, etc), it can be extremely difficult to copy, making it a very safe option.
It may not seem like much of an advantage, but being cashless makes it easy to ward off borrowers. Another plus is that you can pay the exact amount without worrying about not having change or getting it back from shopkeepers.
GO DIGITAL, GET DISCOUNTS
Service tax : Waiver of service tax of 15% on digital transactions up to ₹ 2,000.
Fuel : 0.75% discount on digital purchase of fuel through credit/debit cards, e-wallets or mobile wallets.
Rail tickets : 0.5% discount on monthly and seasonal suburban railway tickets from 1 January 2017. Online rail ticket buyers get up to ₹ 10 lakh free accident insurance too.
Rail catering : 5% discount on digital payments for railway catering, accommodation, retiring rooms, etc.
Highway toll : 10% discount on NH toll payment via RFID or fast-tags in 2016-17.
Insurance : 10% discount by government general insurers on premium paid online via their portals. 8% discount on new LIC policies bought online via its site. POS: ₹ 100 a month is the maximum rent that PSU banks can charge for PoS terminals.
Rupay : Kisan credit card holders to get RuPay Kisan cards.
DRAWBACKS OF DIGITAL TRANSACTIONS
Higher risk of identity theft
"The biggest fear is the risk of identity theft. Since we are culturally not attuned to digital transactions, even well-educated people run the risk of falling into phishing traps," says Nagpal. With the rising incidence of online fraud, the risk of hacking will only grow as more people hop on to the digital platform.
Besides, the latest move by the government to remove the two-factor authentication process for online transactions up to ₹ 2,000, will not help. Irrespective of the size of transaction, the absence of this additional layer of security will expose thousands to the risk of identity theft. Another weak link is the inadequate redressal mechanism. "With the poor redressal system in India, imagine what a poor rickshaw puller will do if he has his Aadhaar ID stolen?" asks Mumbaibased financial trainer P.V. Subramanyam.
"Given the tedious process and poor grievance redressal, people will have no easy recourse if they lose money online," adds Nagpal. There is no stringent legal process to deal with this kind or scale of fraud. Add to it the mass identity theft from banks' or companies' databases and it can turn into a financial nightmare akin to the data breach in the Indian banking system in October this year.
Since you will be dependent on your phone for all your transactions on the move, losing it can prove to be a double whammy. It can not only make you susceptible to identity theft, but you could also be rendered helpless in the absence of physical cash or any other payment option. This can be especially problematic if you are travelling abroad or in smaller towns or villages with lack of banking infrastructure or other payment options. Another drawback is that you need to keep your phone constantly charged. If the phone dies on you, you will be stranded, particularly if you are in the middle of an important purchase or dealing with an emergency.
Difficult for tech-unsavvy
India has a low Internet penetration of 34.8%(2016), according to the Internet Live Stats, and only 26.3% of all mobile phone users have a smartphone (2015), as per Statista figures. Besides the practical difficulty of going digital, "a bigger block is the psychological shift. You are suddenly jumping three generations to the digital medium," says Pai. Adds Subramanyam: "It's a problem for the older people, who may suddenly find themselves locked out of their accounts if they can't download an app or don't have cash." The digital medium may prove a challenge for the tech-unfriendly people, who will need more time to adapt or the availability of other options to conduct transactions.
While there is no denying the convenience of card or mobile wallet transactions, it could open a spending trap for an unsuspecting population. According to behavioural finance theorists, the pain of parting with money is felt more acutely if you use physical cash instead of a card. Hence, using cash instead of cards or mobile wallet acts as a natural bulwark for people who find it difficult to control their spending. "This is the reason that people could end up overspending, throwing their budgets into a disarray," says Pai.
Besides, a high penetration of the digital payment system is contingent on the fact that the same amount of cash does not come back into circulation. If it does, people are more likely to switch back to the former ease of using cash as it is a habit that they may find difficult to break.
The original article could be seen here.