Who wired my cash?

In 2001, a sceptical Railway Board was hearing a proposal from the Indian Railways Catering and Tourism Corporation for launching a portal to sell tickets on the Internet. The idea was exciting, but there were concerns about the financial liabilities it entailed. Chief among them: How would customers be reimbursed if the online system stalled?

A decade later, those worries have evaporated. Around 40% of all passenger railway tickets in India are bought online today, with revenues from the portal touching
Rs 8,007 crore for FY2011. According to a study done by Visa International, the railways spends Rs 25 for every ticket they sell over the counter (OTC), for infrastructure, cash handling, and staffing costs. With more than 240 million tickets sold annually, both OTC and online, the railways can save Rs 360 crore annually (that’s nearly a crore a day) via 100% e-ticketing.

T.V. Seshadri, president of the India business of MasterCard Worldwide, the payment solutions company, says card-based payments contribute about 3% to 4% of the total personal consumption expenditure today, against 1% a decade ago. Since 2005-06, card spends have grown 187% to Rs 1.14 lakh crore for 2010-11. According to Reserve Bank of India’s 2011 annual report, paper-based transactions are steadily migrating to electronic. In 2010-11, 40.9% (by volume) of all transactions, personal or otherwise, were electronic, up from 32.8% in 2008-09.

The creation of currency, cash distribution, handling, storage, and even disposal, has a cost attached to it. For the RBI, a higher percentage of e-transactions means that the printing costs of currency come down. An indicator was the central bank spending Rs 378 crore less on printing notes in 2010-11, compared with the previous year.

Yuwa Hedrick-Wong, global economic advisor to MasterCard Worldwide and professor of international business at University of British Columbia, says the costs of cash to governments can run into tens of billions of dollars. Hedrick-Wong, who is working on a paper on the costs of cash to the government of Canada, says, “Between 1% and 2% of Canada’s GDP could be saved if the federal government conducted all its transactions electronically.”

However, e-payments also come at a cost. The average merchant fee to the banks for such transactions is about 1.5% ad valorem, much higher than the 0.15% that K. Radhakrishnan, former CEO of Reliance Retail Value Business, attributes to cash management costs for retailers. However, Sandip Tarkas, president, customer strategy at Future Group, says he would prefer card payments across the group’s various retail formats rising from the current 50%.

“Although the cost of handling cash is much less, we prefer that our customers pay by card. It is not only simpler but, more important, plays a very vital role in increasing business,” says Tarkas. “Cards liberate customer purchase. If we lose a sale today because the customer is not carrying enough cash, it is gone forever.”

Card payments also bring another direct cost advantage for large retailers such as the Future group. Most retailers opt for the magic pricing strategy of Rs 189, Rs 249, and Rs 99, creating a large requirement for coins as change. “Sometimes we buy coins from the open market at a 10% to 20% premium,” says Tarkas. “Card payments bring down this cost substantially.” In a day, the group’s requirement for coins could be anywhere between Rs 20,000 and Rs 40,000 and not all of it is met by banks.

Card payments also eliminate risks associated with cash such as security, counterfeits, and mistakes in physical counting. Mukesh Sharma, general manager at Hub, Guwahati’s first mall, says it used to lose up to Rs 1 lakh a year because of counterfeit currency. This figure has come down because e-payments make up 40% of the total payments that Hub receives.

While the benefit may seem obvious, just 3% of personal consumption expenditure coming from e-payments leaves a lot of room for improvement. E-payments are as high as 20% in developed economies such as Sweden, South Korea, and Australia. Uttam Nayak, country manager, India and South Asia, Visa International, says, “The kirana store owner doesn’t want to accept cards because he is also part of a parallel economy that allows him to under-report and save on tax.”

E-payments, though, have a positive impact on small- and medium-sized retailers and their inventory management. Take the example of a small retailer who is unable to build an inventory because he does not have enough cash in hand at that time to purchase the items from the manufacturer. This could lead to a situation where demand suddenly spikes and the retailer loses out as he is unable to supply. “There is a cost attached to undersupply, and e-payments allow such costs to be mitigated,” says Hedrick-Wong. He adds that the impact of increased e-payments on a developing country such as India could be much larger as they help achieve transparency.

Nayak says e-payments can help resolve the issue of financial inclusion to a great extent. United Bank, one of the largest banks in Pakistan, joined hands with Visa for the disbursal of aid to people affected by the 2005 earthquake. “It is always difficult to ensure whether financial aid reaches the intended group. The disbursement was done through prepaid cards, which allowed full accountability and also ensured that it went to the right people,” says Nayak.

Banks prefer their customers using e-money instead of cash as it lowers the overall transaction costs for the bank. For every transaction done at a bank branch, the bank incurs a cost of Rs 20 to Rs 25, owing to overheads such as electricity, salaries, infrastructure, and stationery (see table). A cheque transaction at a counter can cost up to Rs 20 if it is a funds transfer, but a transaction that involves the teller can cost the bank Rs 30. An ATM transaction brings down this cost to Rs 10, and net banking lowers it further to Rs 1.50.

Bhavesh Zaveri, head of cash management and wholesale banking operations at HDFC Bank and board member at National Payment Committee of India, points out that movement of liquid cash is the slowest. “Transition from cash to non-cash means money moves faster. This fast movement of money translates straight into higher GDP.”

The rise in credit card payments has a far reaching impact on the savings rate in the system as well. The opportunity cost of cash, especially in rural areas, is very high as people usually withdraw a lumpsum for every day expenses, bringing down the interest-earning capability of cash. “That you don’t have to touch your entire bank balance at the beginning of the month may look minuscule for an individual household, but multiply this by 1.2 billion [India’s population] and it quickly becomes crores of rupees,” says Hedrick-Wong. Even if each household were to increase their savings rate by 5% annually, the cumulative impact on the national savings rate would be significant.

The more people use plastic, the less they withdraw from their current and savings accounts. This helps
banks increase their low-cost deposits and lending capacities, which again adds to the velocity of money in the system. “CASA ratios [the ratio of the deposits
in the form of current account and savings account to total deposits of the bank] go up the minute customers start using cashless payments, because they withdraw less,” says Nayak.

According to Bijaei Jayaraj, founder and CEO of Loylty Rewardz, a firm that designs and operates the loyalty programme for the State Bank group’s (SBI, State Bank of Travancore, State Bank of Bikaner & Jaipur, and the like) 104 million debit cards, even if 10% of the SBI group’s transactions at the ATM get converted into e-payments, it could end up saving up to Rs 1,000 crore annually. “If customers use the debit cards at the point of sale, the bank can not only cut down transaction costs, but actually earn revenue per transaction.”

While banks earn from every e-transaction, the cost is often a deterrent to a lot of retailers and e-commerce businesses. A Nasscom committee is lobbying with the government to create mechanisms to improve trust and push e-payments. Large-scale e-payment systems for insurance premiums and mutual funds will help reduce distribution costs and possibly create one of the biggest slices of the e-payments pie.

E-payments also have a significant impact on remittances, which can often be both costly and risky. “Typically, money order costs are around 5% ad valorem,” says Nayak. E-payment is not only a cost-effective way for the Indian labourer to remit funds, but also safer and quicker, says Hedrick-Wong. In fact, mobile banking might just be the perfect answer.

The real fillip for e-money will be mobile money. The pace of the behind-the-scenes action with mobile money is so furious that Future Group’s Tarkas believes that in two years, the tide will start shifting towards mobile wallets. Citigroup is just one of the many that have announced allied products to get a slice of the mobile payments category. Its Cash-To-Mobile Receivables Solution is aimed at corporate and institutional clients, who want to receive funds from retailers or end customers instantly. Along with SBI and ICICI Bank, telecom operators such as Airtel and Vodafone, handset makers such as Nokia and even Internet giants such as Google (with Google Wallet) are betting on mobile action.

Unlike the top-down model of most card-based payment systems, where the richest get access first, mobile banking is expected to be much more democratic in its growth. The largest impact of mobile banking, as the report of an inter-ministerial group pointed out in April 2010, was on financial inclusion.

“With mobile subscribers in rural areas far more than bank account holders, a large section of the rural population now has access to mobile telephony but not to financial services,” the report said. “With the rural mobile subscriber base expected to grow significantly over the next few years, a system that enables the provision of basic financial services through the use of mobile phones can be a major step in the direction of reaching out to the unbanked sections of the country.”

A Boston Consulting Group report on mobile banking in India says, “India has more than 500 million mobile phone subscribers, compared with just 240 million individuals with bank accounts and 20 million credit card holders. More than half of Indian households—110 million altogether—do not have a bank account. Yet, of the households without a bank account, 42% have at least one mobile phone. And nearly 90% of those phones are capable of handling basic financial transactions.” The impact of mobile banking? Do the math.