Expect your household budget to explode: going cashless comes at a cost


The government’s demonetization campaign has caused a shortage of cash, forcing people to turn to plastic money and other forms of digital payments. But, for a society accustomed to physical tickets, the transition to cashless comes at a cost. Many households will likely see their budgets explode as they pay more at merchant establishments that accept digital payments.

According to a report by JM Financial, approximately 95% of consumer transactions by volume and 65% by value are conducted in cash in India. “India is still a cash-intensive economy with a cash-to-GDP ratio of over 12%,” the report said. Life has become difficult as the higher denominations of Rs 500 and Rs 1,000 accounted for 86.4% of the total currency in circulation by value as of March 31, 2016, according to data from the Reserve Bank of India.

“Consumers have no choice but to opt for digital transactions after demonetization, and for that they will have to bear additional costs,” says Madan Sabnavis, Chief Economist, CARE Ratings. He points out that although ATM transaction fees have been removed, other fees remain. Some of these are service charges for booking tickets online (Rs 20-40 plus tax) and a surcharge on the use of cards at petrol pumps (except on cards which specifically waive the surcharge). It’s 0.75-1% on debit cards and around 2.5% on credit cards. “Although it was recommended to remove this additional fee, it has not yet been implemented. Today, when a financial transaction is made using a debit or credit card, the merchant incurs an additional cost, which they often pass on to the customer,” says Sabnavis.

Impact on your budget

Besides transaction fees, an individual also has to pay more when moving away from providers of family goods and services to establishments that accept digital payments. We looked at the additional costs an individual faces when going without cash in their daily life across three product categories in Delhi and Mumbai, and the impact this will have on their household budget.

Home Essentials: To buy vegetables and fruits in a supermarket, be prepared to shell out between 5 and 30% more. Add to that the cost of driving to the mall or supermarket and paying parking fees. If the supermarket only sells Tetra Pak cartons instead of packet milk, you could end up paying 50% more. Starting at Rs 1,200 per month for a liter of milk per day, your monthly cost will climb up to Rs 1,800. There are offers in supermarkets where a shopper gets free sugar or a discount on using the cards , but going to a local seller is likely to be cheaper in the majority of cases.

Buying household essentials online is another option, as these vendors accept digital payments. This also reduces travel times and fuel costs. However, in some cases a minimum order may be required for free delivery, says Rs 1,000. If the invoice is lower, there might be a delivery charge of Rs 25-30, which varies according to the category of goods chosen.

Traveling: While many people get to work using local trains, buses and the metro, some rely on auto rickshaws or taxis to get to the station or bus stop, or to get to to the office from there. A four kilometer rickshaw and taxi ride costs Rs 49 and Rs 59 respectively in Mumbai. If you hire an app-based taxi, it will cost you around Rs 100, thus doubling your cost. However, if the distance is more than 10 km, app-based taxis can cost you about the same or even cheaper than a rickshaw or taxi.

Eat outside: Lunch at a small restaurant or roadside stall can cost around Rs 70-80. But if you go to a small restaurant that accepts cards, the cost will probably increase by at least 60%. Many restaurants do not accept cards if the order is less than 100 rupees. The cost of a cup of tea or coffee with snacks can soar from 30-40 rupees at a roadside stall to 100 rupees at a restaurant that accepts digital payment. Food ordering apps are becoming popular, but they require a minimum order of Rs 150-200 for free delivery.

Like many others, Anita Verma buys household essentials on credit and currently pays the seller by check. She even plans to pay her maid, reporter, dhobi and driver by check next month. “But, this arrangement is temporary. Most of them will not continue to accept this form of payment because they need immediate cash for their expenses,” she says. For her, the sore point is a visit to the doctor, where she does not have the possibility to pay by card and many do not accept old banknotes.

Besides the costs in purely monetary terms, there are practical difficulties one faces in going without cash. In metros, it is even easier to opt for digital transactions, as the level of acceptance is higher. In fact, many roadside fruit and vegetable vendors have now started accepting payments through mobile wallets like Paytm. But in smaller towns, cashless transactions can be difficult. India has one of the lowest numbers of card readers or point-of-sale (PoS) terminals per capita in the world, according to research by EY. About 70% of them are in the top 15 cities and contribute more than 75% of total volumes.

Moreover, the banking infrastructure is ill-equipped to handle large volumes of card transactions. Four days after the demonetization announcement, Mumbai-based Sushma Bhosale went shopping at a supermarket. But the PoS terminal did not accept his card despite repeated attempts. Eventually her brother came with some money and paid the bill. If you are in an area with poor internet connectivity, you will not be able to transact using your mobile wallet.

A cashless future: not so close

Digital payment is on the rise in the country. The number of debit cards more than doubled between 2012 and 2016, as did card readers or point-of-sale machines. Online transactions through National Electronic Funds Transfer (NEFT) increased from Rs 4 lakh crore in 2009-10 to Rs 83 lakh crore in 2015-16, an increase of 2,000%. Recently, we have seen new payment mechanisms such as wallets and the unified payment gateway. But it may not be possible to go completely cashless in India, as cash is needed for small bill payments, says Abheek Barua, Chief Economist, HDFC Bank. For example, for payments to the plumber, electrician or tailor, cash would always be required. If you use NEFT or check, your transaction cost will increase. “The data shows that over the years, the volume of cash transactions has increased, but the value has decreased. This indicates that large ticket payments have moved to cashless payment, but for small ticket payments, cash remains the preferred payment method,” he says.


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