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Cash Is King In India – But For How Much Longer?

in Blog, Retail and Ecommerce

India is expected to become the world’s most populous country within the next decade, and its newest citizens are being born into a country deeply rooted in economic tradition. While Western nations had embraced digital payment methods decades before the internet required it, India remains a country based around cash on delivery. That’s true even for ecommerce. And this cultural quirk is something foreign companies often struggle to understand when they launch business ventures targeting Indian audiences.

Where Cash Is King

Although debit and credit cards have been offered to Indian consumers since the 1980s, with online payment systems arriving in the early Noughties, cash remains the payment method for an estimated 90 per cent of transactions. Its importance was highlighted by the Indian Government’s recent attempts to steer its citizens towards digital transactions. In November 2016, all 500 and 1,000 rupee banknotes (around 85 per cent of the country’s entire cash reserves) were withdrawn from circulation. Customers had to deposit them in banks, as part of a national drive to move towards bank transfers and credit.

Ironically, the amount of cash in circulation as a proportion of India’s GDP is higher now than it was before demonetisation. In recent years, other countries have witnessed similar trends. America, Canada and Mexico have all seen their cash-to-GDP percentages rise over the last decade. Cash accounted for 20 per cent of technology-obsessed Japan’s GDP in 2016, while South Korea’s cash-to-GDP ratio more than doubled in a decade.

Online Transactions In A Cash-Based Society

Cash on delivery remains the default option in Indian society, where goods or services are exchanged simultaneously for cash. The concept of paying in advance simply hasn’t taken root as it has in European and North American countries. The loss of trust caused by a swathe of high-profile ecommerce frauds involving fake products has reinforced a cultural aversion to paying in advance of goods receipt. Indian cyber laws are weak, and fraud prosecutions are extremely rare. A rumour that bank deposits weren’t safe in Indian banks led to a run on ATMs last year, with cash hoarding particularly prevalent in rural areas.

Indeed, the lack of technological infrastructure in rural India represents a key obstacle for exponents of bank transfers, Bitcoin and credit cards. In rural regions, less than one in six households is estimated to have internet access. Nor are smartphones bridging the gap as they have in African nations, where 4G connectivity became a substitute for the lack of landline internet infrastructure. Only around 85 per cent of Indians own a smartphone, and half of those who do can’t access reliable data services.

From The Merchant’s Perspective

Because most ecommerce transactions are paid for with cash on delivery, digital payment methods remain an alternative rather than the default. And that poses challenges for new entrants to India’s ecommerce market. There is limited public knowledge of how to use debit cards, and scant information about the steps taken by platforms like PayPal to protect users from fraud. Some analysts argue the only way to move India towards a less cash-driven society involves state-driven education programmes about the safety and benefits of digital payment methods. Indeed, education is crucial in other respects – almost a third of India’s population is illiterate. And those who are would be unable to set up online payments, assuming they could afford a smartphone or access a stable cellular network.

Consequently, new entrants to the Indian ecommerce market must be willing to offer cash on delivery alongside digital payment methods. Otherwise, they will drive a significant percentage of potential customers into the welcoming arms of more culturally-aware competitors. Cash on delivery isn’t an insurmountable obstacle for ecommerce retailers, though it does require employing trustworthy delivery firms and waiting longer to receive payment for ordered items. Without any periods where the supplier holds both ordered goods and customer payment, short-term turnover is affected, though this obviously balances out in the long-term.

There are even some modest advantages to selling goods online for cash. Merchant processing fees are eliminated, and there’s no risk of ecommerce payment gateways being hacked (or customer payment data being stolen).

Cash Is Here To Stay

Following the failure of demonetisation, India’s love affair with cash seems set to continue. Cryptocurrency scandals have been widely reported in the media, spooking a nation already averse to depositing hard-earned income. For digital payment methods to achieve mainstream acceptance, a far stronger IT infrastructure will be required, especially in rural regions. There must also be a national education campaign showcasing the safety of digital payments, and promoting workarounds like prepaid cards.

These transformations would take years to accomplish, if they happen at all. In the meantime, Indians of all ages will continue to favour cash on delivery for goods ordered online.


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