War on cash

Announcing zero duties on digital transactions, the latest Indian budget suggests a continuation of Modi governments cashless push. Jury is still out on the demonetization drive of late last year. As the move sparked backlash, especially among middle- and lower-income masses, the government relocated the goalpost and started selling the crackdown on illicit/counterfeit fiat as a quest for digital economy.

In a recent column (Going cashless: Can demonetization help? published on January 10, 2017), BR Research had highlighted the need for both the supply- side and demand-side forces to be in some shape before a full-throttle push for digital is made. Once a critical digital mass develops, digital can help bring in transparency, cost savings and efficiency to payment transactions.

But beyond those commercial aspects, this so-called war on cash which is supported by the UN, a few multilateral bodies, global NGOs, banks and payment service providers under banners such as Better than Cash Alliance is being pushed to empirical limits. Left unchallenged, some in the think-tank community have been linking going digital with pro-poor and pro-women development outcomes under themes such as financial inclusion.

These assertions are only promises at this stage, and developing countries like India and Pakistan need to be careful with them. Payment means that are predominantly cashless, or digital, will end up impacting different income groups differently. Particularly, and adversely, exposed could be folks in lower income groups, most of who tend to be unbanked and rely on cash as the sole means of value transfer.

Even if for a moment we imagine that digital literacy and digital infrastructures availability wont be main issues for low-income/rural areas, a bigger issue will arise. These folks, who have been used to transact in cash all their lives and mind you, being a medium of its own, cash itself has no processing cost for end user will suddenly find that with digital payments, each of their transactions carries a service fee. And these service fees turn out to be significant, in Pakistan as well as other developing countries.

This is not to cynically undermine the utility of digital payments. Sure, digitization can be used as a main tool to expand the scale of financial services. But its impact on development outcome is yet unknown. Phil Mader, a research fellow at the Institute of Development Studies in Brighton and author of the 2015 book The Political Economy of Microfinance: Financializing Poverty, sums up this counter-narrative while writing for the poverty-focused Next Billion website this February 1:

Lets be realistic: If the mission really is poverty alleviation, its not moneys physical form, but how it is distributed, that matters. Digitalising currency and abolishing cash, however, will be regressive if poor people are forced to pay for everyday transactions, are subjected to more observation and discipline, or could even find their livelihoods criminalised. Meanwhile, cash might have insufficiently recognised advantages, including being free to use, anonymous and under public stewardship. Its time for a conversation whose parameters arent strictly cashless.

Going digital would surely help financial institutions save on logistical and financial costs of handling physical cash, but they still dont find it enough to reduce hefty transaction fees that they charge in many parts of the world. This processing fee for the end user will disproportionately hurt the low-income and poor people.

In Pakistan, where the current official focus on financial inclusion is to open more accounts particularly in the branchless space, the risk of imposing only digital solutions is lower than India. The takeaway is that policymakers here and there must not mess with cashs relevance as a means of value transfer for those at the bottom of the pyramid, unless empirical evidence suggests otherwise.