Payment habits are slow to change and are dictated by societal norms, behavioural patterns and structure of an economy. India is no exception to this general rule. Nevertheless, in recent times, the Indian economy has experienced two distinct pushes (much stronger than the typical Thaler-type nudges) that could have had profound impact on payment habits in India, even if temporarily. First, it was the policy-induced shock of demonetisation and now it is the natural shock of Covid-19. The Covid-19 pandemic, which forced people to stay indoors and avoid using paper money, offered another “natural experiment” setting to examine whether the preference for digital money has increased. A priori, Covid-19 could have two diametrically opposing effects on digital retail payments.
Decline in payments volume to the airlines, railways or hospitality industry could have affected digital payments
adversely. These adverse effects have been reinforced by declines in cross-border payments (both B2B or C2B) as well as international remittances. These push factors tend to depress digital payments
during the Covid-19 induced lockdown. On the contrary, because of the lockdown, digital payments
could have also got a boost via increased usage of e-commerce platforms like online grocery stores, online pharmacies, recharges and bill payments. Fiscal stimulus in the form of direct benefit transfer and donations to government funds could have involved higher digital payments. These pull factors, on the contrary, will ameliorate the adverse effects of Covid-19 on digital payments. Thus, the net effect on digital payments will be determined by the relative strengths of these pull and push factors and could go either way.
The data released by the National Payments Corporation of India provides some interesting pointers in this regard (see table). With lockdown starting on March 25, most of the digital transactions have experienced a sharp drop in April 2020. However, by May 2020, all the modes of retail digital payments have caught up.
While in April, the pull factors were hardly visible, by May 2020 the urban middle class started adjusting their payments habit partially and a number of government initiatives caused a spurt.
First, cash transfers to the economically disadvantaged population of the country were made through Aadhaar-enabled payment system (AEPS). This facility came in handy during the global pandemic and allowed the government to seamlessly transfer cash benefits to the needy. The Rs 20 trillion economic support package announced by the government to tide over the Covid-19 crisis included Rs 348 billion as cash transfers under the PM Garib Kalyan package. The significant increase in AEPS numbers in April and May is mainly due to the cash transfers. Interestingly, among all the digital payments channels, AEPS numbers are the only ones that showed an increase in April 2020.
Second, boost came from the unified payments interface (UPI). Introduced in April 2016, an improved version of the UPI was launched in 2018 that has made peer-to-merchant transactions easier. The complete halt of economic activities, with a few exceptions, in April 2020 expectedly witnessed a sharp fall in UPI volume. But this dip was short-lived as UPI volume in May has reached pre-covid levels. Interestingly, the ticket size of transactions through the UPI is normally small, e.g., on the average Rs 1,770 in May 2020. Payments through IMPS (Immediate Payments System) are made for large value transactions— the average size per transaction under IMPS was six times that of UPI. Though on the rise, the IMPS volume still has more ground to cover, and in May 2020 its transaction value was only 79 per cent of the February numbers.
Third, cash withdrawals have also picked up as people become less paranoid of the possibility of virus contacts in ATM kiosks. The May volume is 50 per cent higher than the April volume. Restaurants, shopping malls, and most of the non-essential stores were completely shut in April and May. This was reflected in the pattern of POS transactions. The use of credit or debit cards for ecommerce did not fall much during the lockdown. So, as expected, people have largely relied on online delivery stores to meet their daily needs.
As we move to unlock the economy, and activity returns back to shopping malls and local grocery stores alike, it remains to be seen when digital payments will be back on track. Till then, the future of digital payments continues to remain shrouded in some uncertainty.
The writers are professors at Indian Institute of Management Calcutta