ABSTRACT: has resulted from two factors, ‘the Cost of


The demonetisation by the Indian
government undertaken in November 2016 was partially aimed at increasing
cashless transactions in the Indian economy and also contribute to increasing
acceptance by the population to participate in use of digital payment systems
on a large scale. The government is constantly trying to induce the use of
various digital payment modes and systems for various purposes so as to
transform India into a cashless economy over the course of time. The needs for
such transformation has resulted from two factors, ‘the Cost of Cash’ and ‘the
safety of digital payment systems over traditional cash’.

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It has been established that
digital payment systems will lead to large scale job creation in the economy. A
recent study has also established a positive relationship between the value of
electronic or digital payments with the Gross Domestic Product of the

Key words: Demonetisation,
Cashless transactions, Digital Payment Systems, Cost of Cash.



Digital Payment Systems are systems whereby payment is
made through digital mode i.e. both the payer and payee send and receive money
digitally. It is also known as electronic payment as electronic devices
connected to a network are used for performing such transactions. Digital
payments do not involve any physical transfer of hard cash and are termed as a
convenient and instant way to make payments as the transaction gets completed

Physical transfer of cash is a very long and time
consuming process. It also costs more as the cash needs to be carried and
allied activities have to be performed by the bank involved in the transaction.
There is also lack of safety when it comes to physical cash. It is very
difficult to transact physical cash in large volumes and also storage of such
amounts is very insecure. Thus due to all these underlying risks, digital
payments are slowly being preferred over traditional mode of payment.



There are typically two types of payment systems in
India. The first being paper based like cash, cheques, drafts, etc. The second
is the electronic payment system which includes the digital payment systems.
Electronic payment systems mean payments done by electronic mode using ECS,
NEFT, RTGs etc. and are used extensively by the people such as Pre-paid
Instruments (PPI), ATM, Point of Sale (PoS) transactions, Mobile banking,
Digital wallets, etc.

The first Automated Teller Machine (ATM) was installed
in India by HSBC Bank in Mumbai in 1987 which led to a large scale
establishment of ATMs all over India along with the spread of ‘plastic money’
in the form of Debit and Credit Cards. Computerisation occurred in the Indian
Banking Industry in 1988 and was followed by the introduction of the Electronic
Clearing System (ECS) in the 1990s to handle bulk and repetitive payment
requirements. This was followed by the National Electronic Fund Transfer (NEFT)
system in 2005 to facilitate real-time transfer between individual accounts. In
2008, National Electronic Clearing Service (NECS) was started to facilitate
multiple credits to beneficiary accounts. This was proceeded by a smaller
version called Regional Electronic Clearing System (RECS) in 2009. A year later
in 2010, Immediate Payment Service (IMPS) was rolled out which allowed instant
24/7 fund transfer through internet, mobile and ATM at very low costs.

The Reserve Bank of India has stated that it has an
objective of driving financial inclusion and enabling high-volume low-value
transactions thereby reducing the dependence on cash.

Due to this, next-gen payment services have emerged in
the Indian economy since 2008-09.

Bank-led: Banks
provide mobile apps as well as wallets of their own so that consumers can make
payments based on their requirements. This is done to ensure a seamless experience
while transacting through the apps.

Telecom Company-led: Large
scale telecom companies like Airtel, Vodafone and Jio have launched their own
payment solutions which are targeted at their own consumer base.

Prepaid Wallets: In
2008-09, RBI issued licenses to 26 Prepaid Payment Instrument (PPI) issuers.
The number of such license holders has grown to 46 in 2016.

Mobile Wallets: These
are app-based accounts of stored value and are funded by credit or debit cards
and netbanking.

Prepaid Cards: Companies
offer solutions with an agent-assisted offering to customers who are not
digitally savvy.

Payment Banks: RBI
provided in-principal approval to 11 entities to set-up Payment Banks in 2015. The
scope of activities of a payments bank includes acceptance of demand deposits
up to INR one lakh per customer, issuance of ATM or debit cards, offering
payment and remittance services, acting as a Business Correspondent (BC) to
another bank and distribution of mutual funds, insurance services etc. These
banks cannot undertake any lending activities or issue credit cards, accept NRI
deposits or become a virtual bank.



population of India was estimated to be 1250 million in the year 2015 and is
expected to reach 1350 million by 2020. Based on data available from the 2011 Census
and Election Commission of India, around 31.3% of the population is between the
ages 18 and 35. According to a recent survey conducted by American Express –
Nielsen, 81% of the people aged 18-25 prefer to pay bills online and around 70%
of the people aged 26-30 are likely to opt for online payment. Thus, the
demographic factor strongly favours the growth of digital payments systems in
India. According to a report titled ‘Internet in India’, there were around 136
million internet users in 2016 in this demographic.

PHONE AND SMARTPHONE USERS IN INDIA: In 2011, the number of smartphone users in
India was a mere 33.2 million which has grown by almost 800% to reportedly
cross the 300 million mark in January 2017. Similarly, the number of tablet
users has grown from 23 million in 2013 to 54 million in 2017. Thus it is ascertainable
that the users of internet enabled devices in India is growing manifold since
2011. According to Morgan Stanley, people who have been using the internet for
two years or less don’t transact business on the internet. However, once a
person has been online for five years or more, they’re more likely to transact
online. For now, that accounts to 30% of the 432 million internet users in
India.  In 2016, 77% of the urban people
and 92% if the rural people who accessed the internet did so by using a smartphone
whereas 6% of the urban people and 1% of the rural population used tablets for
the same purpose.

The number of mobile phone users in India is
expected to be 1200 million and the number of smartphone users is estimated to
reach 520 million by the year 2020.

INDIA: As of January 2017, there are around 420 million Indians
who use the internet which corresponds to approximately 33.6% of the
population. The reported number of internet users in June 2012 was just 135
million which was 10.8% of the population. According to a World Bank Report, in
2011 just 10.1% of the Indian population were internet users. Thus, we can
conclude that the number of Internet users grew by almost 233% in the last 6
years. Internet users in India are expected to be around 650 million by 2020
going up from 300 million in 2015. The penetration rate will also go up from
33.2% to 48.15% by the end of the decade.

FOR CUSTOMERS: Use of digital payments is expected to mirror the popularity
that e-commerce has gained in India in the past few years. Digital payments
provide customers the ability to conveniently pay for everything without having
to worry about paying the exact amount in cash. Also, the settlement process is
much easier. Payment stops being a separate process and starts being a part of
the background which allows the customer to enjoy the activity without having
to worry about transaction settlement. This induces the customers to prefer the
digital modes of payment over traditional modes.

As the mode of digital payments is still new to India, the digital payment
service providers give regular offers and discounts like cashback and special
discounts on products if payment is made using a specified digital mode. The
government has also offered discounts at various rates for payment made through
digital modes.



UPI Apps: Unified Payment Interface (UPI) is
a payment mode which is used to make fund transfers through mobile app. Funds
can be transferred between two accounts by using UPI apps. Registration for
mobile banking is a prerequisite for use of UPI apps. It is not mandatory to
use the UPI app from your bank to enjoy UPI service. You can download and use
any UPI app. UPI apps are a faster solution to send money using Virtual Payment
Address (VPA) or even Indian Financial System Code (IFSC) and bank account
number. There are many UPI apps available on the app stores such as; BHIM, SBI
Anywhere, HDFC, iMobile, PhonePe, etc. Anyone who uses a smartphone and has
access to internet can download and sign-up to use these apps.

AEPS: Aadhaar Enabled Payment Service (AEPS)
is an Aadhaar based digital payment mode. Customer needs only his or her
Aadhaar number to pay to any merchant. AEPS allows bank to bank transactions.
It means the money you pay will be deducted from your account and credited to
the payee’s account directly. You need to link your Aadhaar number with your
bank account to use AEPS. AEPS can be used with the help of PoS (Point of sale) machines.
 Cash can be withdrawn or deposited and money can be sent to another Aadhaar
linked account with AEPS. AEPS uses the account holder’s fingerprint as a

USSD: USSD banking or *99# Banking is a
mobile banking based digital payment mode. You do not need to have a smartphone
or internet connection to use USSD banking. You can easily use it with any
normal feature phone. USSD banking is as easy as checking your mobile balance. This
service can be used for many financial and non-financial operations such as
checking balance, sending money, changing MPIN and getting MMID.

Cards: Cards are provided by banks to account
holders. They are the most widely used mode of digital payment. They are used
to transfer funds and make payments. There are three types of cards. Credit
cards which are provided by banks or other authorised entities. They allow you
to withdraw in excess i.e. on credit. Debit cards are linked to your account
and the transaction results in a direct debit in your account. Prepaid cards
have to be recharged like SIM cards and have stored value in them.

E-Wallets: E-wallet or mobile wallet is the digital
version of the physical wallet with more functionality. Money can be kept in an
E-wallet and used by the customer when needed. E-wallets may be used to
recharge phones, pay at various places and send money to others. The popular
e-wallets are State Bank Buddy, ICICI Pockets, Paytm, Freecharge, etc.

E-wallets allow transfer
from one wallet to the other. However, they do not have the functionality yet
to transfer money to bank accounts. Thus, e-wallets are a very easy and fast
way to make payments especially for e-commerce transactions.



A study by Visa and Moody’s has established that going
cashless is the way to boost economic growth. Electronic payments are believed to be a major force in
economic development and significantly affect spending behaviour and
consumption. Thus, digital payment
systems will surely stimulate economic growth and the following will justify
the same with respect to the Indian economy.

Digital payments add
to GDP: In the years between 2011-2015 $6 billions were added to the Indian GDP
just from digital payments. It has been said that digital payment sector grew
three times faster than expected because of demonetisation and India is thrice
as advanced as compared to its overall growth when it comes to digital

Increase in card
usage leads to bigger contributions in growth: 1% increase in card usage led to
0.07% increase in the GDP of India during 2011-15. This is expected to be even
more in the aftermath of demonetisation.

Increase in digital
payments leads to almost the same percentage increase in Gross Domestic Product
(GDP): In the data available for 2011-15, it was observed that for each
percentage point increase in digital payments there was almost one percentage
point increase in the GDP of India.

in digital payments results in increased consumption of goods and services: In
terms of consumption, each 1% increase in usage of electronic payments
produces, on average, an annual increase of approximately $104 billion in the
consumption of goods and services, or a 0.02% increase in GDP, assuming all
other factors remain the same.

creation: In the aftermath of demonetisation, the Indian economy has access to Rs. 7.9 crore new monthly digital transactions thereby
ensuring prospects for formal job creation in the Indian economy for carrying
out these increased digital payment activities. It is estimated to create 2.6
million jobs all over the world on an average annually. During 2011-15,
approximately 3,36,930 jobs were created due to increased use of cards in

Financial services
become affordable: Financial Services may be simply defined as services offered by
financial and banking institutions like loan, insurance, etc. Financial
Services are concerned with the design and delivery of financial instruments
and advisory services to individuals and businesses within the area of banking
and related institutions, personal financial planning, investment, real assets,
insurance etc.

When financial services are
provided using digital payments systems, the costs of carrying and mobilising
physical cash are eliminated which makes it easier and cheaper to provide
finance to those in need. Research indicates that financial inclusion has a positive
impact on economic growth and can help reduce income inequality.

Economise lending activities: Physical cash has high carrying
cost and large inherent risk of safety which can be done away with by using
digital payment systems. The cost of storage and physical movement of cash are
discarded and the funds can be easily transferred without having to worry about
the physical placement. Since the money does not get stuck in one place as
physical cash it can be recycled faster and made mobile in an easier way. This
leads to more credit available in the economy that too at cheaper rates which
allows more borrowing and this in turn leads to more investment which results
in more profit for the economy.



As per a report by Mastercard in 2015, Indian economy
was one of the least ready countries to transform into a cashless economy prior
to the demonetisation implemented by the Government. However, lack of cash
availability to the masses during the few months following the demonetisation
has led to more and more people using digital payment systems to try and
continue operations of their businesses in the cash-less economy.

Since then the masses have realized that cashless
transactions are much easier and hassle free and make the transactions more
seamless as compares to those involving physical transfer of cash. This has led
to constant increase in the users of digital payment systems which keeps on
multiplying every day.

Digital payment systems provide more convenience to
both the payer and payee and enable them to just complete any transaction in a
matter of seconds. There is no need to keep any records or details of the
transactions as they are stored in the accounts or on the devices of the user
and can be accessed easily at any time in the future. The user also receives
notifications from the service providers regarding any and all transactions
undertaken by them.

The level of security protocols established by the
digital payment systems are also very secure and this gives the user the
confidence to transact freely irrespective of the value and volume of the

Digital payment systems are not just beneficial for
the users but they are also very helpful to the economy as well. They result in
more jobs being created which leads to more income for the economy i.e. GDP and
thereby results in economic development and economic growth at faster rates. As
GDP grows, the standard of living of the people grows which ensures that more
goods and services are consumed in the economy and in turn this results in more
production and services being offered for consumption which ultimately leads to
more GDP for the nation. Using digital payment system ensures that more money
is freely available to those who need it on credit and thus there are more
options for investment in the economy.

The records of digital transactions are maintained by
the service providers which allows the government to tax these transactions
based on their nature. This leads to more money for the government which can be
utilized in various activities for the development of the economy. Hence, there
is less scope for tax evasion or black money in the economy.

Thus, it can be said that the growth of digital
payment systems is a huge boost for the economy and the increase in the use of
digital payment systems directly supports economic growth.