From the seals of Mohenjo-Daro and the punch-marked coins of the sixth and seventh century BCE to electronic wallets today, the world of money, currency and financial transactions have indeed come a long way.
The launch in April of the United Payment Interface, a digital transaction mechanism developed by National Payments Corporation of India that enables users to make payments with the click of a button through their smartphones, is another chapter in the evolving story of money and payments in India. Let’s take a look at the journey so far.
A rich history
The first coins in India are believed to date back to the seventh and sixth century BCE – though there are some theories that the seals dating back to Indus valley cities such as Mohenjo-Daro and Harappa were used as currency. This was followed by credit instruments such as loan deeds, pay orders, and hundis. Paper money, however, made its entry only in the late 18th century, according to the Reserve Bank of India’s Monetary Museum.
Private and semi-government banks first issued currency notes, but the Paper Currency Act of 1861 gave the monopoly of this to the government of India.
Next, cash-less methods of payment evolved, but these still required a physical manifestation of money. Cheques were introduced by the Bank of Hindustan, one of India’s first banking institutions, in 1770. The Negotiable Instruments Act of 1881 formalised non-cash modes of paper payments (such as cheques, bills of exchange and promisory notes) in India.
The RBI was formally inaugurated as India’s apex banking institution in 1935 in Calcutta (now Kolkata) to regulate the issue of currency notes and maintain reserves to ensure economic stability. Currency notes of the day bore images of British Kings and Queens. The George VI series, for instance, went on till 1950, when the Indian government brought out the new design of currency notes, featuring symbols of the newly independent nation, such as the Ashoka Pillar. The Mahatma Gandhi series, which continues till today, was introduced in 1996.
Since the late 1980s, changes in the Indian banking sector gathered pace. India’s first automated teller machine, or ATM, is said to have been installed by HSBC in 1987. The banking sector was opened up to private players after the reforms of 1991, when the economy was opened up, or liberalised, and with the entry of private banks, including major players such as HDFC Bank, Axis Bank and ICICI Bank. The system of money and payments began changing rapidly. Along with ATMs came plastic money in the form of credit cards and debit cards, both of which steadily gained popularity in coming years.
While internet service and mobile phones also came to India in the 1990s, internet usage and smart-phone ownership boomed only in recent years, in the 21st century. Thus, while internet banking has been around in India for quite some time (ICICI purportedly introduced it, in the late 1990s,) the advent of online/mobile payment systems such as National electronic funds transfer, or NEFT, real time gross settlement, or RTGS and interbank mobile payment system, or IMPS, is relatively new.
Mobile or digital wallets such as PayTM and MobiKwik, which allow users to maintain a electronic wallet to which they can transfer money and transact online, are less than a decade old.
These technological advancements have transformed our lives in many ways, allowing us to save time as well as money.
Many of us can remember the time when we used to get a pay cheque every month, for which we would have to take time off to visit a bank, stand in line, deposit the cheque and then wait for the money to be credited to our accounts. Compare that to an instant online salary transfer by most employers.
Similarly, we remember lining up to pay our telephone or electricity bills not too many years ago – all of which can now be done at the click of a mouse button or a tap on our smart phones.
Cash is still king
Despite all these advances, however, cash still remains the predominant form of payment in India, even when we exclude India’s large black market (which is pegged at 20% of India’s GDP).
According to some estimates, only 6%-7% of transactions in retail payments are conducted electronically and the rest are in cash or through cheque. Currency in circulation increased 15% in the financial year 2015-2016. In its annual report, the RBI attributed this increase to “a cluster of state elections, apart from other frictional factors such as festival-related demand and jewellers’ strike.”
The convenience of cash is undisputed – transactions are instant, cash does not require any verification, runs 24x7 and is universally accepted. Think about the role of cash plays today: most households use cash to pay salaries of their help, to purchase vegetables and fruits and several small-ticket purchases. Similarly, cheques are still in vogue for paying rent.
Since large sections of the country are not connected to the Internet or do not own smartphones, cash remains the primary mode of payment.
There's an app for that
However, though cash may be king, it is also costly since it entails printing and storing currency. Moreover, cash also fuels the black-money economy, corruption and terrorism. Aware of these pitfalls of a cash-based economy, the government and the RBI are slowly changing the way payments are made in India. The government’s anti-corruption, pro-technology stance is well known and can be seen in the importance given to initiatives like JAM (the Jan Dhan, Aadhar, and Mobile), direct benefit transfers.
The RBI’s Vision 2018 document specifically mentions a “less-cash” society. Thus, there is a concerted effort to reduce the role of cash in our lives. These efforts will pay off.
The United Payments Interface system is another page of the book. The system, allows users to make payments directly through their smartphones, through the United Payments Interface app, without having to key in their card details or any password. With time, the RBI hopes that it is popularised to such an extent that citizens start using the app even to purchase grocery and other small transactions. Several banks have begun to launch the app and many more are likely to follow.
While the app will take time to gain acceptance, the structural change in the way we make payments is here to stay.
Anupam Gupta is a Chartered Accountant and has worked in equity research since 1999, first as an analyst and now as a consultant. His Twitter handle is @b50.