Little has been understood about allocation of costs and profits on a Cashless transaction. Precisely we can say that
- In a cash economy, the government pays the cost and takes profits.
- In a cashless system, the government makes far larger profits, the service-providers collect fees, and users pay much higher costs.
Thus, it could be said that the cost of printing a Rs. 2000 note is about Rs.3.55 to print. When, such a note is handed out to a civil servant as part of her salary, the Government makes a profit to the tune of Rs. 1,996.45. There are no costs for using the note in further transactions, until it is worn out. The government may hope circulation will translate into tax revenue. But there are no guarantees, since there is no audit trail on note usage. Following is an example through which we can understand this better:
Let us say there is a transaction of Rs. 2000 bank transfer. Here-
- Transfer costs are near zero, using the Unified Payment Interface.
- The SMS cost is say some few paise per transfer (even if the transaction is much more than 2000)
- The cost of electronic ledger entry is nearly zero.
- The person receiving this money would be using the money for some transactions.
- The bytes (the computer coded transactions) are transferred to other accounts via mobile wallets, credit cards, debit cards etc.,
- The service providers, who enable each transaction, receive a fee called the Merchant Discount Rate (MDR), set by the Reserve Bank of India. For a credit card, MDR varies from 0.25 per cent for transactions below INR 1,000 to one per cent for those above INR 2,000. The minimum MDR payable on a Rs. 2000 transaction is Rs. 20.
- The uniqueness of an Electronic Payment is that it can circulate any number of times, unlike a currency note. Thus it far exceeds printing costs.
- It is estimated that the MDR for a single electronic transaction may be six times the lifetime cost of a physical note.
- Here it is therefore essential to understand that there might be an infinity of transactions and every transaction leaves an audit trail, which generates tax revenue.
- Thus we see out of an Electronic Payment, the users pay all costs, the service providers are taxed on profits from MDR; merchants are taxed on profits from transactions; telecom service providers are taxed on revenue from traffic generated by transactions.
We can say that the net cashless transactions cost the Government much less (almost near zero) but generate more income; however, cashless transactions end up in users spending much more. Developed countries adopt to cashless transaction since it is not safe to carry huge sums of cash around, and more so it is helpful in keeping a track of their transactions. The major flaw in an electronic transaction is absence of privacy, since every transaction will be tracked. However, the privacy issue may not be applicable for our country since we do not have any privacy or security laws here. Let us sum up this with comparison to other countries.
- Sweden prefers cashless transactions, since they require high social security. Also a Swedish citizen by paying high tax, gets in return lifelong health care (and a state funeral), pension, free education, free legal representation etc.,
- Volume of cash transactions used by other countries are:
- USA 45%
- GERMANY 80%
- JAPAN 90%
We can conclude by saying that with the current economic conditions in our country the Government wants to push Cashless transactions in the public mind through coercive means which the service providers will be forced to adopt. But what the user receives in return for the higher revenue squeezed out of him/her? India does not have a social security like Sweden or Germany, easy business environment like America or safety as is assured in Japan. Nor we see any privacy or data security available in our country like other places.
Keeping this mind, is it not essential that these things should primarily be in place, before we go to embrace a Cashless Economy..????????????