Digital Payment Mechanisms and Financial Inclusion in India

Digital payment mechanisms have pushed forward India’s attempts toward financial inclusion quite a bit in the last couple of years. With more than three hundred million people brought into the formal banking sector between 2014-2017 (India Digital Financial Inclusion Report, 2019) this trend just keeps increasing. However, has creating bank accounts increased bank transactions? While initially, there was no marked increase in the usage of the bank accounts, thanks to the repercussions of demonetization, quickly followed by the pandemic, we have now begun to see a slow but sustained rise in the usage of digital payment methods in both rural and urban India.  

The rise in digital payment mechanisms:

The first signs of a shift toward a digital payment method were seen right after the demonetization in late 2016. UPI, Paytm, etc became buzz words as people, especially the youth, began using these modes to make payments at shops, for cabs, for online shopping and to access a plethora of other services. However, while this mode of payment seemed to be effortless and quick, shops, cabs, and other service providers were often seen to be wary and hesitant to accept digital payments, and very rightfully so. While digital payments were slowly beginning to rise, people like shopkeepers, street vendors, auto drivers, etc, while having bank accounts were not active users and often used their bank accounts for very little other than receiving government subsidies. 

However, the fears of the spread of the pandemic in 2020 changed this scenario completely. Physical transactions were limited to avoid the spread of the virus. Digital payments saw a stark rise in the country, especially during the lockdown. With people unwilling to pay in cash, vendors and service providers were soon forced to move to digital modes of receiving payments to keep their business going. According to RBI data, the volume of digital transactions rose from 3,412 crores in 2019-20 to 4,371 crores in 2020-2021. Everyone from daily wage workers, street vendors, and other low-income groups were encouraged by the government to move towards digital payments through numerous financial inclusion schemes. 

Challenges to the rise in digital payment mechanisms:

While there has been significant growth in the usage of digital modes of payments, there are several challenges that continue to mar the rate of financial inclusion in the country. 

  1. Lack of trust:  An important, yet often ignored aspect of financial inclusion is the lack of trust, especially in the low-income and rural communities in the formal financial institutions. With news of new frauds and banks going shut every day, this fear is not unconfounded. However, this lack of trust is often correlated to the lack of knowledge among these communities. It is therefore of utmost importance to build trust and understanding of these services through human interactions to ensure the last mile uptake of these communities. 

  2. Community-centric product design: India is a country of vast diversities, and hence, the need and the ease of use differ among different people. Very often, products are built for the wealthier or more knowledgeable groups of people. One needs to identify a user’s need for different languages, capabilities of understanding, and abilities to navigate a product while designing it. While we are taking great strides towards building inclusive products (for example, the recent launch of UPI for feature phones) there is still a lot of scope for being more considerate while designing these products. 

Rang De has been exploring linkages between digital payments and financial inclusion over the last few years. Enabling digital repayments by investees has been a great challenge that we and our partner organizations have been facing.  And while we have found quick fixes and solutions for certain communities through the deployment of PoS devices, setting up of Aadhaar Enabled Payment Systems (AePS) and micro- ATMS, or moving towards digital banking through India Post Payments Bank (IPPB), we still have a long way to go. We continue to make efforts to find solutions to help bridge the gap between the assumed impact of financial inclusion and the ground reality. 

As I write this, I am reminded of my conversations with my local grocery shop owner in early 2017, a few months after demonetization. When I asked him about setting up a UPI id to receive payments digitally, he was vehemently opposed to it. Citing the lack of trust in banks as well as the fear of something going wrong easily with a digital payment system, he said he was happy collecting the money in cash. However, the unique nature of challenges brought about by the pandemic forced him to shift towards receiving digital payments. Albeit grudgingly, he moved from a completely cash-based business to being able to digitally accept payments and pay off his vendors. While the uptake of digital payment mechanisms continues to rise, our focus needs to now be on creating sustainable and easily accessible products that are used by communities due to their ease in usage and their obvious benefits, rather than it being a result of external circumstances, making it seem like a difficult pill to swallow. There is a need to create human-centric products that are designed to meet the diverse needs of people. Also, there’s a dire need to educate these people on the benefits, challenges, and dangers of these products because empowering communities financially truly happens only when they are given the knowledge and choices along with access to these financial products and services. 


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