November 29, 2016

Merchant Payments: A Key to India’s Drive for an Inclusive Digital Economy?

Written by Matt Homer, Digital Finance Policy and Partnerships Lead at USAID's US Global Development Lab

This article originally appeared on Let’s Talk Payments.

In the aftermath of the 2007–2008 global financial crisis, we have become increasingly aware of the unique and often heavy costs borne by the poor to use the financial services many of us take for granted. This is just as true in the world’s wealthiest nations as it is in its poorest. But in emerging markets, cash-based economies can impose additional costs on the poor.

Consider Rambabu, a tea vendor in Kota, India. He sells over 500 cups of tea a day, and one of his biggest challenges is providing small change to his customers. To make the small change he needs, Rambabu pays beggars 100 rupees to exchange 1,000 rupees into small denominations. That’s a 10 percent surcharge. Rambabu also struggles to safely transport and store his earnings at the end of the day.

Rambabu isn’t the only one impacted by India’s cash economy. High fees in the informal market can further reduce the disposable income of those who are already poor. And the time that could be spent on more productive activities can be lost traveling to pick up a benefit check or waiting in line to have it cashed. Additionally, the cost to government is not always visible, but can be enormous. It’s been estimated, for instance, that the Indian government could save $22 billion a year by transitioning to digital payments.

India has made significant financial inclusion progress in the past two years, but cash is still dominant with over 97% of retail transactions conducted in cash or check and only 6% of merchants accepting debit cards or mobile payments.

India certainly is not alone. The international community is increasingly recognizing that digital approaches are critical to achieving meaningful financial inclusion and to meeting a variety of other development objectives. Last year, the World Bank set a goal of achieving universal financial access by 2020 and world leaders agreed to 17 sustainable development goals (at least seven of which are conditional on deeper financial inclusion) intended to end poverty by 2030. Realizing these aspirations requires moving beyond conventional approaches and identifying pathways to financial inclusion that deliver real value to consumers and merchants.

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