By Tony Azzara
Export growth is key to the opportunity for U.S. businesses. U.S. trade in goods and services with India totaled $142.1 billion in 2018, up 36 percent over five years, from $104.6 billion in 2014. Importantly, however, growth in U.S. exports to India grew far faster than that overall pace: exports to India totaled $58.9 billion in 2016, up 60 percent from $36.8 billion in 2014, according to the Office of the U.S. Trade Representative.1
Meanwhile, the Association for Financial Professionals (AFP) reports that demonetization spurred significant growth in India’s digital money use (up 76.2 percent in 2017 over 2016).2 However, cash continues to dominate India’s financial payment systems: cash in circulation as of June 2019 had risen 24 percent above the level before demonetization began in October 2016.3
Among the key differences in how U.S. and Indian consumers and businesses pay for goods and services:
Despite the Indian government’s efforts to increase use of digital and mobile payments systems, cash remains far-and-away the dominant payment method for medium- and small-value transactions in India. Cash accounts for about 96 percent of total payment transaction volume, according to the AFP’s 2019 Cash and Treasury Management Country Report: India.4
Digital payments systems are newer in India than in the U.S., and only about half the merchants there accept them. Business Insider India reports that digital payments infrastructure has cost and reliability issues, and many customers remain unaware.5 However, a March 2019 study by the University of California, Berkeley, found that infrastructure issues were not the main cause of relatively low digital payments adoption. In a survey of approximately 1,000 merchants in Jaipur, the Berkeley researchers found only 42 percent had adopted digital payments systems—and even among that group 80 percent of their customer transactions were done in cash.6 The report concluded that the main reasons for the low adoption by merchants were “a perceived lack [of] customers wanting to pay digitally, and concerns that records of mobile payments might increase tax liability.”
Just like wire transfers in the U.S., credit transfers in India represent an important and growing form of cashless payments, especially for B2B payment uses. But their growth in India is more dramatic. In fact, driven by B2B payments, use of credit transfers in India leaped 75.4 percent in 2017 over 2016, to take a 38 percent share of non-cash payment transactions, according to the AFP report. Over the same time, U.S. wire transfers grew only at a single-digit rate, and represented 19 percent of non-cash payments in 2017.7 In India, the value of credit transfers in 2017 was about 188.2 trillion rupees (roughly $2.7 trillion), more than 46 percent higher than in 2016.
Credit and debit cards, combined, captured 30 percent of India’s non-cash transaction volume in 2017, and were growing at roughly 30 percent per year.8
Both countries favor debit cards in terms of transaction volume, but Indians appear to use their debit cards for higher-value transactions than in the U.S. In India, 59 percent of payment card transactions were via debit cards in 2017, versus 41 percent for credit cards. In the U.S., debit cards made 66 percent of all payment card transactions, and credit cards made 34 percent. But the value of all those transactions was split almost exactly evenly in India, at 4.6 trillion rupees (or about $65 billion) each. In the U.S., credit cards captured 55 percent of the value of payment card transactions ($3.1 trillion) and debit cards had 45 percent ($2.6 trillion), according to the respective AFP country reports.
Today, debit cards are the most preferred payment method for online shoppers, according to a report by Financial Software and Systems (FSS), one of the largest payment processors in India.9
India’s rapid digital financial payment systems growth, catalyzed by demonetization, appeared to accelerate in the last year. According to the Reserve Bank of India’s (RBI’s) 2019 annual report, payments made through the Unified Payments Interface (UPI) surpassed debit cards in terms of volume and value in its 2018-19 reporting year. UPI is an instant mobile payment system that was developed by the RBI-backed National Payments Corporation of India. It was introduced only three years ago.
According to RBI, there were nearly 5.4 billion UPI-based mobile payment system transactions in 2018-19, almost six times more than the 915 million transactions seen in the prior year. The value of those mobile payments was approximately 8.8 trillion rupees (about $120 billion)—about eight times higher than the value RBI reported for 2017-18.10
Checks and “demand drafts” are commonly used in India’s payment systems. The demand draft is a pre-payment to a bank that is then withdrawn from the payee’s bank, and can be used for government payments.11
Like in the U.S., paper checks are in a long-term decline in India. But India’s demonetization seemed to cause that decline to slow, at least temporarily. The volume of checks used dropped 10.1 percent from 2015 to 2016, but was down only another 2.9 percent in 2017. The number of check transactions in 2017 was approximately 1.2 billion, or about 7 percent of all non-cash payments.12 According to RBI, the slowdown in the decline of checks was due to demonetization. Overall, India’s check volume declined by 10.8 percent between 2012 and 2017.13
Another possible reason for checks continued use is RBI’s check truncation system (CTS), which enables same-day settlement of locally cleared checks and just one or two days for “outstation” checks, according to the AFP report.
Indian businesses and consumers both use direct debits for regular bill payments. RBI says direct debits are an alternative to checks, especially for repetitive payments.14 Direct debits use grew 31.1 percent to 478.4 million transactions in 2017, for a 3 percent share of that year’s non-cash transactions.15
India’s global payment systems landscape continues to evolve rapidly following the government’s effort to shift the economy to electronic transactions, which begun in earnest in 2016. Still, cash transactions dominate much of the economy, and checks remain popular for B2B payments, even as use of real-time mobile payments systems takes off.
Tony Azzara is a business technology writer and researcher based in Queens, NY, whose work focuses primarily on financial services technology.
1. “India,” Office of the U.S. Trade Representative; https://ustr.gov/countries-regions/south-central-asia/india
2. Cash and Treasury Management Country Report: India, Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
3. Two and a half years of Demonetisation: Cash rules, digital payments grow, credit cards drag, Financial Express; https://www.financialexpress.com/economy/two-and-a-half-years-of-demonetisation-cash-rules-digital-payments-grow-credit-cards-drag/1681838/
4. Cash and Treasury Management Country Report: India, Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
5. “Did you know more than half the shops in Indian cities don’t accept digital payments,” Business Insider India; https://www.businessinsider.in/shops-in-india-still-prefer-cash-over-digital-payments/articleshow/68089374.cms
6. What explains low adoption of digital payment technologies? Evidence from small-scale merchants in Jaipur, India, UC Berkeley; https://escholarship.org/uc/item/13p9k1sn#main
7. Cash and Treasury Management Country Report: USA, Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
9. “Will India's Payments Landscape See A Future Without Debit and Credit Cards?,” Yourstory.com; https://www.yourstory.com/2019/04/indian-payments-space-future-debit-credit-cards
10. Annual Report 2018-19, Reserve Bank of India; https://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/0ANNUALREPORT2018193CB8CB2D3DEE4EFA8D6F0F6BD624CEDE.PDF
11. “B2B Payment Methods in India,” B2BPAY; https://www.b2bpay.co/b2b-payment-methods-india
12. Cash and Treasury Management Country Report: USA, Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles
13. Benchmarking India’s Payment Systems. Reserve Bank of India; https://www.rbi.org.in/scripts/PublicationReportDetails.aspx?ID=923#ANC
15. Cash and Treasury Management Country Report: USA, Association for Financial Professionals; https://www.afponline.org/publications-data-tools/data-tools/country-profiles