By: Carly Trachtman with contributions from Ethan Ligon and Ketki Sheth
It was a hot day in Jaipur and my colleagues and I stopped in a store to get a juice in Barkat Nagar market. Barkat Nagar is a typical Indian market brimming with activity from motorcycles, auto rickshaws, cars and pedestrians lined by stalls on all sides boasting everything from books to clothes to electronics. When it came time to pay, instead of pulling out credit cards, everyone in my group started searching their wallets to the right bills with which to pay. In fact paying with credit cards would not have been an option, as this merchant was one of many in Barkat Nagar that only accepts cash payments. This reliance on cash is not a phenomenon specific to the market, but a broader trend throughout many parts of India.
Over the last two years, the Indian government has been trying to change this trend and has been engaged in shifting its cash-based economy into a digital one, but their success to date has been relatively limited. Hence, in an attempt to better understand the Indian digital payment landscape, I traveled to Jaipur last summer as part of a DCO-supported investigation, headed by CEGA affiliates Ethan Ligon and Ketki Sheth.
Given the economic diversity of India, I visited as many different markets as I could and was astounded by the differences I saw from market to market -- especially depending on the socioeconomic classes served by each. In an upper class shopping area, most merchants were able to accept credit cards and other mobile wallets for payment. Even the chai cart located outside of one of the shops had a prominent sticker reading “PayTM accepted here” (PayTM is one of the major mobile wallet providers in India). In the same market, I talked to a merchant in a larger store who sold children’s clothing. When I asked him if he was able to accept credit cards, he scoffed. “Of course I do!” When asked if it would be useful for him to receive loans based on his digital transaction history, he informed me that he had already used a lending service like this in the past and had indeed found it very helpful.
However, when I visited markets that weren’t catering to the elite, the cash economy dominated and digital payment options were severely limited. One such market I explored was in a low income area of the Shastri Nagar neighborhood. Small stalls selling everything from bags of rice to school supplies to women’s formal shoes were packed together on the sides of the street. A portion of produce sellers were organized together under a tent, whose roof was part formal structure and part cloths tied together with string. I walked up to a small stall where a young man was selling cell phones, an item that seemed to me expensive enough to not warrant payment in cash. When asked if he accepted digital payments, he told me he did not accept credit cards, but did accept payments from several mobile wallet services; however, almost all of his customers paid in cash. He explained that people in the area got paid in cash and so they paid for everything in cash. When asked about where he got loans for his business if he needed them, he replied that he would mostly borrow money from friends and family, because getting a bank loan was a long and tedious process.
These two interactions highlighted how just within a few miles of each other, in the same city, there are merchants who are fully integrated into digital finance and its related benefits (including credit), and those who are excluded. While the average penetration of digital finance across India is known to be low, this average statistic hides significant variation across markets serving different socioeconomic classes. Many of the merchants who lacked credit expressed a strong desire to get formal loans for working capital and business expansion, if there was a more accessible process. So how do we bridge this gap?
Digital credit may be part of the answer. If low consumer demand for digital finance is driving low adoption of digital payment systems, then informing merchants about the benefit of digital credit tied to digital finance may be an alternative driver for adoption. For merchants who have limited formal credit histories, a digital payment transaction history can provide proof that they run a viable business. So in this sense, digital credit can help simultaneously with two distinct goals: to increase financial inclusion for small-scale merchants and to facilitate the transition to a digital economy.
However, switching away from a cash-based economy may be a slow, tenuous process, as consumers, merchants, and intermediaries all adapt to new ways of doing business. Despite these difficulties, our research shows a potential silver lining. A recent survey of over 6,000 fixed store merchants conducted by People Research on India’s Consumer Economy (PRICE) in conjunction with the USAID funded initiative Catalyst, found that while only about 3% of merchants had reported ever receiving a formal business loan, around 96% of merchants reported having a formal bank account and around 80% reported having a smartphone. This suggests a potential need for digital credit, and that many merchants possess the technological literacy and some of the necessary infrastructure to manage digital loans. Hence, perhaps with the right push, merchants will find it worthwhile to adopt digital payment devices. This will likely make them eligible to access digital starter loans. Our team is hoping to explore this avenue further to improve financial inclusion for merchants in Jaipur.
Carly Trachtman is pursuing her PhD in Agricultural and Resource Economics at UC Berkeley. She traveled to India during Summer 2017 to conduct qualitative interviews as part of the DCO funded pilot study “Mobile Payments and Inclusive Credit: A Silver Lining in India's Cash Crisis?” This study received a second round of pilot funding in November 2017.