By ‘cashless’ we mean zero use of physical cash. Therefore, Cashless Payment refers to any type of transaction that customers do without using physical currencies and coins.
With digitalisation, payments have also become a part of it. It has also revolutionised the entire payment ecosystem and digital modes have replaced the traditional methods of payments. Moreover, India aims to achieve its goal of a cash-lite or cashless economy.
Cashless payments use electronic payment methods such as credit/debit cards, mobile wallets, bank transfers, UPI and digital payment apps for transactions. There is no exchange of banknotes or coins to transfer money from one account to another.
Moreover, cashless payments have witnessed growth because several fintechs like payment gateways (PGs), payment processors and payment service providers (PSPs) have come into play. Fintechs have made use of digital technologies to provide the convenience of payments to customers.
Therefore, cashless payments became increasingly popular in recent years.
Additionally, the Government of India has also pushed several initiatives to fuel the adoption of cashless payments. For example, one of the most effective initiatives was when the National Payments Corporation of India (NPCI) launched the Unified Payments Interface (UPI) which boosted the growth of cashless payments by leaps and bounds.
Gradually, all online merchants as well as PGs have enabled UPI payments.
We can categorise cashless payment into some commonly used methods that are :
- Unified Payments Interface (UPI): As mentioned above, the National Payments Corporation of India (NPCI) launched UPI (United Payments Interface). Several apps process UPI payments such as Google Pay, PhonePe, Paytm, and BHIM (Bharat Interface for Money). UPI is a real-time payment system through which customers can link their bank accounts to a UPI-enabled app. Once linked, they can make instant payments or fund transfers using a unique virtual payment address (VPA)/UPI id, mobile number, or QR code.
- Mobile Wallets: Mobile wallets or digital wallets are apps that enable customers to store funds digitally in virtual wallets. For instance, Paytm, PhonePe, Amazon Pay, etc. are mobile wallets through which customers can make payments from one digital wallet to another wallet. They can add money to their wallet from their bank using net banking or credit/debit cards and can also send money back from their wallets to their bank accounts. They allow customers to make payments for various services, including bill payments, recharges, and online purchases. Before UPI came into existence, wallets have been quite a popular means of direct online transactions.
- Aadhaar Enabled Payment System (AePS): AePS enable cashless payments by leveraging the Aadhaar biometric identification system. It facilitates payments in rural areas and among individuals who may not have access to traditional banking services. The users can link their Aadhaar numbers to their bank accounts to make payments via AePS. They can send money or do withdrawals using biometric authentication at Micro-ATMs or through Business Correspondents.
- QR Code: QR Code is also a kind of UPI payment. Any bank account that is linked to a UPI id can have its specific QR code which the payor can scan and pay. It is an easy and quick way for money transfers between two accounts. Therefore, QR code-based payment system is UPI transfers via QR codes. Businesses can however also create dynamic QR codes which are for a specific payment by a particular customer. Merchants can also generate QR codes that are interoperable across various payment providers, making it convenient for customers to make cashless payments.
- Electronic Transfer: In India, banks mainly offer three types of electronic transfers. These electronic modes of payments include National Electronic Funds Transfer (NEFT), Real-Time Gross Settlement (RTGS) and Immediate Payment Service (IMPS). While NEFT and IMPS usually process low-value transactions, banks use RTGS for high-value transactions. Also, NEFT operates in batches which means that the banks do not settle the total payment amount in the recipient’s account at once. They break the amount into separate batches. On the other hand, NEFT and IMPS settle in real-time. IMPS allows immediate transfer of funds and this service is accessible on bank/public holidays. Customers can initiate funds for all such transfers by physically visiting the bank or through online banking sites and mobile apps.
- Cards and Point-of-Sale (POS) Terminals: Point-of-Sale refers to the time and place where a retail transaction is completed. POS terminals are hardware systems and machines that facilitate payments at retail locations via cards. Hence, retail stores, restaurants, and other businesses use POS terminals to accept card payments. Debit cards, credit cards, and prepaid cards are widely accepted for cashless payments in India. Delivery agents of e-commerce and online retail stores can also collect payments for COD (cash-on-delivery) orders via POS machines. However, there is one challenge as multiple agents will need multiple devices. A solution to this challenge is softPOS by Cashfree Payments which can turn any phone into a POS machine.
Cashless payment methods are used for a wide range of transactions like online purchases, bill payments, peer-to-peer transfers, and also in-store payments. Many businesses, not only online and offline retail stores but also restaurants, travel agencies, hospitals, etc. now accept cashless payments. Usually, they accept payments through QR code scanning.
The adoption of cashless payments comes with numerous benefits and a few challenges. While online payments demand high data and transaction security for protection from fraudsters, it still adds to the ease and fast processing of payments.
It reduces the use of physical cash reducing the risk of fraud and theft because all online transactions have records and reference numbers. Therefore, in some ways, cashless payments can be more secure than traditional cash transactions. Moreover, people need not visit banks or withdraw money from ATMs each time.
It also enables faster transactions providing more convenience to people. Another benefit is also that it can help to reduce costs. Businesses have another benefit like they can save costs on cash registers or counterfeit detection equipment which becomes necessary when accepting cash payments.
However, there are still challenges to be addressed, such as improving digital infrastructure and increasing awareness and education about digital payment methods.
Also, not everyone has access to a bank account or a credit card. Another challenge is that some people may not be comfortable using cashless payments.
Despite these challenges, the adoption of cashless payments is likely to continue to grow in the future. Cashless payments offer several benefits to businesses and consumers, and these benefits are likely to outweigh the challenges.
