Can Digital Credit Stimulate India’s Weak Digital Finance Market?

This post was written by DCO grantee Carly Trachtman with contributions from CEGA affiliates Ethan Ligon and Ketki Sheth. It was originally published on CEGA’s Digital Credit Observatory (DCO) Blog.

Carly talking to the owner of a small shop (left) in Shastri Nagar with a colleague at Catalyst, Darshan Singh (right) who was serving as a translator (Credit: Carly Trachtman)

It was a hot day in Jaipur and my colleagues and I stopped for a juice in Barkat Nagar market — a typical Indian market boasting everything from books to clothes to electronics. When it came time to pay, everyone in my group started rummaging around in their wallets for the right bills. Using a credit card would not have been an option — a reliance on cash is standard throughout many parts of India.

The Indian government has been working hard to change this trend over the past few years, with limited success. As part of a DCO-funded study led by CEGA affiliates Ethan Ligon and Ketki Sheth, I traveled to Jaipur last summer in an attempt to better understand the Indian digital payment landscape.

Given the economic diversity of India, I visited as many markets as I could and was astounded by the differences I saw. In an upper class shopping area, most merchants were able to accept credit cards and mobile wallets for payment. Even the chai cart located outside of one shop had a prominent sticker reading “PayTM accepted here” (PayTM is one of the major mobile wallet providers in India). In the same market, a seller of children’s clothing scoffed when I asked if he accepted cards: “Of course I do!” In fact, he is already using a lending service that allows him to borrow based on his digital financial history.

In markets not catering to the elite, cash dominated and digital payment options were severely limited. In 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. I was surprised to learn that a young man selling cell phones — an item that seemed to me expensive enough to not warrant payment in cash — did not accept credit cards. While he did accept payments from several mobile wallet services, almost all of his customers paid in cash because that’s how they were paid. He further explained that he relied on friends and family for business loans, because getting a bank loan was a long and tedious process.

These two interactions highlighted how despite doing business a few miles apart, some merchants are fully integrated into digital finance and its related benefits (including credit), while others are excluded. The average penetration of digital finance across India is known to be low; but this average hides significant variation across markets serving different socioeconomic classes. Many of the merchants who lacked credit expressed a strong desire to access formal loans for working capital and business expansion.

So how can 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 ways in which digital finance can increase their access to digital credit may help drive adoption. For merchants who have limited formal credit histories, a digital payment transaction history can provide proof of credit-worthiness. In this sense, digital credit can simultaneously promote financial inclusion for merchants while facilitating the transition to a digital economy.

Shifting away from a cash-based economy will be a slow, tenuous process, as consumers, merchants, and intermediaries all adapt to new ways of doing business. But despite these difficulties, our research to measure the demand for digital devices and associate mobile payment scheme indicates 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 3% of merchants reported ever taking out a formal business loan, around 96% of merchants reported having a formal bank account and around 80% reported having a smartphone. This suggests that many merchants possess the technological literacy and some of the necessary infrastructure to manage digital loans.

Perhaps with the right push, merchants might find it worthwhile to adopt digital payment devices, thus helping them access digital starter loans. Our team is exploring 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.