What explains the low adoption of digital payments in Jaipur, India?
This post was written by Carly Trachtman, PhD student in Agricultural and Resource Economics at UC Berkeley, in collaboration with CEGA faculty affiliates Ethan Ligon and Ketki Sheth, and with Badal Malick (Catalyst). Their research on digital payments in India was supported by a grant from CEGA’s Digital Credit Observatory.
Digital transaction methods that allow individuals to complete financial transactions without a physical exchange of cash or check have become an important component of the financial inclusion landscape in recent years. Perhaps the “textbook” example is the spread of M-PESA in Kenya. Work in this setting by William Jack and Tavneet Suri has shown that M-PESA has reached almost universal coverage of Kenya’s adult population, and that the platform’s introduction led to a 2% reduction in the overall number of poor households.
There are several potential benefits of digital payments: reducing frictions of transacting in cash (e.g., making change), reducing distance-related costs (e.g., depositing cash in a bank), increasing financial transparency (e.g., curbing cash-related fraud), increasing security (e.g., reducing theft of cash), and improving business record-keeping (e.g.,creating a verifiable history of transactions which can facilitate interaction with the formal financial sector). Increased transparency may also provide economy-wide benefits, such as improved tax compliance.
While in various development settings there have been substantial efforts to proliferate digital payment adoption and usage, success has been varied. One context where we see low adoption of digital payments despite the availability of various digital payment adoptions is in India.
With support from CEGA’s Digital Credit Observatory, we set out to understand the low adoption of digital payments by conducting a set of informal interviews as well as structured survey exercises with merchants in Jaipur, Rajasthan. A listing census in this tier-two city identified 6,011 fixed store merchants (i.e. merchants with a permanent structure and location), of which we surveyed 1,003 between April and May 2017.
The merchant survey took place approximately 5 months after India’s famous demonetization in November 2016, where 500 and 1,000 Rupee banknotes were abruptly taken out of circulation to encourage transition to more digital payment usage. But at the time of the survey, only about 42% of merchants interviewed had even nominally adopted any form of digital payments. Of those who did adopt, usage was low: in terms of the average total transaction value (rupees), digital payments made up less than 20% of their engagement with customers, and only about 10% of their engagement with suppliers.
Explanations for Low Adoption
An intuitive explanation for the low adoption is that merchants might not be able to afford the resources to adopt digital payments. However, we do not find this to be a likely explanation for low adoption in Jaipur. 96.6% of surveyed merchants have a bank account, 79.3% have an appropriate device (such as a smartphone or computer), 55.5% have internet access, 99.7% earn annual profits that exceed the usage fees (e.g. making it possible to move money from a mobile wallet app to a bank account), and 96.3% have the technological literacy required to use digital payments. Even when accounting for the required documentation and costs incurred by merchants to acquire these underlying inputs, we estimate that 98.6% of these merchants can afford to accept digital payments.
If affordability is not the main factor stopping merchants from adopting the technology, then what is?
We find suggestive evidence of demand-side factors, including a perceived lack of customers wanting to pay digitally, and concerns that records of mobile payments might increase tax liability.
One reason merchants might not adopt digital payments is simply because their customers do not want to pay digitally. Indeed, digital payment adopters report that on average 15% of their customers want to pay digitally while non-adopters only report 5% of their customers wanting to do so. While these reported numbers are certainly higher for merchants who have adopted digital payments than for merchants who have not, the percentage is not very high in either case. Additionally, these percentages were reported to be higher directly following the demonetization, implying that the percentage of customers who want to pay digitally is decreasing over time.
Another possible explanation is that the potential for increased tax compliance serves as a disincentive for merchants who fear adoption will increase their tax bill. We find that 74% of digital payment adopters report having a valid tax ID number, while only 48% of non-adopters do, suggesting that those who adopt are more likely to already be taxpayers. Certainly businesses who do and do not adopt digital payments may be different in other important ways, yet controlling for other observable business and business owner characteristics, having a tax ID number as well as percentage of customers demanding to pay digitally both have significant effects in predicting digital payment adoption.
Our results thus suggest that simply lowering the costs associated with adopting digital payment technologies is unlikely to be successful in increasing adoption of digital payments.
Hence policy makers in Jaipur who want to increase digital payment adoption should perhaps focus more on simultaneously fostering merchant and customer demand for digital transactions and think about tradeoffs between tax compliance and digital payment usage. For more details on our study and analysis, see our CEGA working paper.