Payments Transition in India – Consumer Preferences and Policy Shifts

Economic growth should be supplemented by an efficient payment and settlement system. Many attempts have been made to improve the efficiency of payment and settlement system in India. Especially the effort has been in terms of promoting digital economy. But the stickiness to payments through currency notes by the people has had a moderating effect on these efforts. The policy shift of Government of India towards demonetization of higher denomination currency notes has given thrust to digital payments. The study hypothesizes that post demonetization, the payment and settlement system indicators would show moderate to high deviation from the volume and value that can be forecasted using the historical data. Using Automatic ARIMA Forecasting in EViews, the forecasted values for the indicators for a period from November 2016 to March 2018 were estimated based on the historical data of the indicators from April 2011 to October 2016. The forecasted values of the indicators are then compared with the actual values of the indicators to see if they differ significantly by using paired t-test. The study finds evidence to suggest that the policy of demonetization and resultant reduced supply of currency notes has provided impetus to the Indian public to move towards digital platforms, and the increased supply of currency notes thereafter has not led to complete reversal of this shift in this change in consumer preference. This leads to the conclusion that through effective policy shifts, consumer preferences can be altered, and the Indian economy could become a less cash economy.


INTRODUCTION
The changes ushered through the policies of Globalization, Privatization and Liberalization in 1991-1992 have resulted in a sea change in the economic landscape of India and the Indian economy has grown exponentially following the economic reforms put in place in 1991-1992. The growth in the volume of economic activity needs the support of the Payment and Settlement Systems practiced in the country and its interaction with the world market. Reserve Bank of India (RBI), as the Central Bank of the country, has been developing the payment and settlement system for the country, that is robust, secure, and efficient in its functioning. Payment India, 2016). This also encouraged the discussion of converting Indian society into a less cash/cashless society -a society that relies less on the currency notes and coins for transactions. It needs to be understood that currency notes and coins are forms of money. Money, over the long history of its existence, has been taking different forms at different times. Electronic or digital payments is the latest form (digitized form) that money has taken, as a means of payment and settlement of dues, that can substitute and is substituting its older form (of currency notes and coins).

LITERATURE REVIEW
The studies related to payment and settlement systems have mainly concentrated on the technological aspects of the system, quality of service, factors influencing the adoption of the newer forms of payment systems and the risk perception of internet-based payment systems. There are a few studies that tried to analyze the impact of technology adoption and demonetization on the payment and settlement system in India.
Bhardwaj and Kaushik (2018) have discussed the basic model of Unified Payment Interface (UPI) and its usage in different scenarios. Abad Peiro, Asokan, Steiner, and Waidner (1998) have suggested a framework that allows applications to be developed independent of specific payment systems which are necessitated by the introduction of a variety of different and incompatible payment systems. Dhamija and Dhamija (2017) gave insights into the implementation and feasibility aspects of UPI and how it is better than the earlier systems that are prevailing (even) today.
Another aspect that has been studied is the dimensions of quality in mobile payment service in India (Singh, Grover, et al., 2017). The study has identified that usefulness and ease of use, perceived concern about trust and security have an impact on the perceived quality of mobile payment service in India by the consumers. Siu and Mou (2005), on the other hand, have identified that credibility, efficiency and problem handling play a dominant role in determining the service quality perceptions of customers on internet banking in Hong Kong, while they found that the future consumption is dependent on security and efficiency. N. Singh, Srivastava, and Sinha (2017) have studied the impact of customer's percep-tion, satisfaction and preference on the usage rate of mobile wallets in North India. The study finds that there exists a strong correlation between consumers' perception, preferences and satisfaction. In a study of rural customers' satisfaction from e-banking in India, Sharma (2012) has identified that though rural customers satisfied with the services, they are apprehensive of the security measures and compensations provided in case of fraudulent transactions.
The study also has identified that the lower level of education of rural population affects their usage of e-banking services due to language barriers and unawareness of the availability of multiple language interfaces.
In a study specific to the Allahabad City of India, Sahu and Singh (2017) have identified thirteen factors that will influence the successful transformation of the economy from cash based to cashless economy. The factors that were identified by the study are anonymity, bank involvement, drawer, infrastructure, mobility, parties, popularity, range of payment, risk, security, transfer limit, transfer mode, and transfer time. Similarly, Chandrasekhar and Ghosh (2017) observe that higher costs, the possibilities of loss of privacy, fraud, identity theft and surveillance are major concerns of digital transactions. The safety concerns in using technology platforms in banking transactions have been addressed, to some extent, by  in their comparative study of India and other SAARC countries. The study has found that India has a better mechanism to counter credit risk, liquidity risk and operational risk in the payment system though Indian system is most permissive among the SAARC countries regarding the crime of computer hacking.
Roy and Sahoo (2016) considered the areas in which the payment and settlement system in India can be improved with special reference to liquidity risk, operational risks, access criterion and transparency. The paper has also highlighted the opportunities and challenges in India in this context. In a related study, Dhananjay and Chandra (2015) have tried to test the difference in products related to the electronic medium of payment and settlement in India before and after the formation of National Payments Corporation of India (NPCI) and have found that there exists significant difference.
The influence of demonetization has been widely debated post the announcement in November 2016. While there were reports stating the increase in digital transactions (Maji, 2017; PTI, 2017) and growth in cashless transactions, the reports also suggest that the growth is only in small components of the larger ecosystem of digital transactions (Wilson, 2017). It has also been observed by reports (Waghmare, 2017) that the digital transactions are receding and re-monetization is taking place at a faster phase. Bhattacharya and Singh (2018) have observed that the sharp decline in the currency in circulation post-demonetization was followed by high weekly growth rate in currency in circulation when compared to normal periods during January and February 2017. Post June 2017, the growth and seasonal pattern of growth rates in currency in circulation were like the pre-demonetization period. Studying the adoption of digital payment system during the period of demonetization in India based on the unified theory of acceptance and use of technology (UTAUT2) and innovation resistance theory, Sivathanu (2018) found that the actual usage of digital payment systems is affected by the behavioral intention to use and innovation resistance. At the same time, Sivathanu (2018) has identified that stickiness to cash payments has a moderating effect on the behavioral intention to use and the actual usage of digital payment systems in India.
The above review of existing literature on the payment and settlement system, concentrating on Indian context, suggests that there have been many studies addressing specific aspects of the payment and settlement system, risk perceptions and challenges in the process. The studies on the usage trends in the important indicators of payment and settlement system and evolution of payment and settlement system in India towards transforming Indian economy towards a less cash society has not been studied with conclusive results and in the context of demonetization. The present study will try to bridge this gap, especially in the context of demonetization, keeping in mind the discussions in the preceding literature review.

METHODS
The present study looks at the reflection of demonetization of high denomination currency notes on November 8, 2016 in the Payment and Settlement System indicators as a result of non-availability of currency notes in circulation for the settlement of transactions. The study tries to find out if there is any significant shift from the use of currency notes to electronic medium for settlement of transactions following demonetization. This will essentially help us to understand if the policy shifts like demonetization can bring about transistion in the payment systems and convert the Indian economy into cashless/less cash economy. The results will also help in exploring the possibilities of similar action in countries that share similar economic set-up with India.

INDICATORS AND TRENDS
Economic growth of a country will be accompanied by an upward trend in the volume and value of transactions taking place in the economy. India being an emerging economy, growing at 7.7 percent year-on-year in the first three months of 2018, there is a definite upward trend in the payment and settlement system indicators. The present study has identified seven indicators of payment and settlement system in India, which are directly used by people for their transactions, for the analysis.  (Figure 2 and Figure 3). The demonetization of high denomination currency notes in India on November 8, 2016 led to non-availability of currency notes resulting in the dependency of people on electronic medium for transactions. Since it was not possible to convert the value into currency notes, lower transactions were conducted through ATMs, and high level of transactions took place in other indicators cited above. This is evident in the data presented in Figure 2 and Figure 3.  In addition to the five indicators mentioned above, the study has also considered three additional indicators viz., paper based transactions (Paper Clearing), Number of PoS and Grand Total of all the transactions through various Payment and Settlement Systems prevailing in India. As mentioned in the initial discussion, there is a concerted effort to move away from paper based trans-

RESULTS AND DISCUSSION
The ARIMA (p, d, q) model was estimated for the selected indicators. The forecasted values and volumes of indicators, from November 2016 to March 2018, using the selected ARIMA (p, d, q) models for each selected indicator along with the corresponding actual values and volumes of the indicators are presented in Table 1 and Table 2 (Appendix). The results of paired t-test for actual and forecasted values and volumes of the indicators are presented in Table 3 and Table 4 (Appendix), respectively. It may be noted here that if a payment and settlement system indicator shows an upward trend in the value of transactions without accompanying upward trend in the volume of transactions, the trend in the value of transactions will be an outcome of limited number of higher value indicating a possible flow of money out of the banking system and concentrated economic activity. On the other hand, an upward trend in the volume of transactions without accompanying upward trend in the value of transactions will indicate lower economic activity as the volume of transactions is not translating into value. Similarly, if a payment and settlement system indicator shows a downward trend in the value of transactions without accompanying downward trend in the volume of transactions, the trend in the value of transactions will be an outcome of a larger number of lower value transactions taking place in the economy which could be due to weak economic activity. On the other hand, the downward trend in the volume of transactions without accompanying downward trend in the value of transactions will indicate a small number of higher value transactions indicating the concentration of economic activity and outflow of money from the banking system. Hence, to understand the trends in the payment and settlement system more clearly, the present study considers both the value and volume of transactions in the selected payment and settlement system indicators.
The results show that the actual value and volume of transactions in the case of RTGS, EFT/NEFT, M-Wallet, Credit and Debit card usage at PoS are found to be higher than the forecasted values and volumes for the period following demonetization indicating that customers have adopted these electronic payment and settlement systems. At the same time, the result for paper based transactions shows that during the period following demonetization, the value and volume of paper based transactions have also increased and are higher than the forecasted values. The results, thus, suggest that customers do adopt electronic system, which does not require the dependency on currency notes, in the scenario of less availability of currency notes though one can argue that the adoption was by compulsion during the post-demonetization period. At the same time, usage of cheques, demand drafts and similar paper based systems of payments also increase when customers have a shortage of currency notes. The use of the paper based system is less efficient compared to electronic mode of transactions due to the cost and time consumption in the process. In the present Indian scenario, in which a relatively large section of customers is not educated to use the electronic systems, the short supply of currency notes does come with the risk of adoption of traditional paper based systems of payment which will essentially pull down the efficiency of the banking system of the country at large.
As an obvious outcome of the restrictions on withdrawal of currency notes using ATMs and limited supply of currency notes to the ATMs (Reserve Bank of India, 2016) following the demonetization of higher denomination currency notes, the results presented for credit and debit card usage in ATMs show that the value and volume of transactions through ATMs are less than the forecasted values in the post-demonetization period. But, the more important point that needs to be observed is that the lower value and volume of transactions through ATMs has sustained even after the withdrawal of restrictions indicating that the customers who utilized digital platform for transactions have not immediately shifted back to the use of currency notes when the currency notes are made available without restrictions. This indicates that the practice of using currency notes is a matter of routine practice, which can be changed by means of different measures that can induce people to use digital platform for transactions and learn the conveniences and benefits attached to it. Demonetization of higher denomination currency notes, restrictions on withdrawal of currency notes using ATM and a limited supply of currency notes could be such measures that can make people adopt the digital platform for transactions.
Overall total (Grand Total) value and volume of transactions in the payment and settlement system of India did not show any obvious difference between actual value and volume of transactions and the forecasts in the post-demonetization period indicating that the transactions, in the period following demonetization, shifted from one mode of transactions to another -currency note based transactions to transactions in digital platforms -and there was no loss in the value and volume of transactions following demonetization. Alternatively, it is also possible that the loss in the value and volume of transactions due to lower economic activity during the period following demonetization was compensated by the value and volume of transactions that took place through banking channels that otherwise was taking place without using the banking channels, i.e., the transactions that took place in the unorganized sector prior to demonetization.
On applying paired t-test, it was found that the differences between the actual and forecasted value of transactions in all the indicators discussed above are statistically significant at 1 (one) per cent level of significance, except for the overall total value of transactions (Grand Total), which is significant only at 10 per cent level of significance. The paired t-test for the difference between the actual and forecasted volume of transactions yielded similar results except that in the case of total volume of transactions (Grand Total) the difference is found to be non-significant statistically. The result of the paired t-test, thus, statistically supports the discussions that are presented above.

CONCLUSION
The results discussed above indicate that demonetization of high denominations currency notes led to shifts in the usage of various payment and settlement systems practiced in India. The results clearly indicate the shift in usage from the currency notes to electronic medium of transactions and the shift has persisted even after the considerable increase in currency in circulation in the economy contradicting the results of Waghmare (2017) and Nithin, Jijin, and Baiju (2018). This clearly indicates that the preference of people towards currency note based transactions can be moderated towards the use of electronic platforms for transactions and demonetization did provide that moderating effect providing a solution to the issue of stickiness to cash payments highlighted by Sivathanu (2018). Moderated or controlled supply of currency notes -of higher denominations -can, therefore, result in the higher use of the electronic medium for transactions resulting in a less cash/cashless economy.
Though complete transformation of Indian economy to a digital economy, in which payment and settlement system consists only of digital platforms, is not possible in the present economic and social conditions of India, it can be suggested to: a) withdraw higher denomination notes in a phased manner by restricting the printing and supply of high denomination currency notes; b) rationalize and reduce operational costs of using digital platforms, such as the charges payable to the banks, to provide impetus to use digital platforms. In addition, the operational costs associated could be allowed to be deducted from the total income of individuals (customers) providing them tax benefits; c) implement an extensive educational campaign (by the banking organizations, educational institutions and government bodies) to educate people how the transactions are to be carried out and the benefits of using digital platforms; and d) have a full and effective implementation of Goods and Services Tax (GST) to provide scope for leading the Indian economy into a less cash/cashless economy.
It should, however, be noted that to facilitate the growth of the economy and to finance the growing productive activities, the supply of money should grow with the growth in the economy. However, the study, as well as the earlier studies, has ignored the effect of economic growth and increase in the volume of production of goods and services on the volume of money required, as a means of payment for economic activities. Hence, further research can be carried out by incorporating the variables that measure economic growth and the growth in the productive activities in the economy and their effect on the payment and settlement system practiced in the country.