Growing digitisation to replace cash use, says BCG

Says about 30-40% of cash in circulation now will be replaced with digital transactions

With customers increasingly opting for the electronic mode for transactions, a recent study by The Boston Consulting Group (BCG) says much of the cash in circulation is likely to be replaced by digital transactions.

The report said in 2012-13, about 29 per cent of the number of transactions in the banking system was cash-driven and 22 per cent was by cheque. In 2013-14, the number of cash transactions had already come down to 26 per cent and cheque transactions to 19 per cent.

“Paper money, that has dominated transactions for centuries, could be on its way out. We see the warning to cash. There is a clear possibility of 30-40 per cent substitution of cash in circulation in India with digital transactions,” said the report.

Banks have been working at making their branches and back-end functions more digital. Experts believe this will boost productivity and that proper use of technology can be an important factor in trimming the rise in bad loans the sector has been battling with.

“By digitising processes end-to-end, engaging customers on the digital channel for sales and transactions, and collectively working towards eradication of cash, banks can achieve up to a 30 per cent jump in sales productivity, reduce administrative staff by 10-15 per cent and improve back-office staff productivity by 20 per cent,” added the report.

ICICI Bank, the country’s largest private lender, said lower use of cash would improve its cost to income ratio.

“For instance, we introduced tablet banking and it helped us by giving a much larger share in current account and savings account deposits, by improving the overall efficiency and productivity,” said Chanda Kochhar, managing director (MD).

Apart from making the process of customer acquisition more cost–effective, improving the technology has also helped in risk management, believe bankers, by making the process more standardised.“With the use of technology, we can minimise the error rate and it can also lead to better risk control and fraud management,” said Shikha Sharma, MD of Axis Bank.

BCG believes banks that have strong control over the payments system will be more successful in the process of digitisation. This is because most of the payments growth is likely to be on the digital channel, such as internet, mobile, points of sale, electronic clearance, etc. Going ahead, these channels are expected to serve specialised purposes and the global consulting firm sees it as a "tectonic paradigm shift".

Banks believe that apart from making the transaction process more digital, even customer acquisition and cross-selling can be done through this medium.

“We are always looking at engaging more on this medium. The challenge is not only technology but content management. One needs to continuously innovate,” said Arundhati Bhattacharya, chairman, State Bank of India.

Foreign lenders, which can only open a restricted number of bank branches, believe digitisation has helped them bridge the gap with other lenders. “With less number of branches, taking the digital route is a survival issue for us. To reach out to more people and to improve the customer acquisition process, we have had to do so,” said Pramit Jhaveri, chief executive here of Citibank.

The report says the competitiveness of public sector banks (PSBs) could decline further decline, unless concerns such as talent constraints and overarching control in decision making is addressed. "The smaller PSBs are at a particular risk of rapid decline, given their poor investment in transformation. They lag significantly on virtually every dimension of digital preparedness. In our view, this should be a primary consideration in the blueprint for consolidation of PSBs in India," stated the report.