Sustaining transition to a digital economy

The Live Mint, December 28, 2016

Pradeep S. Mehta

Don’t assume that the recent surge in online transactions is an irreversible move towards a digital economy

Since last month, the government has been relentlessly pushing for transition towards a less-cash and more-digital economy. It has adopted a carrot-and-stick approach to nudge user behaviour. The currency in circulation has been taken away with a warning that the entire physical form will not be replaced. At the same time, charges on digital transactions have been reduced and digital payments are being incentivized.
Such collective efforts have forced a massive increase in digital transactions. Mobile wallet players have experienced a substantial increase in the number of users, and mechanisms like unified payments interface have recorded a more than 1,000% increase in usage.

It would be a mistake to assume that the current surge indicates a sustained and irreversible movement towards the embrace of a digital economy. Not too long ago, the desire to ensure bank accounts for all citizens culminated in the Pradhan Mantri Jan-Dhan Yojana (PMJDY). Close to 240 million bank accounts were opened in no time, but most of them remained dormant despite added incentives. Creative use of such accounts to launder unaccounted money is now being reported.
History has an uncanny ability to replicate itself, and it might not be an overstatement to assume that like PMJDY accounts, electronic wallets might be predominantly used to receive online payments, only to be immediately withdrawn and used over the counter. Note that Kenya, despite being the epicentre of the digital payments revolution, is still struggling with high over-the-counter cash usage.

This possibility of an inability to leapfrog to the digital ecosystem will obviously not fit within the grand design of government. The problem with most government drives is the top-down approach of issuing diktats and a muddled bureaucracy which does not have the foggiest understanding of ground realities. This also is the biggest bottleneck in fast-forwarding to Digital India, a desire voiced by many, including me.
The success of the digital ecosystem is dependent upon several externalities. These include successful authentication of user information, availability of mobile or Internet connectivity, existence of payment and acceptance infrastructure. Such externalities increase the inconvenience associated with digital transactions.
Inconvenience: For instance, most digital transactions in India can only be undertaken through smartphones. Reportedly, only about 17% of Indians own a smartphone. This is the lowest among BRICS (Brazil-Russia-India-China-South Africa) economies, wherein China leads with 58% smartphone penetration. Even the global median is much higher than India’s, at around 43%. The process of making digital payments through feature phones involves entering complicated codes, which is not an easy task even for educated persons like me. Even when a smartphone is available, smooth availability of mobile or Internet network is not certain. Several pockets in the country do not have uninterrupted access to a mobile network.

Security risks: Availability of all essential prerequisites for digital transactions does not take away the security risks inherent in such transactions. Not so long ago, the largest ever compromise of sensitive debit card information of close to three million consumers was reported in India, requiring several banks to reissue such cards. Reportedly, confidential data pertaining to servers, including encryption keys of service providers such as payments system operators, banks and wallet issuers, could potentially be accessed by hackers, raising the possibility of fraudulent instructions/transactions. Mobile payments applications are not using hardware-level security which can make online transactions more secure. One can imagine the level of security standards employed by local service providers when global giants like Yahoo have suffered data breaches in over one billion email accounts.

The legislative and regulatory framework related to cybersecurity and data protection is weak and requires urgent attention. The regulatory attitude is archaic, with a requirement to report security breaches on a quarterly basis, and limited attention on monitoring compliance with international security standards.
Unfortunately, user awareness about digital security is also negligible. Often, consumers are complacent about protecting their personal information online. Lack of awareness results in consumers relying on third parties to undertake digital transactions. Such intermediaries could extract unfair charges for their assistance and advice.
In every crisis lies an opportunity. The National Association of Software and Services Companies (Nasscom) suggests India aspire to build a cyber-security product and services industry of $35 billion by 2025, and generate a skilled workforce of one million in the security sector. Such products and services need to be designed through a bottom-up approach, i.e. they should be able to deal with local problems and provide customized user-centric comprehensible solutions, rather than being copied from other jurisdictions.
Consumers also need to be involved in the review of legislative and regulatory framework around digital security to ensure their interest is kept at the core. Their awareness and capacity will be crucial to sustaining the transition towards the digital economy.

Pradeep S. Mehta works for CUTS International.
Amol Kulkarni of CUTS also contributed to this article.

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