Adoption of Digital Payments by Small Merchants in India

Context

Switching from cash to digital transactions could benefit individuals in low-and-middle-income countries through improved financial security, transparency, convenience, transaction costs, change-making, and record-keeping. However, India’s economy functions mainly in cash despite the availability of multiple digital payment technologies such as internet banking platforms, Point of Service (PoS) devices, mobile wallets, and UPI.

Study Design

The researchers surveyed 1,003 merchants with small, fixed-store enterprises in Jaipur, India to understand whether the costs of obtaining a bank account, an appropriate device, internet access, usage fees, or limited technological literacy could explain the limited adoption of digital payments.

Results and Policy Lessons

The researchers found that 58% percent of merchants did not adopt digital payments of any type even though adoption would have been relatively inexpensive and feasible. After accounting for household expenses, the average household’s income exceeded all of the prerequisite costs by 27 times. Findings suggest that the majority of merchants can access the bank accounts and smartphones necessary to transact digitally and that they have the financial literacy skills necessary to use available digital payment systems. Furthermore, even merchants with digital payment technology still conduct 81.4% of their transactions in cash. If the costs of going digital do not solely account for low adoption, then the perceived benefits of cash transactions must play a role. The most commonly cited reason among merchants for non-adoption is the lack of customer demand for digital payments. While many merchants also mention a lack of awareness of digital alternatives, in a context where individuals are quite educated and information about digital payments is widely available, perceived risks of increased tax liability may also play an important role.