Objectives and framework

To understand merchants’ adoption decisions we adopt a simple microeconomic framework. This framework treats adoption as a fundamentally economic decision, driven by merchants’ assessments of the salient costs and benefits. Examples of costs merchants might consider might include on-going payments made to internet providers or to payment service providers, or the fixed costs of purchasing hardware such as smartphones or point of service (PoS) terminals. Examples of benefits might include simpler and more transparent bookkeeping; increased demand (for the merchants goods or services) from consumers who prefer to use mobile payment technologies rather than cash; or reduced risks of theft and reduced costs of transacting with banks. At the broad industry level, we will describe the costs merchants consider to be “supply-side” factors, since the costs small merchants face will generally depend on the behavior and technology used by firms building mobile money platforms and providing services to the small merchants we consider. Obversely, we’ll think of the benefits considered by merchants to be “demand-side” factors, since these will typically depend on the needs and resources available to the merchants’ customers.

Within our microeconomic framework, our chief objective is to test the hypothesis that supply-side (rather than demand side) factors are the principal obstacle to digital payments adoption by merchants in Jaipur. This is not the only hypothesis one could test, but is of particular policy interest because of a focus by the government of India and international organizations on reducing these costs as a means toward spurring adoption.

Our simple microeconomic framing of the problem is not the only possible framing of the decision merchants face, and other frameworks might be more suitable for testing other hypotheses. For example, a more behavioral approach called the “Technology Adoption Model” (TAM) with origins in social psychology focuses less on cost-benefit calculations and more on on intrinsic motivations and would-be users’ perceptions of the usefulness and ease-of-use of a new technology [14]. Related approaches in the marketing literature [15] also pay close attention to the details of customers’ perceptions of new technologies and their resulting behavioral reactions. These approaches would be better suited than ours to measuring variation in adoption related to variations in technology, such as different software applications having different user interfaces. In contrast, a more “macro” approach models the spread of a new technology as a diffusion process [16]. Such an aggregate approach would be better suited to understanding things such as the relationship between aggregate economic growth and technological innovation.

Our microeconomic approach requires neither the data on perceptions of usefulness and ease of use employed in the TAM approach nor the international data on national income and product accounts exploited in the macro literature, and focuses instead on answering a particular question: do the costs borne by would-be merchant adopters deter adoption of digital payments technology?

Preview of results

Typical of the low adoption observed in India, we find that about 60% of merchants in our sample have not adopted digital payments of any type. Our survey data suggests that the previously described supply-side barriers do not fully explain the low rates of digital payments adoption in our sample. We demonstrate this is in three distinct ways. First, we show that 98.6% of sample firms are feasible prospective digital payment users, in that they have the necessary documents, business income, and literacy so that they could satisfy all of the prerequisites for digital payment adoption if they so chose (i.e. they could afford to purchase necessary infrastructure, have the documents to open a bank account, etc.). Second, we show that not only are there many merchants that could satisfy these prerequisites, but many merchants already do satisfy them. In our sample, 97% of merchants have a bank account, 79% have a device with the potential to access the internet if purchased (such as a smart phone or computer), 55% have internet access, just under 100% can afford the related usage fees, and 96% are technologically literate. In total, 54.24% of the sample merchants already satisfy all of the aforementioned requirements, and yet only 42.0% of the sample have adopted digital payments. Third, we show that even among current digital payment users, usage is low, with around 80% of their transactions with customers still being done in cash. Given these three findings, we conclude that lack of digital payment adoption by sample merchants is generally not due to being unable to overcome supply-side barriers for using digital transaction methods. Instead, decisions not to adopt may depend mainly on perceptions of other demand-side benefits or taxes (which, from the merchants’ point of view have the same effect on profits as a reduction in demand). We present evidence (including regression analysis) that beliefs about customer demand to pay digitally, and beliefs about increased tax liabilities associated with digital payments (from the merchants’ point of view an increased tax has the same effect as a reduction in consumer demand) may play important roles in merchants’ decisions to adopt digital payments.

The rest of the paper proceeds as follows. The “Materials and methods” section presents additional background assumptions used in our estimation about the types of digital payment technologies available to merchants in the sample and the necessary infrastructure required to adopt these technologies, a description of the data, and a description of analytical methods used. The “Results” section lists our main results suggesting supply-side barriers are not the main cause of non-adoption of digital payment technologies by merchants in our sample. The “Discussion” section provides alternate explanations of digital payment non-adoption based on demand-side factors, and discusses determinants of digital payment adoption. Our final thoughts are contained in the “Conclusion” section.

Key definitions and background assumptions

Prerequisites for digital payment adoption.

In order for merchants to accept digital payments, there are prerequisites they must satisfy; namely merchants need to have a bank account, have an internet connection, have a device with internet access, be able to pay the fees associated with using these devices, and be technologically literate enough to use digital payments. If merchants do not already satisfy these prerequisites, they may face supply-side barriers to obtaining documents and/or paying costs associated with adoption. Assumptions used in this analysis regarding prerequisites to use digital payments for one year and how to satisfy them are summarized in Table 1.

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Table 1. Prerequisites necessary for adopting digital payment technologies for one year.

https://doi.org/10.1371/journal.pone.0219450.t001

All four digital payment types require merchants to have bank accounts at public or private banks in order to complete transactions, either because transactions are done directly between consumers’ and merchants’ bank accounts (for internet banking and UPI) or because they are done using card or wallet platforms in which money must be transferred in and out from a bank account (for PoS devices and mobile wallets). If merchants do not satisfy the bank account prerequisite already, they will be able to open an account fairly easily as long as they have the required documents. At the time of the survey, these were an Aadhaar card and a Permanent Account Number (PAN) card [18] [19], which are documents used to verify citizens’ identity (Aadhaar) and taxpayer status (PAN).

The “device” in Table 1 refers to a device through which the merchant can access the website or application necessary to make and accept digital payments. All four digital payment types can be completed over a smartphone application, hence when we estimate costs of obtaining a device, we do so for the case of a smartphone. However, internet banking can be done using a laptop or desktop computer, and some mobile wallet payments can be done using an internet-capable feature phone [20]. Therefore when we consider whether merchants already have the appropriate device to accept digital payments, we suppose this is the case if they have a smartphone, feature phone with internet capabilities, or computer. We estimate the costs of buying a smartphone that would work well with digital payments at INR 7,000 (US$105.00) [21]. Additionally, to use a smartphone one must also obtain a SIM card, for which we estimate a cost of INR 100 (US$1.50) and which requires a proof of identity document (such as Aadhaar) to obtain [22]. Hence in total, the costs are INR 7,100. Yet, we are calculating annual costs and a new smartphone is not purchased every year. In many emerging markets, smartphones are replaced every 2.2 to 2.5 years [23]. Hence we divide these costs by 2.2, to calculate an annual device cost of about INR 3,228 (US$48.42).

Aside from the cost of owning a phone, there are costs for the phone to be functional, including the costs of cell service and internet data (which are also necessary to transact digitally). Cell service and data are extremely inexpensive in India; an investigation on the World Bank Data Blog found that in absolute terms, India was sixth cheapest country in the world in terms of monthly mobile phone fees in 2014, at approximately US$2.80 [24], and Cable.co.uk found that in 2018, India was the country with the cheapest price of cellular data, an average price of of US$0.26/GB [25]. To estimate costs of purchasing cell phone service and data, we consider more current information about smartphone plans for one of India’s biggest telecom providers, Airtel [26]. An example of a current pre-paid “bundled” 10-day plan offered by Airtel in Rajasthan is unlimited calls to and from most places in India, 1 GB of 3G/4G data, and 100 text messages within India a day all for 99 Indian Rupees (INR). This plan is fairly comprehensive, would likely meet a typical merchant’s needs, and would only cost INR 3,614 for an entire year (US$54.20); for our calculations we round this up to INR 3,700.

Some digital payment systems have additional upfront costs (such as the cost of purchasing a PoS device to swipe cards), as well as recurring service fees (either a flat fee per month or a fee per transaction). In our survey data (explained in detail in the following section), merchants who use digital payments were asked about the upfront and recurring costs associated with various digital payment methods. The median reported value for each can be seen in Table 2. We note that while accepting internet banking and PoS payments do seem to be associated with significant upfront fees, mobile wallets and UPI are not. Instead, mobile wallets have some small recurring fees associated with them, though these recurring fees tend to only be the fees associated with transferring (a large enough sum of) money out of the mobile wallet and into a bank account, and hence may not be incurred every month [27]. For the estimated costs in this paper, we suppose the fees associated with using digital payments for a year are INR 2,400. We chose this number by calculating the median cost of using any digital payment for a year (multiplying the monthly fee by 12 and adding this to the upfront cost) among sample merchants.

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Table 2. Median digital payment usage fees.

https://doi.org/10.1371/journal.pone.0219450.t002

Finally, to use digital payments, merchants must either have an underlying general knowledge of how to use digital technology or be literate enough to be able to figure out how to do so. While we do not have exact information on whether a merchant is “literate” enough to use a smartphone, we can look at proxies, such as general literacy, education level, current smartphone app use, current digital payment technology use, and whether they report one of their employees being comfortable with a smartphone (as even if the owner is not technologically literate, an employee may be able to complete transactions). For the purposes of our analysis, we consider a merchant technologically literate enough if they have completed at least eighth grade in school, currently use digital payments, have used social media smartphone apps, and/or have at least one employee who can comfortably use a smartphone, and consider a merchant to have baseline “written literacy” such that they could potentially obtain technological literacy, if they do not report being illiterate.

Data

The survey data in this study was collected as part of a project headed by Catalyst, an initiative funded by United States Agency for International Development (USAID) under the mSTAR Program [28], to increase adoption of digital payments in India, using a targeted ecosystem approach. The survey interviewed 1,003 fixed store merchants in Jaipur, and was conducted by People Research on India’s Consumer Economy (PRICE) in August-September 2017, following a listing census that identified 6,011 households and enterprises in Jaipur a few months prior in April–May 2017. More information about the sampling strategy, which was random, but with stratification by industry and “digital readiness,” can be found in the S1 Appendix. The goal of the survey was to learn more about the ecosystem in which merchants interact in Jaipur, and specifically to understand the adoption of and willingness to use digital payment technologies by merchants. Jaipur is a tier two city in India, whose citizens span the socioeconomic distribution and may be representative of other medium size urban areas in India (some other tier two cities include Agra, Lucknow, Chandigarh, and Nagpur). Jaipur was selected as a “lab” because Jaipur is a focus area for Catalyst, and the Government of Rajasthan is interested in increasing digital payment adoption among citizens. But more than that, Jaipur is an interesting context to study; as a medium-sized urban area with large socioeconomic diversity, and many small and medium-sized merchants, it is a setting where many merchants could potentially gain from adopting digital payments. The survey collected various information, including personal information about the business owners’ households, information about the business operations and profits, and attitudes toward digital payment technologies. Additionally, when available, statistics from the listing census will also be presented. All data used in this paper can be found at https://osf.io/qzj2t/. More information about sample merchants can also be found in [29].

Sample businesses operate within a variety of different industries, with the most common being apparels, fabrics, and furnishing, general stores, and food service activities (which together comprise over 40% of all sample businesses). Almost all sample businesses are permanent, perennial, sole proprietorships. Over two-thirds of businesses were started by their current owners, and the average business has been operating under its current owner for 16.5 years. Additionally, these businesses are relatively formal; not only do they have a permanent structure, but over four-fifths report being registered with the Ministry of Corporate Affairs. Despite being relatively well-established, most businesses report that they want to grow. The majority are retail stores doing most of their sales with consumers as opposed to other businesses. The sample does contain some wholesale stores and service providers as well. Generally, these stores are well-trafficked, receiving a median of 95 customer visits weekly, with about 90 visits ending in a transaction. Businesses receive many repeat customers; on average businesses report that 40% of all customers are repeat customers. Generally, the size of these businesses is small to medium-sized, with a median of two employees per firm, aside from the owner. About half of these employees are hired labor and the other half are unpaid family labor. Average annual sales are INR 2,147,522 (US$32,212), and average annual profits are INR 381,441 (US$6,000).

The survey also collects information on the owners of these businesses. In terms of demographics, almost all of the merchants in our sample are male. The majority are Hindu, the majority religion in the area, and most of the rest are Muslim. About a third are a member of a Scheduled Caste, a Scheduled Tribe, or an Other Backward Class. Nearly all of the merchants in the sample have an Aadhaar identification number that will allow them to access financial services such as a bank account. Additionally, these merchants are quite educated; almost eighty percent have at least a tenth grade education. Only ten merchants in the entire sample (less than 1%) report that they are completely illiterate. In terms of these merchants’ households, the average merchant has about 6.25 household members. In general, most of these households’ income comes from their business; on average 85%. Per capita income is a little less than US$1,500 annually, and per capita expenditures is closer to US$730. These numbers suggest that in terms of socio-economic status, these households are similarly well-off to other urban areas in India, and close to the average national GNI per capita, which was approximately US$1,820 in 2017 [30].

Methods

We use descriptive methods supported by linear regression analysis to show that supply-side costs cannot plausibly account for low rates of digital payments adoption. To do this, we characterize sample businesses as digital payment users if they report they are currently using one of the four digital payment technologies listed above in their business. We compare the percentage of digital payment user businesses to the percentage of businesses that could feasibly satisfy all of the prerequisites to adopt digital payments. A business is considered a feasible digital payment user if for each of the five prerequisites listed in Table 1 they meet one of the following criteria:

1. The business already satisfies that prerequisite (e.g. the business already has a smart phone).
2. The business has the necessary documents, annual profits (which they could use to purchase devices/cover fees), or literacy to satisfy the prerequisite if they so chose. (e.g. the business does not have a smart phone, but their profits exceed INR 3,228 a year, suggesting it is feasible for the business to obtain a functional smart phone using their profits).

The idea behind this comparison exercise is that if satisfying these prerequisites is the primary barrier to digital payment adoption, then the number of businesses that are able to satisfy the prerequisites should be similar to the number of businesses that accept digital payments. This follows from the reasoning that those who do not adopt are unable to because they cannot satisfy the prerequisites. If instead many more merchants can feasibly satisfy the prerequisites but are still not adopting digital payments, this implies that though merchants can theoretically adopt digital payments, they do not find accepting digital payments to be an optimal use of their resources; in other words, that the perceived costs of adoption do not outweigh the perceived benefits.

There may be a concern that our cost estimates do not accurately capture the full costs of satisfying the prerequisites to adopt digital payments, and hence that some “feasible” users may face significant barriers to adopting digital payments. To address this, we compare the percentages of businesses using digital payments to the percentage of businesses that already satisfy the requirements for digital payments(i.e. they have a bank account, device, and internet service, can afford service fees, and appear technologically literate). If these prerequisites are the binding constraints to adoption, we would expect these percentages to be similar. If instead more merchants satisfy the prerequisites but are not adopting digital payments, this again implies that some other features in the digital payment technologies are generally driving non-adoption.

Finally, these previous exercises considered adoption as a binary choice, that is the decision of the business is whether to use any digital payments at all. Yet anecdotal evidence suggests that many merchants have “adopted” digital payments in the sense that they could accept these, but in practice seldom do. Hence, we also explore digital payment usage among the users. If barriers to satisfying prerequisites for digital payment adoption are the main binding constraint to adoption, then we would expect that those businesses that do use digital payments (and hence have overcome any relevant supply-side barriers) use them quite liberally. If this is not the case, this would support the conclusion that there are other important factors or reasons that drive businesses to not adopt digital payments in this context.

Digital payment adoption

A summary of digital payment use in the sample, including a breakdown of the type of digital payment methods used, can be seen in Table 3. In both the listing census and final survey, about 40% of fixed store merchants (36.3% in the listing and 42.0% in the main survey) already use a digital payment technology of some type. The most common type of technology used is mobile wallets, with 82.1% of all digital payment users in the main sample being mobile wallet users. After that, 30.2% of all digital users in the main survey sample use PoS devices, slightly less use internet banking, and very few use UPI. Again, despite the fact that UPI seems to be a dominant technology to the other methods, it was a fairly new technology at the time, likely explaining these low numbers.

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Table 3. Digital payment users.

https://doi.org/10.1371/journal.pone.0219450.t003

Feasibility of digital payment adoption

Now we consider the question whether merchants are unable to adopt digital payment technologies because they are in some sense unable to satisfy the requirements necessary to adopt digital payments. The main results can be seen in Table 4.

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Table 4. Ability of sample businesses to adopt digital payments based on ability to satisfy prerequisites.

https://doi.org/10.1371/journal.pone.0219450.t004

The second column of Table 4, labeled “Have means to obtain,” reports the percentage of merchants that have the resources (in terms of documents, profits to cover costs, and baseline literacy) to obtain each requirement, as detailed in Table 1. To understand whether merchants can cover costs for a given requirement, we consider whether their annual profits exceed the annual costs associated with the requirement. For the vast majority of sample merchants, having enough annual profits to cover the costs associated with digital payment use does not seem to be an issue, with over 99% of merchants being able to cover all of the associated fees. Additionally, 99% of sample merchants have at least basic literacy, such that with some effort, they could learn how to navigate a smart phone application to accept digital payments. We observe fewer merchants satisfying the requirements for having a bank account. While over 99% of merchants have the required Aadhaar card to open a bank account, only about 93% have a PAN card. While there are costs associated with not having a PAN card (major financial transactions are impossible to complete legally), there are also significant costs associated with getting a PAN card if a merchants does not have one (namely, they likely have to start paying taxes). Hence for the 7% of merchants without a PAN card, there may be significant barriers to opening a bank account. Thus, we find that 91.53% of merchants are feasibly able to obtain all of the requirements to use digital payments.

We further observe that some merchants satisfy the requirements (Column 2 of Table 4), despite not meeting the technical requirements of doing so (Column 1 of Table 4). Notably, we see that while only 92% of the merchants technically have the means to get a bank account, almost 97% report actually having a bank account. This discrepancy could potentially be explained in a variety of ways; perhaps the bank account a merchant uses is actually under some other person’s name, or perhaps the merchant was able to open an account previously (given the changing nature of recent laws surrounding the documents required). To ensure we include merchants that already have the required infrastructure, such as a bank account, we calculate the final column labeled “Have means to obtain or Already have”. This is the union of qualifying merchants in the previous two columns, yielding the percentage of all the merchants that either could obtain or already have each piece of infrastructure. We are left with the striking result that 98.6% of sample businesses are able to satisfy the prerequisites associated with digital payment use. This is significantly greater than the 40% of merchants that actually use digital payments in our sample, and so is evidence that the ability to satisfy these prerequisites is not the binding constraint inhibiting digital payment adoption. Additionally, this suggests by revealed preference that merchants do not see digital payments as providing an annual benefit that exceeds the annual costs of INR 9,245.

There may be concerns that though merchants’ profits exceed the costs of obtaining the requirement, that these costs may comprise a significant portion of business profits, and that business profits are a major part of their household income that cannot easily be spared. In this vein, there are a few important points to note. First, for the median sample merchant, all of the annual costs combined are only 3% of their annual profits. Additionally, if we think that businesses only adopt if digital payment-related costs make up a small enough fraction of their profits, we note that these costs only comprise more than 10% of annual profits for 5.28% of the sample and comprise more than 5% of profits for 25.1% of the sample. Moreover, out of those merchants for which annual costs would theoretically comprise more than 5% of their profits, 35.7% have already adopted digital payments, which is broadly similar to adoption in the full sample. To see this relationship visually in S1 Fig, we plot the empirical cumulative distribution function of annual profits and indicate the fraction of merchants whose profits fall below each of these thresholds. Additionally, to the point that business profits cannot be spared because they are essential to household expenditure, the average differential between household income and expenditures is INR 247,800, which is almost 27 times more than all of the prerequisite costs combined. Additionally, only 44 sample merchants (4.39% of the sample) report a difference between income and expenditures that is less than INR 9,245. Out of these 44 merchants, 34% use digital payments already.

Possession of the underlying requirements

In the “Already have” column of Table 4, we see that not only could most merchants satisfy the prerequisites for digital payment adoption if they so chose, but 54.24% of sample merchants actually do. Having all of the infrastructure is an endogenous choice among merchants that could predispose them to be able to use digital payments. But dividing the percentage of adopters in Table 3 by the percentage of merchants that already satisfy all the requirements in the “Already Have” column of Table 4 reveals that even among merchants satisfying all of the requirements, at most 77% of them use digital payments. In reality, the percentage of individuals with all of the requirements that are currently using digital payments is a bit lower at 67.5%, since 54 merchants (5.38% of the overall sample) report using digital payments despite not having all the requisite technology. Of these 54 merchants, notably about 91% report not having internet access. Yet it is possible that they do have internet access through smart phone data and misunderstood the question ascertaining whether the merchant has internet access (as it is possible that internet access was thought by some merchants to only signify WiFi or broadband connections and not cellular data). More generally, because of this confusion, there may be reason to believe that the overall number of merchants that actually do have internet access at their enterprise is higher than what is stated. This is particularly interesting given that, as we can see in Fig 1, the “binding constraint” to merchants not satisfying all five requirements seems to be internet in many cases (for over 23% of sample merchants overall). We also might worry that people may not choose to have internet access because the internet is slow or does not work very well. However, in general internet speeds in India rank 88th out of 200 countries in the world, and there is no indication from our survey data that merchants think the internet is slow. [31]

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Fig 1. Prerequisite fulfillment by component.

This Venn diagram shows the number of sample businesses (out of 1,003 total) with each possible fulfillment combination of the five prerequisites that must be satisfied to use digital payments.

https://doi.org/10.1371/journal.pone.0219450.g001

Usage among adopters

Finally, we consider usage among merchants that have adopted digital payments of any type. If infrastructure and cost concerns were the main constraint restricting the adoption of digital payments and that the technology is fully optimal to use otherwise, one might expect frequent usage of digital payments among users. Our survey asked merchants what percentage of overall value they transacted through each payment medium, including cash, checks, internet banking, PoS, mobile wallets and UPI, with customers as well as with suppliers. The average breakdown of transaction values with customers and suppliers among digital payment users can be seen in Fig 2. With customers, even among digital payment using merchants, cash and checks on average make up 81.37% of transaction values, with only 18.63% coming from digital payments of any type. About half of the value paid through digital payments comes from mobile wallet transactions. Regarding payments to suppliers, similarly 90.81% of overall transaction value on average is made through cash or check. Only the remaining 9.19% of transactions are made through digital payments. Among those, over half are made through internet banking.

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Fig 2. Breakdown of overall transaction values by payment method with customers and suppliers.

These pie charts display the average breakdown of overall transaction values by payment method among the 421 merchants using digital payments.

https://doi.org/10.1371/journal.pone.0219450.g002

One might be concerned that averaging transaction value percentages over all digital payment users obscures different behaviors of users of each type of digital payments (e.g. if users of mobile wallets do most of their transactions digitally and internet banking users do almost none of their transactions digitally, averaging over both of their behaviors may not make this fact apparent). Hence we do a further breakdown of payment acceptance among users of different digital payment technologies. The results can be seen in S2 Fig. Internet banking users do 26.16% of sales in digital payments, PoS users 29.11%, mobile wallet users do 17.56%, and UPI users 25.8%. Some of the differences in this sample can generally be explained by looking at Table 3 above; users of internet banking, PoS, and UPI generally also use mobile wallets (this is necessitated by the fact that 82% of digital payment-using fixed stores use mobile wallets), hence users of internet banking, PoS, and UPI are more likely to accept multiple types of digital payments, and therefore perhaps make more overall sales using digital payment technologies. Merchants also report they prefer using internet banking and checks for purchases of larger values, and so it is sensible that relatively large portions of sales among internet banking users are made up of internet banking (and checks). As with the value of customer sales payment method breakdown, we also break down the sample further and distinguish between payment methods used to pay suppliers among users of different types of digital payment technologies in S3 Fig. Both internet banking users and UPI users transact a small but significant amount of their value paid to suppliers digitally. For internet banking users, almost a quarter of their transaction values are paid digitally, with over 80% of that quarter being comprised of internet banking payments. For UPI users, almost a quarter of their transaction values are paid digitally as well, with about half of that quarter being comprised of internet banking payments. Among users of PoS devices and among users of mobile wallets, the percentages of value to suppliers paid digitally are significantly less: at 9.1% and 7.3% respectively.

Hence even among users of digital payments, only a relatively small fraction of transactions with suppliers and customers are digital. Even among the population of merchants satisfying all of the prerequisites for digital payment adoption that have adopted, there is substantial potential for greater usage. This also provides evidence that other factors besides supply-side barriers are driving digital payment use-related decisions.

Stated reasons for adoption/non-adoption

Merchants were asked to provide up to three reasons underlying their digital payment adoption decision, with adopters being asked to provide reasons why they adopted, and non-adopters reasons why they had not yet adopted. The top three most cited reasons by each group of merchants are listed in Table 5. Additionally, the most common “first” reason underlying adoption decisions is starred in each category.

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Table 5. Stated reasons for adoption and non-adoption of digital payments.

https://doi.org/10.1371/journal.pone.0219450.t005

Among adopting merchants, the November 2016 demonetization is the most commonly reason given for adoption, with 73.9% of adopters citing it, and it being the most common reason cited first. But “demonetization” itself was a demand-side reason for adoption; it had no direct effect on the costs facing would-be adopters, but a possible direct benefit related to customers’ subsequent behavior. So these underlying reasons that digital payments are beneficial may lead merchants to adopt digital payments even many months after the demonetization. We see these potential benefits with some of the other commonly cited reasons: customer demand and ease of use.

Perhaps more importantly, we look at the reasons why merchants report they do not adopt digital payments. The most commonly cited reason is lack of customer demand for this payments technology. This is notable, as customer demand was also a top reason cited by adopters of digital payments. This suggests that adopters may have (or at least believe they have) more customers who demand to pay digitally than do non-adopters. Lack of awareness is the most common first reason cited for non-adoption, and fear of being cheated is also mentioned by a substantial fraction of merchants. These two issues could potentially be overcome with more information about digital payments and their safety being provided to merchants. If merchants are currently unaware or misinformed about using digital payments, this means that for these merchants that the perceived cost of becoming aware of these technologies and learning how to use them outweighs their perception of the benefits. Hence inducing adoption among these merchants is a matter of reducing costs, increasing benefits, or changing perceptions.

A relevant concern is that merchants’ lack of awareness could be driven by a lack of readily available information about digital payments; for example, merchants may not be aware that these methods exist. However, in our context, this is very unlikely. At the time of the survey, the Government of India was making significant public efforts to promote switching to digital payments. Information about digital payments appears to be quite abundant; sources of information about digital payments reported by surveyed merchants include: the newspaper, television, their bank, outdoor ads, social media, family and friends, other merchants, and digital payment sales people. It also is a common practice in markets to prominently post stickers with the logos of all payment types a merchant accepts (clearly providing other merchants signals of who they might be able to ask about digital adoption). Therefore, if merchants lack information necessary to adopt digital payments, it is likely that they don’t perceive the benefits to obtaining this information to be great enough.

Possible sources of heterogeneity explaining adoption decisions

Given the stated reasons for adoption as a starting point, we try to pinpoint key sources of heterogeneity in perceived costs and benefits of digital payments that may explain adoption. First, since many adopters and non-adopters alike stated customer demand as an important factor, we consider more closely whether businesses tend to adopt digital payments based on their beliefs about how many customers demand to pay digitally. Second, given that many individuals stated that they chose not to adopt due to lack of awareness in a context where individuals are quite educated and information about digital payments is abundant, we attempt to consider reasons for non-adoption that merchants may not be willing to tell a survey enumerator. Given that adopting digital payments increases business transparency, we hypothesize and explore the idea that some merchants may not adopt because they are concerned it will increase their tax liability.

Predicting digital payment adoption with customer demand and tax behavior.

While these comparisons between digital payment adopters and non-adopters are informative, we also know that there are other important differences between these firms, both observable and unobservable. Some of these differences may simultaneously affect customer demand for digital payments, tax payment behavior, and digital payment adoption. To address this issue, we estimate a linear probability model (using ordinary least squares) to see how tax paying behavior and customer demand beliefs predict which firms adopt digital payments, controlling for other observable characteristics. (S2 Appendix contains tables showing a t-test of means of all dependent variables used in the regression between adopters and non-adopters). These results can be found in Table 6.

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Table 6. Predicting digital payments adoption with tax registration status and reported customer demand.

https://doi.org/10.1371/journal.pone.0219450.t006

The dependent variable is a binary indicator of whether or not a merchant had adopted any of the four types of digital payment technologies at the time of the survey. The coefficient estimates can be interpreted as reflecting variation in the probability of adoption. There are 5 explanatory variables of interest. “Have tax ID no.” is an indicator of whether the merchant had a TIN, TAN, or GST number at the time of the survey, “GST registered” is an indicator of whether the merchant was registered for GST at the time of the survey, “Customer demand (Pre Nov. 2016)” denotes merchants’ self-reported proportion (between zero and one) of customers demanding to pay digitally before the November 2016 demonetization, “Customer demand (Post Nov. 2016)” denotes the same proportion for directly following the demonetization, and “Customer demand (Now)” denotes the same proportion at the time of the survey in August 17th. The caveats associated with especially the customer demand variables from previous sections certainly still apply.

Columns 2–5 have fixed effects for industry category. Columns 3–5 have controls for enterprise characteristics, and Columns 4–5 also control for business owner characteristics. Column 4 differs from Column 5 by only including customer demand pre-demonetization. Table 5 suggests that many merchants adopted digital payments as a consequence of demonetization. If adopting digital payments is associated with ex-ante rationalization or learning about demand for digital payments, we would expect customer demand estimates for digital payments may be biased upwards for all periods following the demonetization for digital payment users. We therefore expect customer demand before demonetization to be less susceptible to such bias. We therefore restrict Column 4 to exclude the potentially biased demand indicators post-demonetization.

Having a tax ID number (suggesting the merchant pays at least some taxes) implies a 6% higher probability of having adopted digital payments. Meanwhile, having registered for GST is not significantly related to digital payment adoption after accounting for enterprise characteristics. Beliefs about customer digital payment demand are correlated significantly with digital payment adoption. Using only pre-demonetization demand, a 10 percentage point increase in percentage of customers demanding digital payments implies an approximately 2.9% increase in the probability of adopting digital payments (Column 4). When including demand for digital payments in the two periods following demonetization are included, the effect of customer demand in the pre-demonetization period becomes negative, while it is positive in the other two post periods. This is possibly because customer demand in the pre-period is positively correlated with demand in both post periods (correlations are 0.53 and 0.6 with demand post-demonetization and at the time of the survey respectively). But when including all three periods, a 10 percentage point increase in customer demand for digital payments in the current period is associated with an increase in the likelihood of adoption by 9.2%. Hence, we see that even when controlling for various other business and personal observable characteristics, tax payment and perceived customer demand to pay digitally significantly correlate with merchant adoption decisions.