By IMTFI researchers Deepti KC and Mudita Tiwari
Imagine running a small-scale enterprise where payments for business transactions are made in bags of cash. Imagine incurring revenue losses during cash transactions because fake and damaged notes commonly circulate in the market. Imagine incurring such disparate risks to avoid taxation by the government on cash revenues.
The enterprises in Dharavi, Mumbai, are replete with examples of risky business transactions undertaken to avoid taxation and government vigilance. Dharavi has nearly 5,000 informal businesses, producing nearly $650 million in goods and services every year. Funded by the Institute for Money, Technology and Financial Inclusion (IMTFI) at the University of California, Irvine, we interviewed 100 informal business owners, 20 suppliers, 115 clients, 2 bank managers, and 25 banking agents in Dharavi to understand the social, cultural, and business factors influencing the preference for cash transactions over banking (including electronic) transactions.
|Dharavi, Mumbai (Photo by authors)|
Our study found that a large number of transactions were undocumented and hidden. On average, business owners and suppliers made cash transactions of INR 18,000 ($300) and INR 43,615 ($727) a week before our survey. Business owners were reluctant to report exact transaction amounts, and we believe the above-mentioned amounts were underreported.
Despite cash being the most popular payment mode for business transactions, business owners accessed banks primarily for personal banking needs. Use of online banking systems, ATMs, and credit cards (electronic payment systems) was infrequent, and a majority preferred using bank teller services to withdraw and deposit cash. Eighty-nine percent of those we interviewed reported having bank accounts, though only 27% reported ever conducting online transactions for business.
Abhyudaya Cooperative Bank, located in the heart of Dharavi, was the preferred bank of choice for local business owners. The bank official reported that the bank conducts approximately 75% of its business in cash and on average INR 3.5 crores ($580,000) are deposited and INR 5 crores ($800,000) are withdrawn every week. Customer Service Providers (CSPs) appointed by local banks also provided basic services such as remittances, account openings, and deposits for business owners and customers. However, both bank officials and the CSPs agreed that lack of aggressive marketing and campaigning by service providers has resulted in a lack of knowledge about the benefits of banking services amongst business owners. This lack of knowledge impedes the usage of banking services for business transactions.
Our study also found that almost all business owners perceived cash as a safer and cheaper option. Trust was an important factor that deterred use of electronic transaction methods. For example, rumors circulated about people losing money while using credit or debit cards, though none of the business owners we interviewed had such personal experiences. Nonetheless, all business owners reported that if customers demanded debit card, mobile, or online transactions in the future, they would invest in infrastructure supporting these services.
|Bank customers (Photo by authors)|
The perspective of customers was similar to business owners about usage of banking services for transactions. Although all customers had heard about credit and debit cards, and mobile and online banking, nearly 70% of customers had never paid using debit and credit cards.
We found that cash is the preferred mode of transaction for the following reasons: (i) business owners considered savings on taxes through undocumented cash transactions as a short-term benefit; and (ii) lack of awareness and trust in the financial products impeded usage of banking services. Though banks, ATMs, and CSPs are proximal, these institutions have not aggressively reached out to educate customers about the benefits of electronic transactions.
We recommend financial providers design context-specific messages to address the knowledge gap about financial products and services, and to address the underlying behavioral biases impacting take-up. For example, for business owners, financial literacy materials must be designed to highlight loss of free interest of long-term savings; loss of lucrative investment opportunities; potential loss of revenue through inaccurate and undocumented cash transactions; and ease of availability and transfer of funds via remittance by highlighting phone and Internet banking.Strategic messaging using real-life and relatable stories might encourage these business owners to take up e-payment services in the future.