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.
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| 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INR 5 crores ($800,000) are withdrawn every week.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.
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| 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.
For more, see a recent post by Deepti KC and Mudita Tiwari at the Financial Access Initiative blog.
Information on the 2013 project.
Information on the 2013 project.
Since all these businesses involve cash transactions with small and marginal investors, as a practice, all its businesses collects cash at its local office and then distribute the same to its investors rather than transferring the cash to its head office and then again re-transferring the same to its branches. This way, the risk of carrying cash is minimized since, in the past, some cash was looted and several employees had even lost their lives. It also became a cost-effective method of handling cash, the spokesman said. "This also ensured timely payment of money to investors.
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