No abstract

The COVID-19 induced lockdown in India was an inflection point for on-boarding of new users into digital payments. Using a large survey dataset, we examine the driving factors of this shift for those who used digital payments for the first time. Apart from demographic drivers of payment choice traditionally explored in the literature, we find that this shift was significantly shaped by the degree of awareness of digital modes, access to smartphones and debit cards, and pandemic-relief welfare transfers. Users who had abandoned digital payments due to prior bad experiences switched back to such modes.

Combining Data Envelopment Analysis and dynamic panel data methods, we find that adoption of digital payment technologies by Indian banks has helped enhance their cost efficiency. Instead of directly reducing the inputs used in intermediation, the gain in efficiency may be on account of cheaper availability of such inputs when banks go digital. These gains may stem from assimilation into the entire digital payments ecosystem, as opposed to piecemeal adoption of technology. We find both cost and technical efficiencies exhibiting persistence. Banks’ relative asset holdings in the industry, non-performing assets, cost of deposits and returns on advances and equity are other important variables that drive cost efficiency.