Banking

People, even economists misunderstand the nature of banks on the modern economy. Most people hold on to an ancient concept of banking: that bank take money from the public and give out loans charging interest for it while giving interest for deposits. This concept is woefully outdated. This would have held true when the economies of the world were on gold standard and banks were independent. The money supply was limited by physical factor: that of gold production. Economiea today rely on fiat currency, that is not backed by anything other than institutional assurance, that is RBI governors signature. The currency has a floating value that keeps changing with the social, economic, political and cultural landscape. In today's economy the central banks, retail and commercial banks, the government, private citizens and businesses for part of a nexus that keeps the value of money at a more or less useful level. The idea of the individual being a banks customer is outdated.

Banks don't depend on your deposits to give out loans. They get their money from the reserve bank as loans. That is loaned to people for interest. The difference in interest is the profit.

As it stands now the service provided by banks in terms of providing ATM's and savings account are only a convenience. It is a cost on the bank. Banks would be right to charge for these services. And the value provided by these services are actually worth what is charged. For example, your money is kept safe in a public place under AC for you to withdraw at your convenience.

The high rate of cash usage in a India is actually justification for using these means to achieve higher levels of cashlessness. In foreign countries the charges maybe low, that is because large transactions take place through cashless means. The number of cash transactions are lees, so they don't incur high cost for cash transactions like in India, where even educated IT professionals use cash for high value transactions. Our IT professional will go to atm 4 days in a row to withdraw 1lakh to buy something.

Regarding the cost of digital transaction. It doesn't matter becuase there is hidden cost in cash transactions that are not easily apparent. You are paying more than the 2 percent charge when cash is used. Think of this. For a cash transaction you need a clerk at the bank, how many transaction does a clerk do a day. What is he paid. If he does 50 transactions a day and he is paid 1000 Rs a day that is 20 Rs per transaction. This is surely passed on to consumers.