On November 8th, the Indian government withdrew the circulation of the Rs. 500 and Rs. 1000 notes. What does it mean? It is an opportunity for financial services to reinvent and restructure themselves and pave the way for the next phase of digital payments.
- Why the move towards digital payments?
The Indian government wanted to crackdown on black money and parallel economy. But some other underlying factors compelled the government to take this measure. The Reserve Bank of India and many other commercial banks annually spend a massive $3.5 billion in currency operations costs. To highlight the enormous cost of printing cash in India, here are couple of startling revelations. In comparison with other emerging countries, India is a highly cash-intensive economy with cash to GDP ratio of 12%, almost four times higher than other markets such as Brazil (3.93%), Mexico (5.3%), and South Africa (3.73%). Additionally, cash accounted for nearly 95% of all the transaction, 90% of the vendors didn’t have means to accept electronic payments, almost of 85% of the workers are paid in cash and more than half of the population didn’t have access to a bank account. In the view of these complications, drastic changes were needed to create cost-effective and inclusive digital ecosystem.
- It was not the first measure !
Demonetization will certainly play an important role in facilitating digital payments in India, but we cannot overlook the other important policy measures introduced by the government. Indeed, in 2014, the government launched the Pradhan Mantri Jan Dhan Yojana (Prime Minister’s People Money Scheme), a scheme to help the unbanked people have access to financial services. As of June 2016, over 220 million people have opened their accounts and have deposited $5.7 billion under the scheme. It is an extremely important milestone that will lead to a greater financial integration of the population.
- The positive impact of demonetization :
In just a span of one month, number of transactions and value growth of e-wallet services (Paytm, Oxigen and Mobikwik) and RuPay cards (an equivalent of MasterCard or Visa in India) increased drastically. The growth was encouraging and completely falls in line with the government’s vision of creating a digital ecosystem which is honest, accountable and transparent. Considering that smartphone penetration is low in India, there are several of Unstructured Supplementary Data Services (USSD), which provide financial services for people who use feature phones for transactions. Although the growth in term of transaction and value in comparison with other financial services is insignificant, it is extremely important considering that mobile phones are widely used across the country. Let’s keep in mind that as of June 2016, over 1 billion Indians have mobile phones and 29.8% of the population, roughly 34-35 million use smartphones.
- A better consumer experience :
Apart from these known digital payment mechanisms, there is one more field where India has taken a huge stride and completely reinvented the digital payment landscape. The Reserve Bank of India has launched a system called as Unified Payments Interface (UPI), where it is possible to transfer and receive funds without the need to give bank account details and credit/ debit card information. Just like WhatsApp, which has reinvented the telecommunications industry in India, UPI can also be considered as a major breakthrough, as all the intermediaries are phased out. In the span of just one month starting from 8th of November, the number of daily transactions increased from 3721 to 48238 and in terms of value, it noticed a growth of 677% from $284 thousand to $2.2 million. Thanks to this innovation unique to India, individuals, vendors, and businesses can easily transfer or receive funds.
- Changing Consumer Behavior will be the key :
The government and financial services have established an infrastructure to ease the growth in digital payments. Nevertheless, creating infrastructure is not enough: it’s all about changing consumer behavior. The government has doled out innumerable other measures to help businesses, consumers, vendors develop a habit for cashless spending. Once they develop this habit, it will be difficult to go back to cash. For example, one initiative launched by the government is to waive off the service tax on debit/ credit card transactions of up to $29.5 (Rs. 2000) on digital payments at the fuel stations, insurance premiums, and railway stations.
Once again, looking at developing countries is a great source of inspiration for the Western World. Digital payment is going to be a hot topic for 2017, so let’s keep an eye of the next steps of the transformation in India.