India’s new cash crisis could spur digital transactions
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NEW DELHI, INDIA APRIL 9: Picture showing hands counting the currency notes of Indian one hundred rupee currency notes on April 9, 2009 in New Delhi, India. Photo credit: Raj Kumar/Mint via Getty Images Israel

NEW DELHI, INDIA APRIL 9: Picture showing hands counting the currency notes of Indian one hundred rupee currency notes on April 9, 2009 in New Delhi, India. Photo credit: Raj Kumar/Mint via Getty Images Israel

While everyone was glued to the elections, India has been facing a very serious cash overhaul: It decided to get rid of 86% of its cash notes

In a single stroke, India’s government has wiped out 86% of the country’s legal tender in a massive demonetization campaign that went into effect this week. Aimed at speeding up the transition to a less cash-centric economy, Indians are facing new rules and long lines to make exchanges of their old 1,000 and 500 rupee notes.

Some places have already run out of smaller denomination bills and the new large denomination notes to replace those.

In this surprise move, which most officials were not even informed of in advance, the BBC reports that, “The real target is tax evasion,” with new rules being rolled out to force people to declare transactions and pay tax on them. But Indian economist Prabhat Patnaik predicts further problems, as businesses and consumers struggle to figure out the new rules.

Cash economy

“In a situation where people are not used to cheques and signatures are not standardised,” he told The Wire, “this is something which is going to cause a lot of inconvenience. I think this transition to a cashless economy should be a more gradual, normal process.” Cash is, as the International Business Times put it, still king. It is the norm, and even online payments are processed in it.

But this progression is already happening, and digital payments are a big feature of it. Still, with most financial transactions conducted in hard currency, rather than electronically or by check, India is and will remain a primarily cash economy. Non-cash transactions are only expected to surpass cash by 2023, currently standing at a 78-22 ratio of cash to all other non-cash options. Even online retail, the most popular e-commerce option in the Indian market, accounts for only 8% of organized retail sales.

If nothing else, though, the run on the banks and ATMs will probably encourage more people to sign up for digital services to reduce the hassle. The longtime preference for cash, followed by convenience issues, are the biggest hurdles for more widespread digital payment adoption among low-income consumers, traders, and middle class businesspeople in point-of-sale transactions made almost exclusively in cash.

Expanding digital footprint

According to a report from the Boston Consulting Group (BCG), digital transactions in India have grown by 50% per annum since 2013, primarily for bill payments and mobile plans. Mobile wallet use is becoming more popular as the country expands its wireless capacity and companies, including traditional banks and telecoms, are stepping up to provide the services.

Mobile penetration in India, especially rural India, is surging, as is online access through these devices, with about 70% of the rural population connecting to the internet via phone. Online banking is also generally easier than brick-and-mortar banking, because the “Aadhaar” national identity e-card can link to online wallets.

Image Credit: Boston Consulting Group

Image Credit: Boston Consulting Group

Some of the most popular mobile payment apps include PayTM (which China’s Alibaba has a hand in through the One97 group), FreeCharge, MobiKwik, Oxigen, Vodafone’s M-pesa, and Airtel’s My Airtel. Though they have e-commerce functions, bill payment is still their primary draw for consumers, as well as mobile plan topping off. Popular offline, rural-oriented mobile wallets include Sudvidhaa, Novopay, Ezetap, and Paytronic – aided by the aforementioned “Aadhaar” rollout.

While India has 60 million active online banking users, it has almost 85 million mobile wallet users. Digital payments involve a number of additional security steps, but are preferred for larger transactions. Mobile wallets represent the easiest option among all digital payment options, as it requires only a valid phone number and one-touch payment, but tend towards small transactions.

However, cash is still the preferred mode of payment. There is a long way to go as many of the financial systems aren’t there yet. Only when there is sufficiently developed infrastructure, including help desks for businesses to reach out to when adopting the new platforms, will digital transactions will look more appealing for low-income Indians. And it is them, alongside traders and middle class businesspeople, who will drive growth going forward. Continued disruption from demonetization would, after all, benefit digital more than other methods, when ease of use is caught up with the minimum hardware and network requirements.

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