In November 2016, India’s Prime Minister Narendra Modi, in co-ordination with the Reserve Bank of India, the country’s central bank, took the bold step of demonetization of select currency notes and issued new ones. The primary reasons cited for the move were to stop the use of “black money” considered the basis of corruption and to help with the transition to a digital economy. This resulted in a multitude of problems for citizens – which eventually eased as new bank notes became more widely available. And officials are of the opinion that this move helped achieve most of the objectives charted by the government of the country.
That said, this effort has resulted in diverse consequences. With the addition of Aadhar and increased access to a wide range of digital payment options, a foundation for the transition to a cashless economy has been laid. Given the fact that cash-GDP ratio in India stands at 12% (among the highest in the world), demonetization galvanized citizens to open bank accounts and also adopt digital payment methods. Other interesting facts include:
- Until 2016, 95% of transactions were done with cash
- After Aadhar was launched, more than 270 million bank accounts were opened
- Even though smartphones are freely available on the market, the number of users around 350 million
- In 2017, internet usage amount to around 400 million users and expect to double by 2021
How Did Demonetization Lead to Changes in Payment Behaviour?
Even though digital banking technology has been available for a while now, Indian consumers are not yet ready or willing to change their payment methods from cash to digital. What demonetization brought with it, is a proliferation of digital wallets, along online and mobile banking facilities, Unified Payments Infrastructure, BHIM or Bharat Interface for Money (a mobile app), mobile money and payment aggregators are part of this new digital revolution.
Mining data taken from the banks, online marketplaces and e-commerce firms, demonetization resulted in an 84% rise in debit card usage. The majority of consumers around the country had a tendency to use their cards very infrequently, prior to the November 2016 government dictate. Post demonetization, the value of transactions jumped by 150% and the total number of transactions rose by 400%.
The use of digital wallets also surged, not just in monetary value but also in the sheer volume of the number of transactions. 82% of customers not only opened accounts with service providers such as Paytm, PhonePe, Freecharge, etc., but also put in money into their e-wallets. These wallets facilitated shopping with an increase of 405% and transfers to peers by over 745%. All of this was possible due to platform providers and retailers working in concert, and of course the enthusiastic adoption by customers. Sales data also showed that demonetization pushed transaction value by 93% due to a shift from cash to non-cash transactions.
Effects of Demonetization Across the Country
The adoption of digital payment methods is slowly catching up across India, but the impact was highest in urban areas. In underdeveloped and isolated regions, the pace has been slower for many reasons such as low use of smartphones, lack of trust and adoption in new technologies, older adults who find new technology hard to use, an under-educated and conservative rural population.
Issues such as computer illiteracy, an informal labour market and cash payments are major stumbling blocks to an all-round adoption of the digital financial market. Other issues which also pose roadblocks are hacking which has resulted in huge financial losses to customers. Banks are working towards investing in infrastructure and technologies to help them become more efficient. Transitioning from traditional ways to digital banking methods will also take some time.
Not just that, on-boarding employees to offer the best services in a highly competitive market place is a challenge for banks as well. Working towards improving operational efficiency, banks are focusing on digital safety while helping customers open accounts and navigating the bank website online. As of now traditional banks have a better hold on the market as they offer a better end-to-end service.
Overcoming the Challenges of Digitalisation
Secure banking with the help of technology and preventing cybercrime is an ongoing process. Banks should constantly work on updating their fraud detection methods with additional layers of security. This requires a skilled workforce with access to training on new methods on a regular basis. Not just that, challenges in the areas of new technology, business and regulations must be addressed. Digitalization must also be taken to the so-called “unbanked” to make it completely successful.
There is no doubt that this is a step in the right direction as the demand and use of cash has somewhat taken a backseat in the last couple of years, since the demonetization. The process of digital financial inclusion will take time as this transition has been far easier in urban areas than in rural India. Digitalization will help in reducing counterfeiting, tax evasion and money laundering. It is also expected to close the gap in credit to individuals and companies. Even though the road to inclusion has been a painful one with several impediments and challenges, it is expected to work out and a positive future seems to be in sight. So long as the government, society and industry sectors work together, economic growth is a certainty.