India, the world’s fastest growing economy, is going through a bold transition. On November 8, 2016, the country set sail on a cashless journey on the back of a historic decision taken by the Indian government. Generally referred to as demonetization, the move involved declassification of larger bills of Rs 500 and Rs 1000, which constituted almost 85% of the entire physical currency in circulation. The objective was to facilitate a gradual transition towards a cashless society where digital payments will be the key method of financial transactions. For a country where cash has heavily dominated its overall financial transactions by value and by volume, this was no mean feat.
As Rome was not built in a day, the government has been creating the background infrastructure for such a decision to be taken. This includes creating a no-frills account for a billion people, enabling digital transactions through PPIs, developing a unique identifier for the population in the form of AADHAR, and providing IndiaStack APIs for seamless integration into the cashless layers. Some other initiatives were taken to push this cashless vision, such as providing new-age banking licenses to payment banks, strengthening the business correspondent network, and creating UPI (Unified Payment Interface) and BBPS (Bharat Bill Payment System).
As an initiative for curbing corruption and unearthing black money, demonetization also created the platforms for digital payments and cashless commerce in the progressive Indian economy. Initially, there were initial hiccups for the people as the ATM ran dry and as long queues in banks became alarming. The initial slowdown of local and small business operations also contributed to the challenges. Despite some initial obstacles, the digital payments took off with an increase in the use of banking apps, prepaid wallets, and POS-based card transactions, especially in the first three months after demonetization.
- The volume of debit and credit card usage in POS-based transactions almost tripled to 415 million in December 2016 compared to 140.5 million in October 2016. (Source: RBI, NPCI database)
- Unlike in October 2016, in April 2017 the number of swipe machines which were installed increased to over 2.5 million, a gain of 1.78X.
- In the first three months after demonetization (Nov. 2016 – Jan. 2017), the PPI transactions increased by 47% in volume and 58% in value.
Old habits die hard.
The biggest challenge in the demonetization exercise is changing the perception of Indians about the way they do financial transactions. In a country where cash transactions account for nearly 97% of the total transactions, this certainly looks to be a daunting task.
In May 2017, 85% of the devalued currency was back into circulation as the ATMs no longer ran dry: they were fed with enough supply of the new currency. However, once this happened, Indians were back to using cash again in their daily transactions. The growth in digital payment transactions seemed to normalize and slightly decline, (even though the base was higher) after the three-month-long-spike post demonetization, as cash began to find its place in people’s wallet as time progressed. In the words of the Chairman and CEO of MoneyOnMobile, Inc., Harold Montgomery:
“India has been an all cash economy for generations. After the currency demonetization, hopes ran high that the move would force citizens to adopt digital wallets and other high tech transaction methods; however, statistics clearly show a return to the cash-based spending behaviors which prevailed before demonetization. Consumers see cash as more dependable and trustworthy than digital wallets and other high tech transaction types. It's human nature to fall back to what we are most comfortable with. We adapt technology to fit the user’s preferences and habits. We don't try to change consumer behaviors or preferences to fit a technology. I think this approach explains why our transaction volumes are growing rapidly while high tech digital commerce systems are not.”
As for the NPCI statistics, the use of cards for cash withdrawal in ATMs was INR 849 billion in December 2016, a practice which saw a 78% increase in terms of value in January 2017 (INR 1.516 trillion). Cash withdrawal continued to rise significantly to reach INR 2.259 trillion in March 2017. It was followed by a slight dip to INR 2.16 trillion in April and May. On the whole, the value of cash withdrawal at ATMs increased by 42% in January-May 2017. This statistics shows that the currency circulation has increased and that people are gradually going back to cash transactions. Even though cash seems to be back into the system, the value of cash withdrawal is still 15% less than the value of cash withdrawal at ATMs pre-demonetization, i.e., in October 2016. This appears to be an indicator of acceptance of digital payments. Nevertheless, it’s too early to tell.
On the other hand, card payments on POS amounted to INR 219.4 billion before demonetization, in October 2016. It subsequently peaked to INR 580 billion in December 2016. And as things eased out on the cash front with increasing currency circulation, card payments dipped significantly to INR 358 billion in March 2017 before stabilizing at INR 375 billion in April-May 2017. Compared to January 2017, the value of POS transactions decreased by 23% in May 2017. This decrease suggests that as soon as cash was available in the market, some people were inclined to go back to their old ways of doing cash transactions. However, the level of POS transactions in May is still significantly higher than those at the pre-demonetization level, thus highlighting the growing adoption of card-based transactions.
Demonetization served as the perfect opportunity for PPIs (prepaid instruments players) to establish themselves as an alternative mode of payment at the time of cash crunch. The value of PPI/wallet transactions grew by 60% between November-December 2016 as a result of the severe cash crunch across the country. There was also a slight growth drop in February 2017, when the value went down to INR 18.7 billion from INR 21 billion in January 2017. Again, this can be due to the fresh currency inflow and due to people rushing back to cash after a hiatus of three months.
After demonetization, the value of PPI transactions grew by 14.3% between January and June 2017. However, the volume of PPI transactions went down by 2.3% to 84.7 million in June 2017 compared to 87.3 million in January 2017, according to NPCI.
Source: RBI, NPCI</i>
Is cash really back?
Statistics show that the answer to this question is yes. Cash transactions have been rising over the past few months as the cash is being increasingly available to people. However, it is still 15% behind the level at which it was before demonetization, a percentage that shows that Indians are slowly but steadily realizing the benefits of digital payments. A lot of credit facilities can be attributed to the rise of FinTech and the modern banking ecosystem.
Having said that, we cannot deny the fact that cash cannot be fully replaced (at least not for a while), and it will take a long time for the consumers’ behavior to change. One must also agree that the government, the regulators and the financial services community are working hard to lay the basic groundwork for the future. And the way things are progressing in the Indian financial services and banking space – with payment banks, big banks taking the digital route, the rise of e-wallets and the game changing UPI and Aadhar – there is a huge scope for improvement in the long run. In the near future, one cannot expect a sudden, overnight transition from the physical-to-digital mode of transactions. This will certainly take time (as all good things do). Thus, there is an increasing need for a bridge between these two modes of transactions as the economy looks forward to a seesaw between these two, as well as hoping to see the weight shift towards the digital mode of payments.
Where FinTech Fits
A section in today’s FinTech ecosystem is dominated by business correspondent and prepaid instruments-based FinTech players. Their unique business model involves a digital payment front (mobile app and e-wallet) as well as a cash front (through a network of agent-driven retail stores). With this “phygital” (physical and digital) model, these players operate as a bridge between these two channels of payments, and they are playing a pivotal role in this unique phase of transitions.
For the pro-digital/digitally aware consumers, these FinTech players provide a digital wallet, which enables users to perform money transfer, bill payment, etc. For those with little to no knowledge of the digital payment or those without the access to a smartphone or internet, their business correspondent agent-driven retail stores can be handy as they accept cash payment and carry out digital transactions on behalf of the consumer. With a combination of these two modes of transaction, all the services available on the mobile app are provided by these retail stores by taking cash payment. For the consumers from remote rural markets, this is a game changer as it allows them to avail the basic financial services despite the lack of adequate banking infrastructure and little mobile/internet penetration.
As they facilitate digital-to-digital, digital-to-cash, and cash-to-digital transactions, these FinTech players are agnostic to the mode of payments. They don’t need to compete with the banks. Rather, they work hand in hand with banks and use their technological leverage and business model to fill in the gaps for the quickly growing economy. Their phygital based business model plays a major role too in filling the void for cash-to-digital and digital-to-cash transactions. It supports the economy in remote areas, where the banking infrastructure has a huge scope for improvement. Besides, banks still need to up their ante in terms of reaching the remote and underserved locations of rural India. Currently, there are approximately 200,000 ATMs in India, which would need 2.2 million of them to achieve the same rate per capita as the U.S.
MoneyOnMobile is a FinTech player
MoneyOnMobile provides a range of payment services, including domestic remittance, bill payments, recharges, and ticket bookings. For domestic remittance, the money is available instantly for the transfer to take place instantly, and there is no overnight or multi-day wait for the money transfer process. For cash-based remittance, the cash can be used for an instant digital transaction on the send side, and the digital funds can be instantly converted into cash at any of the MoneyOnMobile’s mobile ATM retailers.
The MoneyOnMobile retailers, as well as the company where the transaction was made, earn a flat fee. The phygital based business model provides a flexible service to their customers, and it enables them to weather any shift downstream or upstream in cash or digital transactions.
“It is rare in any industry that a company is positioned to remain constant or even benefit when conditions create pendulum-like swings. MoneyOnMobile, through our retailer network, is a perfect middleman facilitating consumers who are transitioning back and forth between cash and digital transactions in a changing economy.” - Harold Montgomery, Chairman and CEO of MoneyOnMobile, Inc.
MoneyOnMobile has a large network of 330,000 agent-driven retail stores. In the past five months, MoneyOnMobile has rolled out 2,000 mobile ATMs in its retail stores, and it expects to keep a similar pace for the foreseeable future.
With the goal of financial inclusion and digital India, FinTech certainly has a major role to play.
This article has been presented to you in collaboration with MoneyOnMobile.