On November 8th 2016, India’s Prime Minister Narendra Modi announced that the country would be removing cash from its economy. There’s no doubt that India’s subsequent cash conundrum took everyone by surprise. With a population of 1.25 billion people, India is one of the world’s largest economies and a country that is highly dependent on cash, making the transition a headache for banks, commerce and consumers alike.
Since the announcement of demonetization, Prime Minister Narendra Modi has removed 86% of his country’s currency from circulation by announcing that all 500 rupees and 1,000 rupee notes would be removed. The demonetization was justified as a bid to curb tax evasion, corruption and shut down the black money economy.
Bobsguide asked two experts why Prime Minister Modi has taken the decision to steer his country into a cashless society now, what it means for the country’s future, and how fintech fits into that future.
What is a cashless society?
A cashless society is one where purchases are only made by electronic funds rather than with cash or checks. Electronic payments can be credit, debit or contactless cards, or device payments, but all payment methods are made effectively without the need for bank notes.
“A cashless society is one where financial transactions are not conducted using bank notes and coins. Although not a new idea – barter economies are, after all, cashless – the term has come to be used in referring to transactions where payment data is transmitted electronically between parties to the transaction,” says Anthony Duffy, Director of Retail Banking, UK & Ireland at Fujitsu.
“In 2015, UK Payments estimates that around 2.7 million people in Britain almost never use cash, using plastic cards and other payment mechanisms to transact, while around 2.2 million people rely mainly on cash for day-to-day spending.”
Why is India going cashless?
The so called ‘black economy’ in India is a huge problem. Demonetisation is expected to filter out corruption and seed out all the untracked payments that take place.
Cash payments account for most of the financial transactions in India. In fact: “Cash accounts for 95% of all transactions in the country. If you go to India, 90%+ of vendors did not have card readers or any form of electronic payment at all, until the demonization was rolled out in November”, says Amit Dua, Executive VP of SunTec.
“The fundamental reasons for India to go cashless are the counterfeit currency problem and the black market. Basically, the unaccounted economy.”
“India is an incredibly cash-centric economy. It’s changing quickly but it’s still predominantly cash. It’s important to put into context what the size the unaccounted economy actually is. Until Prime Minister Narendra Modi started campaigning for a cashless society in 2014, one of his campaign promises was to get the unbanked into the banking system to try and get most of the economy accounted for.”
Anthony adds: “About ten years ago, India embarked on a programme to help approximately half of its population who had no form of identification. In 2009, it launched the Aadhaar programme, giving each citizen a digital identity based on biometric data. By 2016, the country had issued twelve digit identification numbers to more than one billion people. This provided people with the opportunity to open bank accounts at one of the eleven state-sanctioned payments banks. As a result, more than 270 million bank accounts have been opened, enabling payments to be made between accounts accessed via India’s Unified Payment Interface and using nothing more than a single identifier such as the Aadhaar number.”
“In an attempt to counter corruption and tax evasion, in November 2016, the Indian Government announced the discontinuation of all 500 and 1,000 rupee notes. This effectively removed around 80% of all banknotes from circulation. Although the plan had been to introduce new 500 and 2,000 rupee notes, too few have entered circulation, thereby causing considerable disruption to the economy.”
What issue is the move trying to solve?
There are several issues surrounding the use of cash in India. Narendra Modi’s aim to remove cash from society was to flush out the so called ‘black money’ and fight corruption. Being able to digitally track all transactions enables the government to crack down on all payments that are being made and understand how cash is flowing. However, the shift towards a cashless society has also left millions of citizens unbanked.
In a country where even Uber accepted cash – the only country in the world where this option was available – it is inevitable that the process of shifting to a cashless economic system is one that is fraught with difficulties.
“Of the 1.3 billion people in the country, half didn’t have a bank account. Most deliveries allowed cash on delivery, with 70% of online shoppers paying with cash on delivery,” says Amit Dua.
“When Modi declared a war on ‘fake money’, he decided that almost overnight India would demonetize two of its biggest notes in circulation; the 500 and 1,000 rupee notes. The idea was that if you make these notes useless overnight, it would fulfil a number of purposes. The first was that it would quickly decrease the volume of counterfeit currency. The idea was to reduce money laundering, increase tax compliance, bring down the criminal activities of illegal trade and get the corruption down. All of these happen around cash transactions. But it’s still a short term pain for a long term gain.
“When those issues are the primary drivers, and transactions go from cash to electronic, there are huge upsides to it. There’s more money in the real economy, the unexplained inflation has come down because all the money is being accounted for. There’s better efficiency. Transactions are faster and there’s also better customer experience. There’s benefits all over. The amount of deposits that banks have witnessed was huge. Increased deposits then generally lead to increased lending. So generally speaking it’s a boost to the economy.”
Anthony Duff adds: “The strategy of moving India towards a cashless economy is, in part, an attempt to introduce greater transparency into the payment system, thereby countering corruption and making more transactions traceable and taxable. But it is also an attempt to modernise the way in which things are paid for. As a result, e-payment providers have reported a surge in new users, as Indians seek ways of making payments which are not cash based.”
Are other countries going to be going cashless?
Nordic regions are leading the race to a cashless society. For instance, Denmark’s government has attempted to accelerate the trend and even proposed that retailers do not have to accept cash should they not wish to.
What’s going to happen next?
Innovation in India is huge, so there will no doubt be new ways that digital banking is imposed to ensure consumer’s banking needs are met.
“Three things are likely to happen next”, says Anthony Duff. “Firstly, the roll-out of replacement bank notes will continue, thereby alleviating some of the economic strains caused and making life a little easier for the millions of Indians who still don’t have bank accounts; secondly, electronic means of payment will continue to grow in popularity – after all, once individuals and business people have started to make/accept frequent electronic payments because of the shortage of bank notes, they are unlikely to stop and go back to old ways; and, thirdly, the transition – first to a banked population and then to digital payments – will take time. There is still a big job to be done in providing Indians with bank accounts, the central pre-requisite in building a cashless society.”
Although the concept of demonetization shocked most individuals, and may have been perceived as a sudden declaration, industry specialists believe that Modi had been long campaigning for a cashless society. In 2014, over 18 million new bank accounts were opened within a week between August 23-29 through the Pradhan Mantri Jan-Dhan Yojana campaign (the Prime Minister’s people money scheme to ensure access to financial services for all).
“Most industry observers, or to many people, it sounds like demonetization, which is the biggest aspect that’s driving the cashless society, happened overnight”, says Anthony. “By now, many industry observers have started tracing back what PM Modi has been doing since he came to power in 2014. It’s actually been going on for two years. In 2014, he spoke about finding ways to solve financial inclusion and opening bank accounts for the underprivileged. Four months before the due date of demonetization, the government launched a very ambition program called the UPI. It’s essentially an app, where anyone can transfer money from any bank account to any other bank, 24/7. Back in May 2016, Modi spoke about making India a cashless society. At the time, people thought it was a classic prime minister rhetoric.
“Modi has been launching a steal of measures in 2016. India has established a Guinness world record of the number of new bank accounts that were open in 2015. Around 115 million accounts opened within a couple of months. All of this suggests that Modi had this planned very well. It didn’t happen on the 8th of November, it’s been a massive build up and he has taken it upon himself to take the unaccounted economy to become digital as fast as possible,” he adds.
Is it permanent?
“Absolutely, without a shadow of doubt” says Amit Dua.
The economy has been gaining pace in helping those that are unbanked, so the move towards a cashless society has been successful in many ways. Experts believe that although there was initial chaos, the positive outcome will by far outweigh the negatives.
What circumstances would it take for cash to become useful again?
“Cash is, and will remain, useful. It has certain features – such as its inability to be overspent; the anonymity it provides; and its near universal acceptance – that will make it always attractive to some people for some transactions. It is unlikely to go away. But perhaps more Indians than ever before now recognise that it is not the only means by which financial transactions can be conducted,” says Anthony.
“There will always be a use for cash” adds Amit Dua.
“If a customer finds it convenient and would prefer to transact in cash, then there will always be a circumstance for it. Just for the sake of technology people won’t stop transacting in cash. But it will be nowhere near a country that was 95% dependent on cash.”
However, most individuals in India can now open a bank account with their Aadhaar card and fingerprint, so if innovation in India continues to gain momentum as it has in the past couple of months, the need for cash could be limited.
Amit Dua is executive vice president of SunTec Business Solutions. Anthony Duffy is director of retail banking in UK & Ireland at Fujitsu.