Transforming India into a digital society that is less cash dependent

As the debate on the pains and gains of India’s move to demonetize high-value currency notes continues to rage, I firmly believe that the digital payments economy is an idea whose time has come.

History shows us how money as a ‘medium of exchange’ has evolved over several millennia from cowry shells to gold and silver coins to paper currency and now to electronic data.

In his international bestseller Sapiens: A Brief History of Humankind, Prof. Yuval Noah Harari notes that today more than 90% of the sum total of money in the world — more than $50 trillion appearing in our accounts — exists only on computer servers as most business transactions are executed by moving electronic data from one computer file to another, without any exchange of physical cash.

“As long as people are willing to trade goods and services in exchange for electronic data, it’s even better than shiny coins and crisp banknotes—lighter, less bulky, and easier to keep track of,” Prof. Harari writes in his fascinating book.

Demonetisation thus offers a transformational opportunity to propel India’s traditional cash-intensive economy to an inclusive, less-cash dependant , digital future.

India Marching Towards a Digital Future

India, like the rest of the world, is witnessing a rapid adoption of digital payments. This can be gauged by the fact that 78% of all consumer payments in 2015 were made in cash down from 89% in 2010 and 92% in 2005, according to a July 2016 report by Google and the Boston Consulting Group (BCG).

This increasing uptake of electronic payments in India is being driven by deeper mobile phone penetration, concerted policy action by the Reserve Bank of India and government initiatives like Aadhaar and Jan Dhan Yojana.

The Jan Dhan Yojana has brought modern financial services to the doorsteps of 250 million Jan Dhan bank account holders in the heart of rural India.

Aadhaar is now the largest online digital identity platform in the world, with over a billion people registered. Nearly 350 million Indians have Aadhaar-linked bank accounts and there have been over 1 billion transactions involving direct transfer of cooking gas subsidy and wage payments under MNREGA, India's job guarantee program, to beneficiaries’ bank accounts.

Thanks to the Aadhaar Enabled Payment System (AEPS), people in the remote, unbanked villages can now withdraw or deposit money at their doorsteps by providing their Aadhaar numbers and fingerprints on a micro-ATM. They can even make cashless payments to another person with an AEPS account using mobile phones.

Five years ago, the National Payments Corporation of India (NPCI) launched the Immediate Payment Service (IMPS), which allows instant interbank fund transfers through mobile phones. Today transactions worth Rs 29,000 crore a month are done through IMPS. Recently, NPCI launched the Unified Payment Interface (UPI), which is expected to make payments more efficient through UPI-based mobile apps. For basic feature phone users, NPCI offers the Unstructured Supplementary Service Data (USSD) technology that allows funds transfers even without internet connectivity.

Financial Inclusion to Get a Push

A recent study, published in the journal Science, provides empirical proof of how mobile-money services can help reduce poverty in developing economies. Access to the Kenyan mobile money system M-PESA increased per capita consumption levels and lifted 194,000 households, or 2% of Kenyan households, out of poverty, according to the study. I believe India can emulate Kenya by building a strong digital payments economy!

A large section of India’s population is still dependent entirely on cash to meet their financial needs - from receiving wages to saving money. As millions of these Indians adopt digital payment methods they will be able to connect to the formal financial sector as customers and suppliers. It will allow the poor, who are typically outside the formal banking system, to build financial histories and thus obtain credit from more formal sources instead of being at the mercy of local moneylenders. Once they realize that their mobile payment history can improve their creditworthiness and help them access cheaper loans, they will willingly use cashless modes of transaction.

It will also allow both banks and non-banking financial companies to reduce their overhead costs on customer data collection as well as increase the reach of their loan services to small value customers. They can then pass on the benefits in the form of low-interest micro-credit to these new customers.

Digital payments will thus provide the poor financial flexibility, financial stability and creditworthiness over the long term.

Digital Payments Is the Way to Go

The digital payments industry in India is a huge opportunity that is waiting to be tapped. The Google-BCG report predicts the industry can touch USD500 billion by 2020, contributing 15% to India’s GDP. Significantly, India is today in a sweet spot: customers want the convenience of digital payments, policymakers are seeking greater financial inclusion and higher transparency, and the infrastructure needed for high-volume, secure digital payments has been put in place. With all the pieces in place, demonetisation provides India a unique opportunity to leapfrog into a brave new digital world! 

Kiran Mazumdar - Shaw
Dec 12, 2016