Cashless boosted by India's demonetization of Rs. 500, 1000 notes?

As dramatic as the US Elections have been, in India, we have had an equally dramatic event touching the lives of every Indian and resident in India. Widely circulated older high denomination (OHD) Rs. 500 and Rs. 1000 notes have been voided as legal tender with less than 3-4 hours notice.

Hindu BusinessLine estimates that current currency in circulation is Rs. 17 lakh crore {Note: Rs. 6.7 crore = USD $1M, Rs. 6700 crore = $1 B. Rs. 17 L crore = $253.7 billion} and 86% of it or Rs. 15 lakh crores is in OHD notes. This is a significant increase in recent years (see graph below). An estimated 20% of it, or Rs. 3 lakh crores is thought to be black money held in currency. Deepak Parekh of HDFC in an interview with Moneycontrol says: "70 percent of value of transactions are in cash and even our gross domestic product (GDP), 45 percent of our GDP comes from informal sector. Informal sector accounts for 80 percent of our population."

At a macroeconomic level, the shrinking of money supply is expected to moderate inflation due to lower money supplies. Some asset sectors like real-estate are expected to see price contraction. Banks will see their current / saving account (CASA), i.e. lower cost funds swell, to help them offset the ongoing non-performing asset (NPA) problem. Adoption of and increase in electronic payments and cashless will lower transaction costs for banks and financial institutions. The monies mopped up by the Reserve Bank of India (RBI) could reach the government as dividends, helping the fiscal deficit (or spending schemes to boost aggregate demand) by about Rs. 2-3 lakh crores (10X more than mopped up in recent income disclosure schemes). Lower inflation may lead to better transmission of interest rate cuts by the banking sector.

ATM Issues

While citizens have scrambled around in the last couple of days, I have found the mood in Bangalore to be relatively orderly. {Update: on Nov 11th the queues at ATMs and Banks were really long and continues being the case!!} Apparently there are 2.17 lakh ATMs in the country. Normally an ATM can hold Rs. 40 lakh in Rs. 1000, 500, 100 and 50 denominations. Most ATMs have been dispensing Rs. 100 only, and it can hold only Rs. 10 lakhs of cash under this assumption. Normal traffic in ATMs was about 150/day, which spiked up to 3000 / day. With a limit of Rs. 2000 / person, and Rs. 100 notes, you can serve at most 500 users per filling of an ATM. Assuming a person takes 1 min to serve, this should mean an ATM should last for 8.3 hours between filling. Anecdotal evidence is that ATMs go empty in 3-4 hours which means they are probably filling it to Rs. 4-5 lakhs only, given the limits on number of Rs. 100 notes available. Huffington Post has a detailed article on ATM makeover.

Thankfully I had a few lower denomination currency and I have some debit and credit cards, and of course UPI and bank to bank transfer mechanisms available at my disposal. It was interesting to observe several other friends, colleagues and ordinary folk cope. I had to give my driver some emergency cash of smaller denominations. The petrol bunk close by did honor the Rs. 1000 note, but asked my to fill in petrol at least for that amount (and ideally exactly the amount). See tweet below by IndianOil. They wanted to minimize exchanging scarce lower denomination notes. Lines at banks were long, but not as long as I expected.

Per RBI the Automatic Teller Machines (ATM): "ATMs will remain closed for operations from the mid night of Nov 08, 2016 so that they do not dispense the withdrawn old higher denomination banknotes (OHD). The ATMs may resume functioning from November 11, 2016 upon their recalibration to dispense bank notes of only Rs 50 and Rs 100 denominations."

SMS'es on the morning of 11th Nov from banks further indicated limits of Rs. 2000 per day for the initial days.

Banks and credit card companies encouraged their users to increase usage. What was remarkable was the way the mobile wallet (eg: PayTM, Mobikwik) and other related companies (eg: Ola) reacted with an instant campaign via all media channels. PayTM emphasized its acceptance in more retail and petrol locations, and a la Reliance Jio, took out a full page ad featuring the prime minister, fashionably to thank him. New slogans emerged: Ab ATM nahin, #PayTMKaro! Ola sent me at least a couple of emails reminding me about Ola Money, and quickly added the capability to accept credit and debit cards (at the time of bookings - to avoid any swiping etc), so that cashless experience would be possible within their cab network. Uber in India has a tie up w/ PayTM.

From Cash-on-Delivery (CoD) to Wallet-on-Delivery (WoD)

A few mobile and online companies discontinued cash on delivery (CoD). Amazon.in was one of them; and Swiggy took out cash on delivery for delivering food from nearby restaurants. [Update: Amazon has re-instated its Cash-on-Delivery (CoD) program. Hindu BusinessLine reports that Amazon is seeing a 10X rise in electronic payments at the point of delivery. ] Zomato helped users by filtering restaurants that accept credit cards. Mobile apps seemed to have a wider range of cashless modes accepted. Swiggy also seemed to have promotions for first time users of any m-Wallet.

Grofers, a hyper-local groceries platform and operator also offered discounts to go cashless via them. Similarly Snapdeal is offering discounts for online payments to discourage Cash-on-Delivery (CoD).

m-Wallet companies like Freecharge (owned by Snapdeal), PayTM rolled out a new service for their courier partners to replace Cash-on-Delivery (CoD) with "Wallet-on-Delivery" which allows users to make payment when their package is delivered. You will receive a PIN to use in your FreeCharge app and once you confirm it, the money will be deducted. This means that you won't have to use a QR code type of mechanism. This reduces cash handling needs, and having exact change etc. PayTM-on-Delivery is also being introduced.

However, mWallets depend upon wireless / telecom internet that is patchy beyond urban areas. Recently in a vacation in Chickmangalore in Karnataka, we realized that the only service available even in semi-urban settings was BSNL. Another issue is that digital wallets is that most have a limit of Rs 10,000 per month. A user will need to go eKYC verification in order to get the limit increased to Rs 1 lakh per month.

Livemint reports Mobikwik had 40% increase in app downloads in less than 18 hours of demonetization. PayTM had 5X increase in overall traffic. A PayTM official claimed that their app downloads tripled and 250% surge in overall transactions and transaction value. Mobikwik co-founder is aiming for a $10B payments volume by 2017. Oxigen folks are seeing 40%+ increase in load money onto their wallets. The shut down of ATMs for a couple of days also drove this.

Credit Card / Debit Card Usage Spikes:

Hindu Business Line reports Innoviti Payment solutions (that processes transactions) observed that the usage of cards for transactions less than Rs. 500 has spiked 65% recently. Transaction sizes dropped by 30%. Usage of debit cards is up 70% and credit cards up by 40% suggesting sharp jump in first-time users.

National Payment Corporation of India (NPCI) observes that during last two days, RuPay usage on PoS / e-Commerce doubled to around 8 lakh transactions a day compared with a daily average of 4 lakh transactions earlier.

As per RBI Data, the number of credit card and debit cards put together is 754 million (Sep 30, 2016) vs 625 million a year ago in a country of 1.3B population. India has about 14 lakh PoS terminals.

But, beyond the high end or middle class urban folks, could this move spur adoption of cashless means of payment more broadly in the nation?

Some anecdotal experiences: My driver (an older gentleman) still has a feature phone and still struggles with drawing money from ATM machines (even though I transfer his pay to his bank electronically). The local kirana store person who has a smart phone is setting up his UPI virtual payment address (VPA) with his bank and starting to share his ID with his customers to encourage them to pay him via that. It is also helping him reduce credit transactions.

Since all Jan Dhan bank account holders have a debit card (Rupay), this was a forced experience for many to use it. Hopefully farmers and other rural folks will now increase their holdings in banks to be non-zero. In general, this may drive people to keep more money in the banking system, and start learning how to use the cashless methods.

Banks also may need to use this once-in-a-lifetime opportunity to have kiosks to train lay people on electronic security; set up the UPI accounts for folks who come and exchange cash, and run some promotional campaigns.

India has 14% of GDP circulating in cash compared to 4% in developed economies. While real-estate stocks did not do well post the announcement, Public Sector Unit (PSU) Bank stocks jumped by a huge amount on Nov 10th, perhaps expecting a large amount of money coming in the form of CASA deposits (current account, savings accounts) which will lower their cost of funds as they try to battle non-performing assets (NPAs). Also if the general public gets a taste of how easy and convenient electronic / cashless transactions can be, this can further lower their costs of operations.

This massive campaign over the next three months could get hundreds of millions transacting electronically for perhaps the first time, and jumpstart the cashless finance economy in India.

While are upbeat on cashless, especially in the urban sector, it is important to remember the opposite context of reality (hat tip: scroll.in) : India is almost entirely a cash economy still. Over 92% of its workers belong to the unorganised sector and earn in cash. Cash powers the rural economy. Also, 97% of retail transactions are done in cash, with only 6% of retailers accepting digital payments. India has 10 lakh point-of-sale machines, or computerised cash registers, one-tenth the number in the United States and China.

Yet this is a once-in-ages opportunity to accelerate the shift towards cashless. Moneycontrol reports on e-wallet companies waiting charges temporarily to move money from wallets to KYC-checked bank accounts. Perhaps the images likes the ones below (hat tip: from moneycontrol article mentioned above) will become more common very soon. And hopefully people will realize UPI is an ultra-low-cost method available as well (once the banks get their marketing act together).

Twitter: @shivkuma_k

ps: Related posts on "Cashless Finance & Universal Payment Interface (UPI)" and "Barter & Cash to Cashless & Blockchain... " , "Service vs As-a-Service ... "

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