Demonetisation Fallout: Surviving in a Cash-Starved India

So the bombshell was dropped at the stroke of midnight in what is being increasingly called India’s 9/11 moment. The government in one stroke sucked wealth out of the thriving black money market and simultaneously caused commotion in cash transactions for God knows how many more weeks. People having been left counting for the rupee 500 and 1000 denomination notes to figure out how much they need to keep ready for depositing in their bank accounts once they get the opportunity. We have been witnessing serpentine queues at all banks and ATMs even now to withdraw what is essentially our own hard-earned money.

Cash transactions in non-essential purchases on the decline?

As an IT media house we’re curious to find out what effect this shall have on IT product purchases across local IT hubs like Nehru Place in Delhi and likewise in other cities. With people starved for cash, most are not likely to spend them on non-essential purchases unless the banking system revives over the next few days. Moreover, with most transactions at such hubs happening with shopkeepers that might not have access to PoS terminals to swipe credit/debit cards, there has been a considerable slump in demand.

Stress test for the digital economy

All this has put immediate stress on the backend IT infrastructure for facilitating transactions through cards and electronic transfers. Honourable Prime Minister Narendra Modi has repeatedly requested people to support his demonetisation move and remain patient for a few more weeks. He’s asserted that the demonetisation move shall provide long term comfort to the masses in the form of eradicating the parallel black economy and thus lead to more jobs and in eradication of poverty. However, the biggest thrust for Digital India has come in the form of his appeal to use digital wallets by the rural population. The right panacea for the future of Indian economy yes but how does the road leading up to it looks like?

Imagine a villager with a smartphone (not far-fetched as volumes on Facebook and WhatsApp suggest) trying to conduct a financial transaction through a digital wallet. Unlikely, right? Well, not really. The comfort level with using such gadgets is very much there as the number of viral videos on social media suggest. What blocks the same person from taking to digital platforms are the following:

1. The fear of the unknown aka security threats.

2. Costs incurred

For a start, the current cash crisis and convenience digital wallets bring might tempt a person to make an attempt, and this is where the PM has struck the right note, in the longer run though it is going to be pure economics that’s going to rule the roost. If transferring Rs 50,000 from a digital wallet is going to cost you Rs 500 (@1%) as transaction charges while transferring money to your bank account, people might not hold on to it. A point to ponder for the honourable PM and perhaps something of a unified payments gateway might hold more ground in the longer run than just this piecemeal approach.

Charges incurred during wallet to bank transfer a key deterrent

There is a charge associated while moving your money out of a digital wallet into your bank account. However, the charge reduces the moment you make your wallet KYC compliant, ie by uploading the standard id proofs and PAN details as required by banks. So, if you are a small shopkeeper with daily transactions worth say rupees five thousand a day, you are unlikely to opt for KYC compliance. Being a small shopkeeper you are also likely to use this money to pay your suppliers regularly. So, the options before you are limited. Either convince all of your trader partners to move on to your digital wallet platform or you keep incurring steep charges while transferring money to your bank account.

Where Unified Payments Interface can help

With the introduction of Unified Payment Interface (UPI) this year, National Payment Corporation of India (NPCI) struck a right cord in fulfilling dream of digital India. As UPI is making its way to market, many analysts have started comparing it with digital wallets. It is too early to come to a final conclusion. The key advantages of digital wallets are the 3Cs to consumers such as Convenience, Cashback and Channel-agnostic offering. On the other hand, wallets face challenges in terms of interoperability, insufficient infrastructure, high transactional cost etc. Where-as UPI value proposition includes but is not limited to simplified 2 factor authentication, use of virtual address instead of bank account number, real time push and pull payments and is regulated by central bank.

Mobile wallets rule the roost at IITF 2016

Most expected a slump in business due to the prevailing cash crunch due to demonetisation and while a 33% drop in visitors was witnessed on the first day, however, what saved the day for sellers and buyers alike was the deep penetration of digital platforms. Most shopkeepers at different pavilions were ready to face the cash crunch and had arranged for PoS terminals or swipe machines. The smaller ones were refreshingly familiar with mobile wallets, in particular Paytm, which proves the company was energetic enough in its marketing and got the message down to where it was needed the most. What made the deal sweeter for customers was that nobody charged anything extra for using the card. Perhaps the prices were already jacked up in keeping with the additional cost or the shopkeepers were willing to pay a small price to keep the business rolling in these cash crunch days.