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Beyond Demonetization

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Executive Summary
Beyond Demonetization

Can India fully free themselves from a cash-based society?

In November 2016, the Indian government declared the use of all INR 500 and INR 1,000 banknotes invalid, and announced the issuance of new INR 500 and INR 2,000 banknotes to replace the discontinued bills. Citizens were left with no other option but to exchange their now invalid banknotes for new bills, and, in doing so, they needed to open a bank account. Making sure all Indians have bank accounts was one giant step toward making money exchanges trackable and quelling the parallel economy of non-accountable, cash-based payment —thereby reducing corruption and encouraging economic growth.

However, the journey to a cashless economy is far from over.

“To eliminate cash or to encourage the usage of digital payments, merchants must see the value in a cashless economy,” 

Going cashless is a challenge in India, where high taxation rates currently make it more profitable to pay with paper—proving the biggest deterrent to cracking open the parallel economy. It is one of the few larger global economies still highly dependent on cash, which reduces the country’s ability to invest in economic growth; as such, India has been seeking a solution to this perennial problem. And while India’s dependence on cash has somewhat reduced, from more than 90% in 2005 to slightly below 80% in 2015, there’s still room for major improvement. For example, despite increased corporatization of Indian retail, cash is still the preferred payment method of large vendor chains.

“Over the past few years, the country has aggressively targeted the unbanked with bank enrollment programs, and today, about 600 million Indians have access to bank accounts. More importantly, each of these customers also has a debit card.”

There’s only one payment terminal per thousand people in India. Comparatively, Brazil and Russia have approximately 25 and 10 terminals per thousand, respectively, and most Southeast Asian countries have about 20 terminals per thousand. So, while the general population in India has access to cards for making payments, the acceptance infrastructure has just started to bloom.

The Indian government realizes that, in order for it to drive digital payments, reduce cash dependence, and crack down on the parallel economy, initiatives must be put in place, pushing banks to install payment acceptance devices. Banks, in turn, will have to persuade consumers and merchants with value propositions that go beyond convenience, such as consumer rewards, lower merchant discount rates, and access to data that can be used by merchants to drive loyalty programs.

Beyond that, in order to achieve a cashless (or reduced cash) society, merchants must see value in the seamless integration of their billing systems, as well as security, access to financing of receivables, and the ability to deliver deferred payment solution —propositions that help them grow their businesses.

“India has been known to leapfrog and adopt new technologies and processes in the past. It went from having only a few million fixed-line phones to over one billion mobile phones in less than 15 years. Similarly, the fact that we have only one payment terminal per thousand in India allows us the possibility to leapfrog beyond cards faster than anywhere else in the world. There is no legacy that we have to deal with.”


Beyond Demonetization

India has been known to leapfrog and adopt new technologies and processes in the past.

India is already EMV chip and PIN-compliant for cardpresent transactions, and all card-not-present transactions require two-factor authentication (2FA). India is the first country in the world to move to 2FA for every transaction, and it is also the first to implement Aadhaar, a biometric based transaction authentication.

There are new methods of accepting payments as well, including digital wallets such as Paytm and Freecharge, which are similar to the digital payment revolution in China with Alipay. These new payment methods are forcing traditional players to reduce merchant discount rates. The monopoly of Visa and MasterCard is being challenged by local schemes—NPCI and RuPay.

India still has a long way to go before achieving its vision of a cashless society, but with the new advancements in payment methods and India’s history of surpassing others in terms of technology adoption, it might not be long before India goes from lagging behind to leading the way.