The decision from the Indian government to cancel the legal tender of INR500 ($7.50) and INR1,000 denomination notes, in an effort to tackle the black money issue, has had widespread effects on the populace. Maybe it’s the perfect time to embrace the digital realm. Patrick Brusnahan investigates

In a sudden address to the nation, prime minister of India Narenda Modi stated that the two highest denomination notes, approximately 85% of India’s circulating currency, would cease to be legal tender.

While people could deposit their old notes in banks and post offices until 30 December and at specified offices of the Reserve Bank of India (RBI) until 31 March 2017, there has been some panic in the country, particularly as banks and ATMs were closed for a period to help the transition.

Thousands of Indian consumers have spent hours queuing outside banks to obtain any amount of the new notes that the government is still in the process of printing. In addition, ATMs are still being recalibrated for the new INR2,000 notes.

The chaos can be summed up with a robbery in Bangalore as a driver delivering the new cash for ATMs stole INR9.2m.

India’s digital future

With the cash crisis ongoing, it’s a good time to look how the digital payments market in India is progressing.

Considering the sizable 1.3 billion population, electronic payments are not as much in vogue as you might expect. Cash accounts for 96.8% of the total payment transaction volume in India, a share that is expect to fall over the next five years.

According to Timetric’s research, the annual value of card transactions in $78.8bn with an average annual spend per card of just over $98. There is less than one card (0.63) per person and an average of only 0.26 monthly card transactions.

In contrast, China’s population has, on average, over four cards each, and Malaysia and Thailand have 1.71 and 1.52 respectively.

Competition in the Indian alternative payments market has increased over the last few years. For example, State Bank of India (SBI) launched the State Bank Buddy digital wallet in August 2015 and, as of March 2016; 4.8 million transactions worth $35.1m had been made. $1.8m of that was at merchant outlets.

Other digital wallets launched by banks include Pockets by ICICI Bank in February 2015 and Lime by Axis Bank in September 2015.

The emergence of mobile-only banks is also likely to accelerate the shift towards digital in India. Singapore-based DBS Bank launched India’s first mobile-only bank, digibank, in April 2016. Customers are entitled to unlimited cash withdrawals and offered cashback and discounts on in-store and online purchases.

Contactless is also set to take India by storm. ICICI was the first bank to introduce the technology in January 2015. It was quickly followed by a number of banks, such as SBI, Axis Bank, Bank of Baroda, HDFC Bank and Standard Charterted.

The shortage of cash following the demonetisation is expected to encourage the use of these new options. For example, digital wallet Paytm registered a more than 400% rise in transaction volume and a 200% rise in transaction value within 24 hours of the demonetisation announcement.

Visa analysis

India has been attempting to be less dependent on cash for a long time. In the early 1990s, the RBI led a development of technological infrastructure that facilitated the creation of a payment and settlement ecosystem.

In 2007, the Indian Parliament passed the Payment and Settlement Systems Act, after which the central bank released a series of vision documents for the periods of 2009-12, 2012-15, and 2015-18. These papers were supplemented by initiative to promote larger acceptance and deeper penetration of electronic payments in India.

Additionally, the Government of India has encouraged the shift to a cashless society with its push for digital payments through the JAM trinity: the Prime Minsiter’s Jan-Dhan Yojana, Aadhaar, and mobile connectivity.

Visa’s analysis shows that in the area of electronic payments, India’s performance lags behind Brazil, China, and Russia. This is attributed to its limited progress on financial inclusion.

In 2014, more than 50% of Indian adults held an account with a financial institution compared with nearly 70% of adults in other BRIC economies.

Visa claims that Prime Minister Jan-Dhan Yojana’s programme would address the issue of financial inclusion. So far, 242 million bank accounts have been opened and over 180 million debit cards issued.

India’s net cost of cash – 1.7% of GDP – is high when compared with most developed economies. This results from India’s high share of coins and notes in circulation, at 13.6% of GDP in 2015, according to the RBI. Consequently, India’s average number of per-capita card transactions lags behind leading‘less-cash’ economies. In 2015, India had 10 transactions per capita compared with Brazil’s 163, South Korea’s 420, and Sweden’s 429.

One of the country’s most successful digital banking initiatives has been SBI launch of a sub-brand – sbiINTOUCH -to capture the imagination of Indian youth by offering a more modern and digitally innovative service.
SBI engaged allen international and Accenture to design the sbiINTOUCH branch layouts.
The ambitious project incorporates a sub-brand and outlets in premier locations in key city shopping centres