digital payment India

It has been roughly three months since the Narendra Modi-led demonetization move rocked the nation; and whether we like it or not, the changes over the past three months in payment and monetary transaction systems, have redefined how we trade and do business. While a shift towards digital payment was the anticipatory change, after a massive surge of 300% in the digital payment transaction in November, the dust is settling much faster than expected. Within just two weeks since the cash normalisation, volumes of digital payment have come down by almost 10% this year, as against December 2016.

According to data released by the Reserve Bank of India (RBI), digital payments in January 2017 were lower by about 10.2 percent in volume, and by about 7 percent in value, when compared to the month of December 2016. The RBI has been releasing periodic data on the changing trends in payment systems since the month of December 2016 and has now noticed a decline in the move towards a cashless economy. This information is rather surprising considering just abut a week back the nation had noticed a sharp increase in the demand for credit cards, clearly indicating the people’s desire to move towards a cashless economy.

Further, the RBI’s representative data on the matter suggest that the debit and credit point-of-sale (POS) transactions at terminals declined by nearly 18.6% month-on-month. Additionally, mobile banking transactions also declined by about 7.6% m-o-m.

Why are digital payment volumes reducing?

The most obvious of answers has to be the RBIs frequent relaxation of withdrawal limits from ATMs and Savings Accounts. In what might be considered a very welcome move, the RBI has now decided to phase out its weekly limit on withdrawal of cash from savings accounts starting from the 20th of February. It will be done in two stages. At present, the withdrawal limit is at Rs.24,000 per week, but this will soon be raised to Rs.50,000. Further, come March 13th, there will be no limit at all on the amount of cash that can be withdrawn from savings accounts.

In effect, there will be more cash in circulation in the system once again.

The increase in cash being circulated, however, implies that individuals once again have no persuasive reason to go digital. And so, while individuals who are already quite savvy with digital payments will continue to remain so, the remainder mass of people will find a lesser reason to shift to a cashless economy.

The other compelling reason for lowering digital payment transactions is the rejection of wallet payments. In January 2017, a sizable number of vendors and traders who opted to accept mobile wallet payment in the wake of demonetization, have stopped accepting the payments through wallets. The higher transaction charges on each transaction imposed by mobile wallet companies and long duration in settling the payments have emerged as the disappointing factors.

“Paytm which was not charging us any fee during demonetisation, is charging 2% on each transaction now. Unlike many other service providers, it takes 3-4 days to settle the payment. For many small and mid-size business owners like us, it’s tough to convince customers to cough up additional 2% for services. Rotation of money is equally important and keeping our money blocked strains our cash flow,” says one of the vendors in Bangaloree who have stopped accepting wallet now.

The sudden move towards demonetization has garnered mixed opinions overall and has left the nation in a state of constant and rapid change. There is, however, no denying, that the entire exercise of moving towards a digital economy is taking a huge toll on India’s human and financial cost elements. The amount of cash that has been recorded in circulation in India is at about 18% of the nation’s Gross Domestic Product (GDP), which is quite large a figure. There are still several sectors of people struggling to cope with the sudden change and shift in trends. For a majority of the nation that has for eons depended on solely cash-based transactions, shifting to an electronically enabled and supported payment system is a massive shift and change in lifestyle altogether- Something that is yet to be addressed adequately.

Why does the future of a cashless economy look promising?

India’s smartphone market is promising with its rapid growth prospects. In fact, the Indian smartphone production is expected to double to about 200 million handsets this year.

The growth of the smartphone market is exactly what will be essential to push the nation’s mobile payments. The number of smartphone users in the country is expected to cross 700 million by the year 2020- It stands at about 350 million at the moment.

Secondly, there are now several online payment options being made available to users and are all operating in a very lucrative market for the growth of their own businesses. Additionally, e-commerce businesses such as Amazon and eBay have been pushing their digital payment offerings even more since the move towards demonetization. It is only a matter of time before more and more individuals embrace a cashless mode of transaction.

What now?

It seems that with the deed having been done, it is now wise to just be patient and cooperate to the fullest extent with the changing system. The drop in volumes of digital transactions could be considered a minor fluctuation in the expected long-term trend for a cash-less India. While this demonetization move may have all started out as a “surgical strike” against rampantly circulating black currency in the system, it has now transformed itself into a radical reformation process, to transform India’s cash-dependent economy into a cashless one- A move that will, of course, take years to accomplish.