Emerging markets often leapfrog technologies. For much of Independent India, it was very difficult to get a fixed-line phone. They were expensive and the wait could be as long as five years. In the 1990’s came the mobile revolution and people across India were able to get a communication device for a relatively small amount of money and they could take the device with them everywhere. Most importantly, they didn’t have to wait years, but only a few hours for the phone to start working.
When it comes to the adoption of non-cash payments, India is in a similar position. Cash has been the preferred source of making and receiving payments since Independence in 1947. Credit cards still have very low penetration across the country. While debit cards have slightly more penetration, mobile wallets (a method of storing credit/debit cards and cash on a mobile phone) have seen quick and widespread adoption. By some estimates, there were 19.9 million credit cards across India in 2014. PayTM and MobiKwik, two of the largest mobile wallet providers in the country, claim to have 20 and 12 million active users respectively. It’s pretty evident that India is fertile ground for cashless transactions, but also has plenty of room to grow.
With the recent developments in government, essential steps for promoting the use of electronic payments, including withdrawal of surcharges, service charges, convenience fees on cards and digital payments are soon to be rolled out across the country. While the adoption rate of mobile, card-based, and online transactions is currently lower than many other countries, payments via online platforms still accounted for 14 percent of all spending in India last year.
India, with most other emerging markets, faces the challenge of regulating transactions and removing illegal “black money” from the system. A recent study has India ranked fourth in the world for illicit money outflows with an astounding $51 billion leaving the country per year between 2004-2013 alone. Yesterday, Prime Minister Modi took a bold step in curbing the use of “black money” by changing the status of the ₹ 500 and ₹ 1,000 notes as no longer legal tender. This could have short-term implications on GDP since cash purchases still made up a large chunk of the Indian economy. The Indian government will eventually introduce new notes in addition to the ₹ 2,000 that was just launched.
These changes are going to create a significant amount of intended strain on the country’s parallel “black” economy but it’s a blessing for Indian startups and new age, digital first, financial services solutions. It also helps advance the government’s policy of financial inclusion by bringing the unbanked into the financial system.
The Solution to the Black Economy: Going Cashless
Cashless transactions with the right security measures in place would remove customer reliance on underground markets (also known as the “parallel economy”). At the moment, high transaction fees, time to complete a transaction and potential security problems are hindering the popularity of cashless transactions, but legislative progress on both fronts does suggest a positive outlook moving forward.
Enabling people to make inexpensive and easy payments using a phone or a fingerprint is convenient both for buyers and sellers and offers tighter security. This ultimately limits fraud and decreases the circulation of capital in the shadow economy, which, in turn, will lead to more tax revenue.
Shining a light on the parallel economy is something that has challenged governments all over the world for ages, even in established Western countries. In Italy, these underground activities are believed to make up 21% of the economy.
The Indian government understands that a cashless society will make it easier to curb the illicit outflow of capital and is taking steps to encourage technology solutions that scale with the size of the Indian economy.
Trust in a Transaction: Know Your Customer (“KYC”)
Knowing the parties in a transaction has always been difficult but in the digital age, a whole new level of uncertainty and potential for fraud exists. It’s part of the reason banks make customers jump through hoops for seemingly minor and mundane information to authenticate identity.
The ongoing work by the Unique Identification Authority of India to collect biometric data and issue all residents a universal ID number (called the Aadhaar) is unprecedented and early results are promising. The program has continued to grow rapidly over the last seven years with recent enrollment passing one billion citizens. However, the infrastructure needed to effectively implement Aadhaar throughout the country still needs work; access to localized bank branches and ATMs, for example, is not readily accessible to millions – yet. Though the program is still in the early stages of implementation, it represents a major leap towards a financial infrastructure with strong safeguards in place.
— TheSwamy (@TheSwamy) November 2, 2016
The tweet above by Sanjay is indicative of how Aadhaar is going to change the way verification of parties in a transaction (“eKYC”) and transactions themselves take place for more than a billion people. The largest mobile wallet in India, PayTM, has reduced paper based KYC to 1%.
In order for cashless transactions to catch on, mobile-to-mobile payments also need to be streamlined. Last year the National Payments Corporation of India launched the United Payment Interface (UPI) to make mobile-to-mobile payments easier. The system allows for the quick transfer of funds across different banks with the use of a single identifier, removing the need to exchange sensitive personal information during financial transactions.
— Dilip Asbe (@dilipasbe) August 28, 2016
All you need to do is download a UPI enabled app and let the fun begin. Startups like Instamojo have been pushing the limits of how digital payments can be made or received for years. Now, with the policy finally catching up, they can make it even simpler to send money or receive payments with nothing more than a cell phone.
Transparency and Portability
The Aadhaar number is a good step in bringing a scalable identification system to an incredibly diverse population of more than a billion people. However, coupled with blockchain technology, solutions providing more financial transparency to the entire country can easily be developed. With blockchain, an open ledger of all transactions could be recorded in a secure and transparent network linked to the legacy banking system.
With a blockchain, customers could have account number portability when moving between banks. That portability is something that politicians in India are already calling for. Imagine, switching banks or brokerage accounts to a new service provider and taking your account number with you. Potentially, not having to deal with changing routing numbers or providing your employer with new banking information ever again.
NASDAQ is currently testing blockchain technologies in a trial program. Last year, nine of the world’s biggest banks announced a partnership to create a blockchain framework that could be used globally.
With all of these developments on the horizon, disruptive technologies and solutions around payments, financial inclusion, remittance, public market investing and broader financial services are going to be boundless. As India adapts and implements the proper security measures and makes bold policy decisions, digital transactions will continue to become accessible, easier, less expensive, and, hence, more frequent.
Customers will have peace of mind about their accounts being protected thanks to biometric security. Business professionals will also find comfort in knowing that blockchain technology records all transactions and protects them from fraudulent activity.
Arguably the biggest winner of all will be the Indian government. With such a system in place, it could greatly reduce its much-derided bureaucracy. The government will also be closer to it’s goals of banking the unbanked, stamping out corruption and black market activities while simultaneously increasing revenues and GDP (by adding in cash transactions that were previously not being captured by official mechanisms).
While India still faces some complex challenges, the country is certainly heading in the right direction with regard to a more sustainable cashless society. If history is any indication, India will, in fact, fully embrace the shift just as it did with mobile a decade ago, though, not without some teething pains.
Also published on Medium.