Why India’s demonetization is the biggest disruption for electronic payments in 2016

Photo credit: niteenrk / 123RF Stock Photo.

As we in India celebrated New Year’s Eve, 2016, it wasn’t lost on us that the withdrawal of 86 percent of the currency in circulation in the country would be analyzed and felt for a long time to come. We turned in to hear prime minister Modi’s address to the nation on NYE, thanking the country’s citizens and announcing a slew of low-cost housing incentives to begin in 2017.

While the impact of demonetization continued to hog headlines even after Dec 31, 2016 (even in the just concluded World Economic Forum in Davos), the overall sentiment has swung like a pendulum between those hailing the move as revolutionary and those labeling it as a disaster.

India, being on the cusp of a major growth phase, is becoming a case study for others to analyze the impact that demonetization will have—both in the short and long-term—on economic growth, a switch to cashless behavior, and curbing a thriving parallel gray market.

Globally, there has been no disruption in payments and financial systems as big as demonetization has been. An unprecedented move in the largest democracy in the world has otherwise been largely peaceful and has triggered nationalist sentiment, a primary reason for mass support. Hence, in my view the greatest disruption in digital anywhere in the world in 2016 has been in India and here are three reasons (and supporting facts) I believe make demonetization the winner.

Strong policy and regulatory support by the Indian government

• On December 8, 2016, the finance ministry announced an incentive package for promotion of a digital and cashless economy, thereby motivating Indians to adopt cashless transaction methods. Interestingly, each measure was carefully crafted to target consumers in the biggest expenditure and growth channels for electronic payments such as fuel and rail tickets.
• The government is promoting merchant acceptance by removing 16.5 percent excise duty on POS machines.
• It is also setting targets for POS deployment with top acquirers in the country followed up with careful monitoring.
• No service fees/service tax will be imposed on digital transactions amounting to less than US$29.34.

Do you spot professionalism, diligence, and long-term commitment? Many think the moves are very unlike a government and see it as almost operating in startup mode.

Demographic dividend of young India adopting a digital lifestyle

• Nearly 54 percent of India is less than 25 years old while 27.6 percent is in the age group of 25 to 44.
• India is the second largest smartphone market.
• “Digital India” continues to lay the ground for a more connected population.

With digital being introduced, marketed, and incentivized, consumer behavior shifts and adoption are highly achievable. There are also more than enough barriers to digital adoption in India, and it will be interesting to see how these are overcome.

Digital literacy drive, digital payments, helpline, and a lucky draw

• The Ministry of Electronics and IT started a new campaign called Digi Dhan Abhiyan to promote cashless transactions by enabling every citizen, small trader, and merchant to learn about digital payments.
• A helpline number (14444) has also been set up to answer queries with trained customer service personnel available.
• The sweetest move, however, is the lottery with weekly and quarterly winners getting sums from US$15 to US$ 145,000.

These consistent efforts to mobilize the masses through education will go a long way to underline the ease and convenience of digital payments, leading to increased trust and adoption of cashless methods for payment.

Do you agree with my assessment? Would love to hear your feedback.

Converted from Indian Rupee. Rate: US$1 = INR 68.13.

This article was first published on LinkedIn.