The big winners

As product promotions go, few can beat Prime Minister Narendra Modi’s dinner-time announcement on Nov. 8 last year outlawing all Rs 500 and Rs 1,000 notes overnight. After announcing that some 86% of the value of all the cash in the country was effectively useless, there was some solace: “in this entire exercise, there is no restriction of any kind on non-cash payments”, he said. In less than 20 days, in his monthly radio address Mann ki Baat, Modi was calling for a “cashless society”, saying “if we can make a start with a less-cash society, a cashless society will not be a far-off destination”.

Between the two speeches, digital wallet providers were on song. On Nov. 9, most English newspapers boasted a front-page advertisement, in which digital payments provider Paytm congratulated Modi “on taking the boldest decision in the financial history of independent India”. The company’s use of Modi’s photograph in the ad effectively made the Prime Minister its brand ambassador. A couple of months before this, Reliance Jio, the long-awaited mobile and data service from Reliance Industries, featured Modi in its series of front-page ads.

Data service providers are among the biggest beneficiaries of Modi’s demonetisation announcement. Talking of data, an increase in the user base of digital payment companies will mean an increase in consumption of data. A recent report by Google and Boston Consulting Group (BCG) estimates that the customer base for digital payments is set to increase from 60 million-80 million users now to 300 million by 2020. Digital payments users will comprise 50% of all Internet users by 2020, and the top 100 million Internet users will drive more than 70% of the value of transactions through digital payments instruments.

Digital payment platforms were gaining popularity in urban areas even when paper money was easy to access. As Fortune India pointed out in January 2016, when we nominated ‘digital wallets’ as the move of the year (represented by Vijay Shekhar Sharma, founder of Paytm and, in many ways, the man who started the conversation about digital payments in India), digital payment platforms gained popularity because they made it inconvenient for users to opt for other ways of paying. That’s what Paytm did when it inked a deal with Uber, under which Paytm was one of the few ways to pay for a ride in Uber cabs. Once people got used to that, everything else fell into place.

Today, there are dozens of mobile wallets used, and with the launch of the unified payments interface or UPI, transacting in the virtual world is getting easier. Data from the Reserve Bank of India (RBI) show that in September 2016, transactions worth Rs 3,190 crore were done on mobile wallets; that’s a huge increase over the Rs 1,800 crore in September 2015.

Paytm, according to latest figures, has about 165 million users, and close rival MobiKwik has 40 million. Demonetisation and the government’s push for a cashless society is just the icing on an already rich cake for companies like Paytm and MobiKwik. But they are still pushing for a bigger user base. Soon after the demonetisation announcement, MobiKwik launched a stripped down version of its app in a bid to reach customers without access to 3G.

It’s sound business sense. About 67% of India’s population lives in rural areas, where there’s barely any electricity and where 3G is non-existent. How do you make inhabitants of such places pay digitally?

To promote Lite, targeted at a predominantly rural audience, MobiKwik has been conducting camps to educate rural users on digital payments. Upasana Taku, co-founder and director of MobiKwik, says representatives of the company have been visiting towns and villages across the country conducting awareness camps. Taku talks about one such village in Gujarat called Chikhli. “Some 50-odd people had come for the camp, and after the demonstration all of them had downloaded the app and even transacted using it,” says Taku.

Paytm says it doesn’t plan to introduce a similar offering. The company is perhaps relying on the fact that it has a payment bank licence, which will allow it to tap the rural base even more effectively. In January, Paytm’s Sharma had told Fortune India: “If someone places a five-year bet with me, [I am willing to bet] we will have more than 60 million accounts at Paytm bank.”

Braggadocio? Sure. But as current events suggest, there may be some foundation to this. With a severe shortage of cash in the system, and with the rules governing note exchange and withdrawals changing almost by the day (at the time of going to press there were 60 notifications from the RBI on this subject), people are almost forced to move to digital payments.

But the cashless dream has a thorny edge. These transactions are more susceptible to fraud, for starters. Then there’s the matter of marginalising elderly and poor people.

Porush Singh, country corporate officer, India, and division president, South Asia, Mastercard, says it will take us a long time to go cashless. However, he is optimistic. “Yes there are many issues that need to be fixed at the moment, but we have the fundamentals of infrastructure in place in the form of initiatives from the government, regulator, and the industry.”

“There needs to be huge partnership between the government and the private sector. The government will need to put in place incentives and mandates to enable them (those in rural areas) to use digital methods and also so that they can get comfortable it,” adds Dheeraj Aneja, director, advisory services, and national payments leader at consulting firm EY India.

So, will we as a country, move to the cashless future that Modi speaks of so passionately? Clearly, a start has been made (and we are not talking of demonetisation). Abonty Banerjee, senior general manager and head of digital banking at ICICI Bank, says that over the last two-three years there has been a surge in the number of transactions through cards and mobile banking. “In a month, on average, we see around Rs 23,000 crore worth of transactions through mobile phones. And our debit card volumes have increased by over 70% this year,” she adds.

Is that enough to go by? Given that the benefits of going cashless are still unclear to many, and that even developed countries such as Sweden have found the going tough, it seems unlikely to succeed in a big way in a country where literacy and infrastructure are lacking.

Also read: Move of the year: Digital wallets

Also, we are still a cash economy; the Google-BCG report says 78% of consumer payments in India are done in cash. According to RBI data, as of September 2016, debit cards were used at ATMs for transactions amounting to Rs 2.2 lakh crore, while for point-of-sale (PoS) terminals, the figure was Rs 15,933 crore.

There’s also the fact that most merchants, especially in the vast unorganised retail sector, prefer cash. Getting mom-and-pop stores on the digital platform will involve a number of steps, from education to connectivity. Similar efforts will be needed to get small farmers and artisans to adopt digital payments.

Alpesh Shah, senior partner and managing director, BCG, says another reason for cash being the preferred option is its absolute ease of understanding even though it is not the most convenient option. In fact, the Google-BCG report states that half of those who do not use digital payments say they find the interface too complicated.

There’s also the issue of PoS terminals being expensive and unviable for small merchants. “Despite the cost of swipe machines coming down significantly over the last several years, a certain minimum threshold of transactions is still required to recover the cost of deployment and maintenance. Further, the current economics of the merchant acquisition business make it unviable for acquirers,” the Google-BCG report says.

Enter digital wallets.

Cheap and relatively easy to use, digital wallets can fix a gap that other means of digital payment cannot.

“[Post demonetisation] we have been overwhelmed by the response from India’s smaller cities and towns. Thousands of kirana store owners, vegetable and fruit vendors, food stalls, pharmacies, and many more merchants across India’s semi-urban and rural areas now accept Paytm,” says Sudhanshu Gupta, senior vice president, Paytm, on e-mail.

Bhavik Vasa, chief growth officer of digital payments firm, ItzCash, says that adoption and interest seen in rural areas is encouraging. The company has around 75,000 outlets across 3,000 cities (which includes smaller towns and villages) where its services are available through franchisees called ItzCash World outlets. They even have their own prepaid cards which can be operated without a bank account. “Our prepaid cards are popular among the under-banked segments of society as they provide safety and convenience in transacting. We even have assistants at our outlets who educate and help people with using the cards or making digital transactions,” says Vasa.

Nitin Chugh, country head, digital banking, HDFC Bank, says that in the aftermath of the Nov. 8 announcement, customers have been approaching the bank for digital payment solutions. “We have seen customers here use mobile and Internet banking for services such as remittances. People even use our mobile banking app to transfer money to each other,” he adds.

Also read: Banking: The future is in apps

Before the Nov. 8 announcement, the digital payments space seemed to have plateaued. Demonetisation, or note exchange and the consequent shortage, and the government’s avowed intention to move the country to a cashless economy, was just the boost the industry needed. But will the move to cashless revolve around digital wallets or around Internet banking, or credit cards? “In the U.S., for instance, the ecosystem has converged around cards. But India has banks, wallets, cards, the UPI and so on—it is fragmented. The mobile will be a critical piece since it is a flexible platform that can support many products. It can become the central theme,” says Aneja.

Vasa says that even if 50% of the economy does get on the digital bandwagon, we will be in a healthy spot. “If, say, currently 10% of payments happens digitally, we have to slowly move to 30% and then to 50%. It is not a sprint, rather it is a marathon.”