To Cash or Not to Cash: The Future of Mobile Pay in India

This article was originally published on the Brown Political Review website, December 3, 2017.

On November 8th, 2016, India’s Prime Minister, Narendra Modi, announced the demonetization of the Indian economy. This move, ostensibly to root out corruption and black money, has been unsuccessful. Overnight, ₹500 and ₹1000 currency bank notes — which made up 86% of the economy — became worthless, and people stood in lines at ATMs for hours to deposit their old, soon-to-be-useless money in exchange for money of smaller denominations and the newly minted currency. This contentious economic move was meant to shock the system, so that people who were hoarding cash and evading taxes would be caught with suspiciously large amounts of currency. However, analysis has revealed that only 6% of illegal wealth is stored in cash, and there are countless ways to convert black money into legal holdings, including investment in real estate, foreign accounts, and gold. The move to reduce the amount of cash in India’s economy did lead to an initial spike in the use of payment apps, and there are currently more than 20 such apps in the country. But new data reveals that cash transactions in India are nearing pre-demonetization levels. This is an inflection point in the Indian economy: citizens will either revert back to cash transactions, or technological payment apps could begin to dominate the economy. Given the global trends, however, India’s reversion to cash seems temporary, as global markets continue to move towards a technology-based system.

The amount of money circulating the Indian economy has rebounded after last year’s demonetization attempt. ATM withdrawals in March 2017 were 0.6% higher than they were a year earlier. While the growth rate was much lower than during the same period in the preceding year, that could be due to malfunctioning ATMs post-demonetization. On the other hand, there has not been a significant increase in the use of electronic payment system in the period following demonetization. Immediately following November 8th, there was a one-time boost of digital transactions. Today, people in India are returning to a cash-based economy, despite the government’s attempts to transition to a technologically-based one.

This could be due to cultural reasons: India is regarded as a cash-loving society. According to a June 2017 financial stability report published by the Reserve Bank of India, “normalisation of notes in circulation appears to be dampening the growth of digital transactions.” While the government attempted to coerce people into adopting payment apps by reducing their other options, old habits die hard. For now, it seems that cash is winning out in the Indian economy.

On the other hand, however, tech companies won’t miss the chance to enter the market at this pivotal moment for economic policy and habits. They must move quickly in order to normalize payment apps in India, where the political and social climate encourages the introduction of new and innovative mechanisms.

In India, the cost of mobile data usage is falling, and the political environment, with little regulation, is conducive to experimentation. Because the government eliminated 86% of the country’s currency, it is imperative that the government endorse and promote a behavioral shift toward alternative payment methods. Card-based systems are not economically viable in remote villages, and many business owners operating in India’s cash-loving society do not have the technology to accept credit and debit card payments. Due to these compounding factors, there is a large market in India for alternate payment methods.

Tez, Google’s new digital payment app, specifically designed for India, was released in September 2017. Google has brokered deals with Indian banks and technology companies so that the app will come preinstalled on many devices. Unlike its competitors, Tez, which is Hindi for “fast,” uses audio QR technology. AQR uses ultrasonic sound to transfer information between devices. This technology uses a phone’s built-in speaker and microphone, which are found on the most basic phones. QR technology requires a camera, while NFC and Bluetooth technology require more advanced smartphones which may not always be present. In 2016 52% of India’s 1.34 billion people had a mobile phone, while only 29.8% of people had smartphones. Google has created an app which can be used by a larger percentage of the population, giving Tez a competitive advantage.

Due to India’s huge population of 1.34 billion people in 2016, there is enormous opportunity for tech markets to infiltrate, dominate, and profit. India is the world’s second largest market for smartphones behind China: given the accessibility of AQR technology, perhaps Tez will halt India’s reversion to cash.

Meanwhile, Kenya, China, and Sweden are all moving toward becoming cashless as well. In 2015, more than two thirds of Kenya’s adult population used M-PESA, an electronic money-transfer app. An amalgamation of factors has led to M-PESA’s success in Kenya, including the risk and high cost associated with sending physical money, the dominant market-position of Safaricom, the telecommunications company that launched the app, and the distrust people had of banks due to post-election conflict in 2008.

In China, too, electronic payment apps are becoming the new normal. Many Chinese people don’t like the idea of owing money due to a pervasive culture of mistrust, thus rendering credit cards increasingly unpopular in the country. Electronic payment apps, linked to debit cards, ensure that people will never be indebted — an attractive alternative. Given China’s desire to establish itself as a player in the global economy, it is unsurprising that the population is adopting this new technology and increasingly perceives credit card and cash transactions as antiquated. In 2016, mobile payments reached $5.5 trillion, evidence of the cultural shift away from cash and toward mobile wallets.

In Europe, Sweden is a pioneer of the cashless economy. In 2015, cash transactions accounted for just 2% of all payments made in the country. In the 1990s, Swedish banks began to charge for checks, thereby giving credit cards a boost and catalyzing a cashless culture. Swish, an app released in 2012 that allows for electronic transfers of money using smartphones, was used by nearly 50% of the population as of June 2016.

India’s culture is cash-centric, but given the global trends, it seems that the future of markets is indisputably cashless. Uprooting tradition and cultural norms is a difficult process, but as technology becomes more accessible, more secure, and more prevalent, it is hard to imagine global economic players maintaining cash-dominated societies for much longer.

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Editorially independent of the university, Brown Technology Review explores developments in technology and considers the economic, social, and political impacts. BTR pulls insight from both industry and academia, aiming to provide readers a holistic perspective.

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Annie Lehman-Ludwig

Brown ’20 — membership associate at the Global Network Initiative; former associate section manager and senior staff writer at Brown Political Review