The Rise of Digital Payments in the Wake of India’s Demonetization

By Akhila Singaraju

On November 8th, Narendra Modi, India’s prime minister, announced a new economic policy that took 500- and 1000- rupee bills out of circulation. These bills, representing 86% of the total cash in the country, were made illegal overnight in an attempt to primarily address the country’s issues with corruption — black money, bribery, and tax evasion.

Demonetization brought urban India to long, unprecedent lines at ATMs. While retrieving new currency, people were seen debating the underlying politics, the patchy implementation, and the ground-level impact. Unable to get their hands on cash for weeks following the sudden announcement, many citizens turned to payments that relied heavily on the Visa and MasterCard debit rails and ACH networks. It became clear that administrators and policy makers put excessive faith in the country’s nascent payment infrastructure — a foundation that has never weathered an online payments storm like the one it is experiencing post-demonetization.

Having worked on FinTech for the underbanked in India for two years, I was curious to see the impact demonetization was having on the most vulnerable sections of society when I recently traveled back this past December. India’s low-income population has been deeply affected by the liquidity crunch. On the long cab ride from Bangalore’s airport into the city, my driver explained his frustrations with the policy. He needed to pay his son’s tuition that week and was relying on cash payments instead of mobile wallets as many of the payment apps’ cash-out policies were too complex for him to use. The rural poor too are afflicted, especially farmers, who are new to the banking system and struggling to secure payments from cash-strapped traders for their produce.

But amidst this challenging backdrop, the demonetization policy is acting as a catalyst for India’s mobile payments sector. While there is a long way to go for the digital payment story to be a success in India, demonetization has accelerated the push towards cashless. In addition to encouraging private mobile players to innovate digital payment solutions, the government has rolled out its own payment app, Bharat Interface for Money (BHIM), built on India’s Unified Payment Interface (UPI) that allows consumers to send and receive payments from any bank. BHIM mimics one of the most important attributes of cash — it is (or has the ability to be) far more ubiquitous than the majority of payment alternatives simply because it is interoperable.

This is just the beginning. This acceleration provides several opportunities for FinTech companies to ensure Indians go online to transact. Three particular opportunities stand out –

  • Re-think on-boarding experience to improve customer acquisition — The government is doing its part to incentivize consumers to use online payment solutions through subsidies for digitally purchased railway tickets, gas, and insurance policies. However, consumers and merchants are still deterred by clunky signup processes. Customer acquisition is a business-technology problem that must be examined through the lens of marketing, sales, and fulfillment. On the consumer side, especially in rural India where literacy rates are lower, many are unaware and apprehensive of adopting digital solutions. To overcome these challenges, as a first step, digital payments solutions must become a part of the financial literacy curriculum. Companies must identify local village-level champions to educate people on using their feature or smart phones for digital payments. Paytm has recently announced a community program, Paytm Pro, to market the product. To scale this for the masses, Paytm would do well to integrate this program into applications that low-income Indians use, like WhatsApp. Next, payment service providers must take advantage of India Stack (read more on a previous WFT blogpost) to fulfill know-your-customer (KYC) requirements for a seamless on-boarding experience. On the merchant side, instead of investing in large field sales teams, companies must think of innovative ways to sign on small businesses so they can start accepting digital payments in minutes.
  • Eliminate unnecessary friction — As with many banking applications, digital payment providers, struggle to balance convenience with security. Cash-based transactions are instant; they are not inundated with passwords and other authentication requirements. To help customers transition to and remain in a cashless world, digital alternatives must strive to provide the same level of password-free convenience, at least for low-risk, small-ticket transactions. Enhancements, and in some cases simplifications, to login interfaces through capabilities such as auto-login or biometric-enabled login through Aadhaar, are critical to improve engagement and usage, especially for high frequency transactions. In fact, the addition of similar simplified login capabilities here in the West have improved app engagement in the order of 10–20%.
  • Go beyond replacing cash — Because of demonetization, payment companies are fulfilling an immediate need to replace cash. Now, flush with scores of new users, companies have a golden opportunity to maximize the lifetime value of these customers; they have to do more than orchestrating payments between consumers and merchants. Companies can creatively utilize large customer and transactional datasets to provide other financial products, such as real-time credit and micro-savings. Venmo’s social feed comes to mind as another form of generating customer engagement and delight, though many feel it’s intrusive. Venmo claims many users open the app just to see what their network has been up to, allowing the company to make something as mundane as paying friends a rewarding experience, one that keeps customers coming back.

Of course, all this is based on my experience as a FinTech PM, so I may have a skewed perspective on what’s required to make digital payments ubiquitous. I’d love to hear from others who have worked in the space. Demonetization is being described as one of India’s most important economic reforms. However, the story of demonetization and its potential impact is currently overshadowed by its poor implementation. Will demonetization’s success ride on how quickly India goes online to pay? What are the challenges digital payment providers face as they innovate and scale to the masses?

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