Challenges in becoming a cashless society: insights from India’s currency note ban

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At midnight on November 9, India banned its two largest currency notes. The 500 and 1000 rupee notes – worth approximately SGD 10.65 and SGD 21.30, respectively – went out of circulation overnight, plunging the country into economic chaos.

The union government led by Prime Minister Narendra Modi had justified the ban by saying it would disrupt the circulation of ‘black money’ – colloquialism for money kept off the books by tax evaders. Financial corruption had been a key election issue in the polls leading to Modi’s election. But he also added that the absence of high value notes would impact terrorism financiers and fake currency producers.

Within weeks, it emerged that the note ban had done little to deter tax evaders, terrorists, or even fake currency producers. Instead, the public endured suffering as they queued for hours outside ATMs and banks to withdraw their own money. Quickly, the government’s justification for the note ban moved to something more believable and aspirational: that India could now move towards becoming a cashless economy.

Here are some challenges to going cashless and learnings from India’s tryst with demonetisation.

E-wallets: a long way to go

Barely months ago, many of India’s e-wallet providers were seen as circling the drain the moment India’s central bank launched its own peer-to-peer money transfer system. Far from being finished, the demonetisation came as a shot of adrenaline to e-wallets. They are now indispensable to millions of households. Small business owners, cab drivers, service providers, etc. moved quickly to open e-wallet accounts without which their businesses would have suffered. Customers who didn’t have hard cash but had smartphones and money in their banks also benefitted from e-wallets. However, e-wallet users remain a small percent of India’s total population. Paytm, which is India’s most popular e-wallet with around 150 million reported users, connects only 15% of India’s one billion cellphone users, or about 12% of the total population.

You need more smartphones

Despite having one of the largest numbers of cellphone users, smartphone use in India is limited. In February 2016, around 220 million smartphone users existed in the country, as per reports. The vast majority of India’s population still uses feature phones. However, smartphone users are a fast growing number. Most digital payment innovations are aimed at smartphones, and those without one may not benefit from those innovations.

Internet connectivity remains low

For digital cash to flow freely, internet connectivity is a must. As of now, India’s internet users are reported to be around 350 million strong. More optimistic sources peg this figure at 450 million. This number is growing quickly and is expected to double in five years. Till then, there currently are nearly 800-900 million people who don’t use the internet and will have difficulties using digital money. Where there is connectivity, services need strengthening. This month, the coastal city of Chennai was hit by cyclone Vardah. This disrupted internet services in many south-Indian centres. This compounded the suffering of millions who had cash nor connectivity for digital payments.

Bank account opening needs to be easier

Potentially 200-300 million Indians don’t have a cellphone or any government ID and would therefore not be able to open a bank account. Therefore they may struggle to set up e-wallets or use other modes of digital payments. India needs systematic reforms in financial governance which would lower entry barriers to the formal financial system, allowing hundreds of millions of more people to reap the benefits of savings and investments.

Digital education needs to improve

Finally, awareness of digital – especially digital payments – remains poor in India. The government must invest heavily towards educating the masses about the benefits of going digital – be it ending terrorism or increasing tax collection.

This article first appeared on Tech in Asia.

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