Cashless transition in India

The demonetization of about 86% of currency in circulation followed by a slow trickle to make currency available (fueled by capacity constraints on printing new currency as well as strict limits on cash withdrawals from banking channels), has begun to push up the acceptance of cashless transactions in the country. It has further helped that RBI has mandated waiver of MDR for a defined period to promote cashless transactions.

A number of smaller merchants have latched on to technologies from Prepaid instrument providers, who have a closed or semi-closed system. As PPIs migrate to become full players in the Unified Payment Interface regime, the true power of UPI will come to the fore. This will allow a small tea and snack vendor or a coconut water vendor to effectively accept any form of non-cash instrument approved by RBI. USSD transactions are being pushed by telcos for those without smartphones, and given the smartphone penetration in India, that is a cashless transaction method being favoured.

A number of people have already started to pay their maids, drivers, cleaners etc. electronically. Since availability of currency is higher in denomination of 2000, and lack of change makes it practically unusable unless one is buying about 1500 worth of goods, the workers who relied on cash are learning to transact electronically as well. Availability of Jan Dhan accounts has made this access easier... the folks who were maintaining zero balance Jan Dhan accounts are now beginning to transact in it, and finding it convenient than carrying cash. Most stores are no longer insisting on minimum 100 or 200 for usage of non-cash methods for fear of losing the business altogether.

Overall, though economy is expected to go downhill for couple of quarters at least due to reduced overall economic activity, the proportion of cashless transactions has certainly taken a quantum leap. 

Cancellation of 500 and 1000 INR bank notes

The Prime Minister of India, in an unscheduled televised address to the country, declared that the current 500 and 1000 rupee notes issued by the RBI will no longer be legal tender from the end of day of 08-Nov. ATMs and banks will be shut and withdrawals thereafter will be restricted to INR 2000 a day initially, increasing to 10000 a day and 20000 a week for 2 weeks. Cash will still be accepted for 72 hours at government hospitals, pharmacies, petrol pumps, milk booths etc.The demonetized notes can be deposited at the banks and post offices till Dec 30, 2016. After that they can be exchanged at the RBI offices till March 31, 2017,

New bank notes of 500 and 2000 denomination will be released by RBI. The current lower denomination notes, of INR 100, 50, 20, 10, 5, 2 and 1 will continue to be legal tender.

This is the single biggest move by the government to curb black money, which is the biggest source of currency in circulation in high denominations. Counterfeit currency, being promoted by cross-border elements and funneling terrorism has also been cited as a big tipping point for this change to come about. This also will have an impact on upcoming swing state elections (e.g. in Uttar Pradesh, which is notorious for cash for votes), apart from the large increase in bank deposits that are expected to occur due to the increased deposit base as well as improved coffers of the government due to increased tax collection base.

It is important, however, to note that this announcement, though sudden and well planned, gels well as an important component of the necessary activities needed to reduce circulation and creation of black money/ cash in market, and move more transactions to electronic and traceable transactions. Consider the following:
1) recently relatively unsuccessful VDIS (Voluntary Disclosure of Income Scheme) that ended on Sep 30, 2016.
2) The move to bite the bullet on rolling out GST with fully electronic transactions, even though its implementation could result in immediate inflation and chaos among the government biggest support base - the trading community - risking its primary vote bank in next elections.
3) Becoming part of the global information exchange system for curbing illicit overseas holdings .
4) Propagating Adhaar based Jan Dhan Scheme, and funnelling government payments and subsidies into these accounts - improving financial inclusion to convert the unbanked into banked
5) Pushing for the UPI interface from NPCI to go live to allow real time non-repudiable transactions
6) Creating and promoting a Rupay payment switch to reduce transaction costs,
7) Promoting non-cash transactions at petrol pumps, railway stations, mass transit etc.
8) Promoting availability of non-cash acceptance infrastructure at small retailers
9) Promoting availability of more payment infrastructure through small banks and payment banks, apart from mobile wallets etc.

These are all answers to the problems ordinary citizens would have faced if this demonetization was done earlier or shortly after this government came to power. Granted that the ball was rolling on some of these from previous governments or from the regulator unilaterally. But now, the infrastructure is in place for this demonetization to not be such a problem, and is expected to contribute materially to our overall goal of reducing physical cash in the world.

Next few weeks are critical for this move to make its full impact felt.

UPI from NPCI Launched

The much awaited Unified Payments Interface (UPI) from NPCI was launched by the government on April 11.

As per MD, NPCI 29 banks have signed up to be part of the UPI and will be part of the system by Jun 29. Eventually all scheduled banks will become part of it, either as a regulatory push or by just responding to market needs. The architecture of UPI allows multiple PSPs (Payment System Players) to connect to UPI and access NACH, IMPS, AEPS, Rupay, NFS etc. PSPs, by definition include Bank, Payment Bank, PPI, or any other RBI regulated entity that is allowed to acquire customers and provide payment (credit/debit) services to individuals or entities. This definition also rolls in the existing "Payment Gateways".

Accordingly, larger entities like banks will be able to service customers and small merchants acquired by PPIs, and vice versa, thus expanding the choice of payments offered to the customer at a merchant. Ability to have a virtual address for both payer and payee can allow the anonymity of cash to exist, at least to the visibility of the merchant.

A lot of action is expected in the last mile space both to the consumer and businesses, as merchant acquisition is stepped up. This is because anyone who acquires the merchant basically acquires them for the entire issuer community of networks, banks, PPIs, etc and not just for their own network. Thus a PayTM acquired merchant will be able to accept Rupay, Mobikwik, Airtel Money or any other payment instrument and vice-versa. MDR is expected to be lower than what is prevalent in the market.

Good times lie ahead for innovations to benefit the customer and merchant alike.