The Next Silicon Valley

India’s shock currency move could be a major boost for digital India and start up ecosystem

While the world’s eyes were focused on the US election in early November, over a billion people were shocked by another major event that happened on the other side of the world, in India, when Prime Minister Narendra Modi announced that two of the most widely used bank notes in the country would be made worthless overnight.

On Tuesday 8th November, the Indian Prime Minister announced the withdrawal of 500 rupee (about $7.50) and 1,000 rupee (about $15) notes effective immediately, removing around 86 percent of the total currency in circulation. In India, the vast majority of consumer payments are still made in cash, and it is thought one quarter of India’s $2 trillion economy is unaccounted for.

Analysts and commentators in India around the world have praised this move. Not many people knew about this, even in government, until the day of the announcement. India has long been pushing the agendas of ‘Digital India’, financial inclusion and universal identity. While this move helped remove a significant amount of black (unaccounted) money in circulation, it may certainly be the digital push India needed, as more people start using formal methods of payment for goods and services, and particularly mobile payments.

According to CCS Insight, India spends about $3.5 billion each year on maintaining paper currency in circulation, including on printing new cash and ATM charges. The Indian government started a massive campaign in 2015 to open no-frills bank accounts for the unbanked, with the aim of bringing the country’s 1.3 billion citizens into the financial fold and remove unaccounted cash.

The latest move is estimated to more than double annual growth at mobile payment companies including Paytm and MobiKwik. Within hours of the government’s announcement to pull paper currency, Paytm saw a 1,000 percent surge in money added to its mobile wallet accounts, a 200 percent increase in downloads of its app and a 250 percent rise in transaction value, according to a company statement on the day after the Prime Minister’s announcement.

While the government’s main motivation for pulling paper money from circulation is to fight corruption and the black market, accelerating the adoption of mobile money could turn out to be a significant boost for mobile payment and tech companies.

The growing adoption of smartphones in India, thanks to falling device prices, is driving a surge in the number of mobile Internet users, which is expected to reach 400 million by the end of 2016. This is enabling previously disconnected individuals to leapfrog into a digital world. The low cost of mobile data and the increasing availability of free Wi-Fi has been creating an enticing environment for newly connected users.

A move to a cashless economy will drive lower transaction costs while leading to improved transparency in the economy. CCS Insight says the Indian government’s initiative to create a cashless society will require the successful adoption of mobile money.

Speaking in Inc42 magazine in India, Deepak Abbot, senior vice president growth marketing at Paytm, said, “There are so many people who don’t have bank accounts and now they will realize the importance of one. With payment banks coming in, it will be a big boost to banking as a lot of people will start using banking instruments. Now with this initiative, I think the drive to open accounts will be much easier because now people will seek information as to how to participate in this digital payment thing. So adoption would be much quicker than what we had planned.”

He adds, “India might be a 95% cash economy today, but we see that percentage is falling. We won’t see the majority using digital payments, at least in the next one year but the adoption rate will be much faster. With this step from the government, we may be able to see in a few months, the numbers which we had planned for a year down the line.”

Inc42 says many mobile wallet operators have already benefited since the announcement. For example, PayU India registered an 80 percent jump in transactions on the Wednesday, as of 12:30 pm, compared to Tuesday, with transaction rising from the average daily volume of 1.2 million to 2.5 million. Similarly, Freecharge claimed that the average wallet balance on its platform increased 12 times since the announcement. Online marketplace Snapdeal also announced the launch of its new and first-of-a-kind feature, wallet on delivery (WoD), which allows users to pay on delivery by using their Freecharge wallet.

MobiKwik meanwhile reported an over 40 percent increase in app downloads within less than 18 hours of the announcement. User traffic and merchant queries went up by 200 percent among its over 35 million users. Oxigen Wallet reported an increase in the load money transactions by up to 40-45 percent during the first half of the Wednesday.

Ola Money, part of taxi aggregator Ola, also benefitted from the drive with over 1,500 percent increase in recharges across 102 cities of its operation within 15 hours of the announcement. Similarly, Bengaluru-based mPoS solution provider Ezetap, which makes its own point-of-sale devices to enable merchants to receive digital payments, saw a 25 percent spike in transactions.

Paytm is still the largest player in the segment with 150 million users.

How will this affect the tech startup ecosystem?

91springboard, a co-working community in Delhi, offered its perspective on how the Prime Minister’s move will affect the tech startup ecosystem. It says that the fact that now money will become formal and white will give rise to a greater number of electronic transactions. Startups will find it easier to collect and pay money.

It will be much easier for startups to collect cash from customers or clients – especially where previously, some startups weren’t able to collect money from people because they did not want to collect cash payments, or were forced to accept cash only or else they wouldn’t get paid at all. This move really makes their life a lot easier.

91springboard adds that this greatly levels the playing field particularly for the startups and businesses that were in sectors that had to deal with corrupt politicians, since money would now have to be accounted for through formal methods of payment.

It also helps investment in startups. Black money and cash money couldn’t go into startups as investments. Now, with more money coming into the formal economy people will start looking at more avenues of investment and this would greatly help startups who are seeking funding.

Lastly, the move will force people to adopt tech, and particularly mobile money. Farmers are used as an example. Previously, he or she would not be motivated to go to a bank that’s 10 km away in order to make a transaction – it was easier simply to be a part of the cash economy and keeping all notes tucked away at home. But now, the farmer and others like them will be forced by government to visit a bank and create an account and deposit all money there. This can then be set up for transactions by mobile phone, removing the need to visit the bank, but an additional advantage could be the ability to obtain more formal credit.

The move by the Indian Prime Minister certainly appears to be a smart one. The majority of opinions seem to agree that it could rapidly push India way ahead of some other nations in terms of its adoption of mobile payments, and cashless transactions. While one of the motivations of the move might have bene to flush out black and corrupt money, the side effect will be the boost in the Digital India campaign, and also a boost for the startup and innovation ecosystem.

[Photo credit: Gadgets 360 magazine]

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