A new payments ecosystem emerging in India could see millions of people switch to cashless transactions.
In India, only 45% of bank account holders report using their account for a transaction in the past 90 days. Until recently, nearly all financial transactions were conducted in cash. Late last year, the government of India took drastic steps to curb corruption and fraud and end the population’s reliance on cash. Late last year, the government of India took drastic steps to curb corruption and fraud and end the population’s reliance on cash. In November, India’s prime minister banned the use of hugh currency notes (500-rupee notes and 1,000-rupee notes) with little warning. The decision wiped out four-fifths of India’s paper currency, and millions of people suddenly couldn’t use cash for goods and services. A story in Forbes explained why this was such a problem:
“Up until this campaign, India was an incredibly cash-centric economy. Cash accounted for upwards of 95% of all transactions, 90% of vendors didn’t have card readers or the means of accepting electronic payments, 85% of workers were paid in cash, and almost half of the population didn’t even have bank accounts. A cashless future is the real goal of India’s move.“
The upside of the cash shortage is that it could force a huge shift to digital transactions, expanding financial inclusion for the previously unbanked. According to a story in The Times of India, to drive non-cash transactions, the government “has set a target of one million additional card swipe machines to be installed by banks in three months.”
Regulatory changes and QR codes
To promote the switch to digital, the government has established a regulatory category of financial services providers called payments banks. Payments banks can offer payments services, but they cannot lend money. This regulatory change allows mobile network operators to offer mobile money wallets in India. The Times of India reports that the country is also promoting a cashless payment system based on QR codes:
“The push for an interoperable QR code has come following a brainstorming session between major banks, payments companies and government officials led by Piyush Goyal, minister of state for power, coal and renewable energy. The interoperable QR code-based payments solution is being called India QR for now. Common QR code for payments soon.“
– The Times of India
The QR code-based solution enables merchants to accept electronic payments from mobile wallets using a smartphone app, without having to install a point-of-sale infrastructure. Currently, around 25% of mobile subscribers in India already have smartphones.
The mobile money opportunity
India’s push toward a cashless economy and its adoption of a QR-code based payment system present a huge opportunity for digital payments providers and mobile money. According to the GSMA:
- India has the second highest number of mobile subscribers of any country worldwide, with 616 million unique mobile services subscribers.
- The mobile phone penetration rate is expected to reach 90% by 2020.
- India has overtaken the United States as the world’s second-largest smartphone market, with more than 275 million.
Merchants and consumers who already have smartphones could easily adopt the new QR code-based payment system. Subscribers with feature phones could take advantage of other mobile money merchant payments applications as an alternative to cash. The popularity of mobile technologies in India, combined with innovative new payment systems, could prove transformational. India is certainly a market worth watching.