India Just Flew Past Us in the Race to E-Cash

Originally published by Backchannel.

New rules have made it harder for Indians to get cash. The result? Mobile payment apps are booming.

Surrounded by bottles of soda and boxes of cigarettes, Sandeep Malhotra sits crosslegged on the counter of his roadside stall, staring intently at his smartphone. A group of customers gestures impatiently, as Malhotra makes it through his first-ever mobile checkout process. He confirms the transaction details, angling his handset to receive optimum 4G. Finally, the green tick appears on his screen: success.

Until last month, Malhotra has always dealt in cash. The ritual of neatly stacking up the notes and then locking them in his battered tin lockbox was a pillar of his daily routine for years. As customers came and went, the pile of notes would grow until at last it was tall enough for him to close for the night. But finance has changed in India over the past few weeks—not only in Delhi, where Malhotra runs his stall, but throughout the entire country.

In November, India’s Prime Minister Narendra Modi announced a ban on 500 and 1,000 rupee notes (a little over $7 and $14, in American dollars) in a bid to curtail corruption. In India, the banned rupee notes are common currency, accounting for roughly 86 percent of all money in circulation in the country. Yet the relatively large-denominations bills were frequently counterfeited and proved challenging for tax offices to track as they flowed through India’s enormous informal economy.

India is a cash-driven country—just under half of the population lives without a bank account—and physical rupee notes are the only currency that hundreds of millions of Indians have ever known. The changeover has been laden with obstacles, with millions of citizens waiting in hours-long lines to exchange rupees. Yet it’s also created an unexpected progression: a burgeoning cashless economy. In the face of demonetization, merchants and consumers are adopting mobile payment.

Before last month, Paytm, a mobile app that allows users to pay for everything from pizza to utility bills, saw steady business—it was processing between 2.5 and 3 million transactions a day. Now, usage of the app has close to doubled. 6 million transactions a day is common; 5 million is considered a bad day.

Paytm is already India’s biggest financial technology platform, having raised $890 million since it launched six years ago. But now the company stands to benefit from a rethinking of how India’s payment system works. Rather than being forced to idle away time in excruciatingly long lines, “people are proactively exploring other ways to settle payments besides cash,” says Deepak Abbot, senior vice president at Paytm. “Now people are realizing they don’t need to really line up, because merchants are starting to accept other forms of payment.”

As part of the drive against black money, cash withdrawals from banks or ATMs are now limited to 2,500 rupees ($37) a day, or 24,000 rupees ($355) a week. These limits, however, don’t apply to online transactions, so Indian consumers are free to move their money as they please—as long as they do it digitally.

All of this has created a newfound system that practically incentives mobile payment. With so many people queuing up at banks every day — and a lot of Indian bureaucracy to wade through in order to open a traditional bank account or line of credit —the appeal of more convenient digital alternatives is easy to understand. According to a report in the Hindu Business Line, as many as 233 million unbanked people in India are skipping plastic and moving straight to digital transactions.“Cash has lost its credibility and payments are no longer perceived in the same way,” says Upasana Taku, the cofounder of Indian mobile wallet company MobiKwik, which reported a 40 percent increase in downloads and a 7,000 percent increase in bank transfers since demonetization. “There’s chaos at the moment but also relief that India will now be an improved economy,” she says.

Taku sees the transition to a cashless society as imminent. Which leaves India with another challenge: Now South Asia’s largest economy has to leapfrog a population that just discovered banking straight into the 21st century.

In countries where having a bank account is commonplace — such as the US, Canada, and most of Europe — adopting mobile payment systems has been slow. The movement is a transition from cash to paper checks to debit and credit cards, finally (theoretically) to e-payments.

India, however, is taking a different route. Unlike its Western competitors, India doesn’t have a personal finance system in place. The country is building the rules for e-payments and mobile wallets in tandem with a formalized economy. Before demonetization was announced, for instance, India introduced a national plan to provide broadband connections in rural areas. Now the country expects to add 300 million more internet users by 2020, marking it out as the fastest-growing digital economy in the world.

“As a country, we have more digital literacy than alphabetic literacy,” explains Ritesh Malik, a Delhi-based angel investor and the founder of startup accelerator Innov8. “We have over 330 million mobile internet users, which is larger than the US population. People may not know how to read a book, but they know how to upgrade their mobile phone.”

Through these rapid developments, India offers a look at how the US might develop in the future. With Amazon having just rolled out its first automated grocery store, Amazon Go, in Seattle, the states could be stepping away from card-based payments. But because the US already has a formal personal financial system in place, concerns about data security have arisen along with digital payments. As many as 70 percent of San Francisco’s public transit riders, for example, said they don’t trust the city to keep their credit card data secure (though 19 percent of those surveyed said they preferred to pay using mobile).

Regardless of how established a country’s financial system is, there are still barriers to adopting mobile payments. “The primary risk in accelerated, widespread adoption of [financial technology] — wherever you are in the world — is that multiple systems and vendors are all trying to take a piece of the market at the same time,” says Vinay Venkatraman, CEO of Leapcraft, a big data consultancy in Copenhagen. “Security-wise it’s always the weakest link in the chain that’s the issue. In this context, these various solutions [are] competing and interacting, which is going to lead to errors, which will inevitably result in security breaches.”

Still, in India officials are hoping that e-payments will help minimize tax laundering and evasion, and all but eliminate petty theft. That means citizens must accept the watchful eye of of state surveillance — from their own country or another—in exchange for any perceived benefits.

In India, this issue has already proven controversial for Paytm. The unexpected surge in popularity led to a media backlash, criticizing the company’s close ties with the Chinese e-commerce giant Alibaba Group, which owns 40 percent of Paytm’s parent company. No one knows who has access to data of Indian citizens who use the service, or what the national security risks might be given a fraught relationship between the two governments.

Despite the challenges, demonetization has triggered a radical shift toward reimagining India’s enormous informal economy as a data-driven digital marketplace. With little warning, the country has propelled its citizens and developers into a mobile payment race with the world’s most developed nations. But whether mobile commerce can usher in a golden age of transparency and fairness remains to be seen—in the US and Europe, just as much as in India.

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