Author(s): Raghu Gopal
On Tuesday, the government of Indian Prime Minister Narendra Modi announced the withdrawal of 500 rupee (about $7.50) and 1,000 rupee (about $15) notes effective immediately, sweeping away 86 percent of the total currency in circulation. In India, the vast majority of consumer payments are still made in cash. About one quarter of India's $2 trillion economy is unaccounted for.
Each year, India spends about $3.5 billion on maintaining paper currency in circulation, including on printing new cash and ATM charges, central bank data shows.
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, the company said in a statement on Wednesday.
The government's main motivation for pulling paper money from circulation is to fight corruption and the black market, but accelerating the adoption of mobile money could turn out to be a significant windfall. India was already a leader in the use of biometrics for identification for government-centric transactions.
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. The network effect is truly kicking in.
A move to a cashless economy will drive lower transaction costs while leading to improved transparency in the economy. We believe that the Indian government's initiative to create a cashless society will require the successful adoption of mobile money. It's a unique and untried method: replacing banknotes with smartphones.