India takes the tough path to digital payments

Out of the blue, on 8th November last year, the Indian prime minister announced in a live televised event – broadcast at 8.15pm – that all Rs 500 and Rs 1,000 bank notes were to be removed from circulation from midnight that night. The final deadline for removal of the existing currency was 30th December. 

The stated aim was to eradicate black money – a big problem when only an estimated 1% of the population pay income tax. Yet in a country where the majority are still unbanked, it has also proved to be a clear move towards the greater use of digital currency. (BBC Radio 4 produced an excellent overview documentary on this on 26th January titled ‘The Briefing Room: India’s Bonfire of the Bank Notes’.)

This demonetisation was a vast sweeping measure. It equalled 86% of the value of the currency and 25% of all actual banknotes. And while it got nowhere near as much media coverage around the world as it would from a more developed market, scenes of queues outside cash machine were widely broadcast.

Many of the problems arose because although people diligently took their old currency into the banks, no new notes were forthcoming. This was compounded by a general ongoing shortage of working ATMs which left many individuals with absolutely no money.

“The country responded well,” says Harold Montgomery, Chairman and CEO of MoneyOnMobile – which allows for easy digital money payments via SMS – when I meet him for a coffee in London. People were “surprisingly docile”, especially when you consider how people would react in countries like the US, France, Germany or the UK. 

However, he says “if you did it the western way [i.e., with plenty of warning and government advice on how to prepare] you’d miss a lot of the point.” This would give the more nefarious elements of society time to get rid of their black money. “It’s not clear corruption goes away because you clobber people one time [though],” he adds.

MoneyOnMobile is one of a cohort of payment companies which are working to tap into the growing digital payment market in India. Montgomery previously worked with digital payments in the US, discovered the Indian opportunity in 2011 and started building investment in 2012. [It raised an initial $10M in venture funding and $1.5M in debt financing last year.] “We’re 100% dedicated to the Indian opportunity,” he says.

The solution “is a cut and paste of [Kenya’s] M-Pesa model,” explains Montgomery, although it has some local variations. This means the principle way it is used, at least initially, is to sell airtime via SMS. However, unlike in Kenya the company can’t tap into a vast existing phone network, so instead, it has to build a store footprint from the ground up. This is achieved by 300 salespeople who are working to promote a revenue sharing model with local shopkeepers across the country.

At the start of this year – in the still ongoing fallout from demonetisation – the company began offering cashback in local shops. This has seen a 10 – 12% growth a week by volume since it launched, Montgomery tells me.

Demonetisation “forces the adoption of digital payments,” he adds, but there is still a long way to go. Before demonetisation payments were only 2% digital, he tells us. If they grow 500% that’s only 10%. “Digital will grow but it won’t replace cash overnight.”

The opportunity for digital payment operators in India mostly comes down to the sheer size of the market. This is a “thin margin business,” explains Montgomery, it takes a very large number of small transactions to cover the overheads.

Interestingly, an offshoot of all this is to provide some befits to local women who often completely lack independent financial means and rely entirely on their husbands. “These women had never had a bank account and never had a way to earn money,” explains Montgomery. “And they don’t want to give their phone number to a man”. This means money transferring services like this one can offer a safe opportunity for slum women like the Kalighat Society in a Calcutta, who run a small business providing phone credit to others in a similar position.

The real significance of digital payments though is that it taps into the growth of e-commerce across the country. Many large organisations – like Amazon – are staking a lot of money on getting into this growing market. However, the lack of credit cards means that 60% of transactions are still cash on delivery and makes development slow. “One of the things holding India back is how to connect with the digital economy,” says Montgomery.

The challenge for companies like his is how to get in with those e-commerce giants. “You have to build a network to get the big players interested,” says Montgomery. “You have to be patient” and deliver the size, scale and reach to satisfy the problems those companies have. “You need a payment mechanism that covers every crevice [of the country] – that doesn’t exist yet – [but] we’re as close as you get.”


Also read:
Can data change lives in India?


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