The Only Winners of India’s Cash Crackdown Are Banking Apps

At a political rally in early December, Indian Prime Minister Narendra Modi quipped that even beggars are warming to digital money—referencing a two-year-old YouTube video in which a homeless person pulls out a card machine for a driver who doesn't have change.

On November 8th, Modi, who leads the right-wing Bharatiya Janata Party, announced that 86 percent of the country's circulating cash, via 500 and 1000 rupee bills, would be voided within hours to curb corruption and bring unaccounted income to light. That's kind of like being told you can't use $1 or $20 bills in a cash-only restaurant.

This colossal shift is particularly difficult to implement here in India, where cash drives over 90 percent of transactions, and where credit card machines aren't widely available. Modi's new policy might be revolutionary, but at a high price: it has left behind millions of Indians who are unbanked and digitally illiterate in its bid to push transactions online.

Although there are over 25 million credit cards and close to 700 million debit cards in India, most people only use the latter to withdraw cash from ATMs. And even if they have credit cards, shop owners and vendors often do not have the connectivity or power to charge them—leaving card-swiping machines to collect dust. Rural India, meanwhile, remains almost entirely run by cash.

For every 1 million Indians, there are 693 Point of Sale (PoS)—credit and debit card processing— machines in comparison to the 4000 machines for every 1 million people in China and Russia. Moreover, well over half of all PoS systems in India are confined to major cities.

That impacts both consumers and vendors. In the weeks since Modi's announcement, millions of Indians have stood in hours-long lines outside banks and ATMs to deposit their money—below a $4,000 limit—and exchange their old notes for new ones. And small business owners are left in limbo.

In the southern city of Hyderabad, Bishan Garashia, a 50-year old salesman, sat idle behind stacks of bright blankets and sweaters. He had two weeks to sell before he packs his unsold stock worth around $3,000 back to his village in central India, he told Motherboard.

The trader, whose roadside stalls line a bustling highway, said his business has dropped by 70 percent since Modi's November 8th announcement. He, like much of India's informal sector which makes up 45 percent of the country's GDP, cannot afford using a PoS system, nor does he have the network connection required for one. The machines are a few thousand rupees (starting at $30), but the bigger expense is the transaction fee, which can run as high as 2.5 percent on credit cards.

"Who is going to come teach us how to use these things?" Garashia said, shrugging away knowledge of how PoS systems or digital wallets work. He said he has a bank account but hasn't been able to send home money in weeks due to the sharp drop in sales after demonetization. The shortage of available currency in the last month has made many Indians save the cash that they have for essentials.

Low-value transactions in India—a pack of cigarettes, roadside meals, or goods like Garashia's sweaters—usually cost less than $5, making credit and debit cards an inefficient and expensive payment mode.

In this plastic-averse climate, digital wallet mobile apps like Paytm and Mobikwik—which allow online and offline payments using money deposited from a bank account—are more likely to become the country's most viable alternative to cash.

Paytm, which is backed by Chinese behemoth Alibaba, reported a 300 percent hike in downloads following Modi's announcement and Mobikwik claimed over 5 million new users in two weeks. In the last month, digital wallet transactions have outnumbered those of both credit and debit cards.

Demonetization has also alerted these companies to India's vast and largely untapped rural market. The Economic Times said Paytm and Mobikwik have each deployed thousands of employees to enroll rural (and semi-rural) owners of mom-and-pop stores. And for good reason. By 2020, rural users will make up half of India's internet base, according to Boston Consulting Group.

"There's an undeniable surge in people interested in using mobile wallets and wondering whether their ATM cards can be used as debit cards—which they can. It's an idea whose time has come," says Ashok Malik, a fellow at the Observer Research Foundation, a Delhi-based think tank.

According to Malik, a conservative analyst, even a small uptick in online payments could result in more of India's economy going digital than ever before. How many of these digital users stay on after the cash scarcity ends—which is said to last until March based on current printing rates—is anyone's guess, he said. "It's a question of habit and getting used to it as well."

But challenges persist, even for those who are using digital currency.

Ravi Kumar, a mechanic shop owner in Hyderabad, signed up for Paytm weeks ago, but is among the millions of Indians waiting for bills smaller than the new 2,000-rupee note (worth about $30) to arrive. For the past three weeks, he has accepted 'IOUs' as payment from customers since he cannot break the high-denomination note into smaller change.

"Paytm may work, but even if I take it, how am I supposed to pay my suppliers? At first we supported [demonetization] but we also thought that there would be enough cash by now."

Even if urban India begins embracing digital or credit-based financing, there's still the issue of those who are without bank accounts. In the last two years, millions of Indians have opened bank accounts, as part of the government's sweeping financial and digital inclusion program. But hundreds of millions remain unbanked. E-banking in rural areas—where internet access is patchy—is out of the question.

Banking disparities can be seen right at the front of the now-famous lines outside ATMs as the demonetization effort persists. Individuals with multiple bank accounts often withdraw three or four times more than the daily limit of 2,500 rupees per person—by using more than one ATM card in a single trip.

Laxmi Nalla**, for one. Shuffling through her purse as she approaches the ATM, the middle-aged homemaker passes two ATM cards to her teenage daughter as she keeps three. Moments later, Nalla and her daughter emerge from the claustrophobic space with five slender 2,000-rupee notes in hand.

"Anyhow 4,000 of this will go to the watchman," she says. "What will I be left with?"

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