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India’s Demonetization Spurs Digital Payment Services

By Mike Faden

India’s dramatic “demonetization” initiative in late 2016 triggered an equally extraordinary uptake of mobile payments and other electronic payment services, which some observers believe may have a long-term effect in helping to move the country’s economy toward a less cash-intensive future.1,2 The shift is of more than passing interest to U.S. companies trading internationally, as India was the 18th largest export market for U.S. goods in 2016 with $20 billion of merchandise exported.3,4

On the evening of November 8, 2016, India’s Prime Minister Narendra Modi announced that the country’s highest-denomination 500- and 1000-rupee bills — representing 86 percent of the currency in circulation – would cease to be legal tender at midnight. He said the move was aimed at combating problems such as fake currency and “black money” earned through illicit activities, and that people would later be able to replace the old notes with soon-to-be-issued replacement banknotes.5,6


Immediate Shift to Payment Services


In a country where an estimated 98 percent of consumer transactions are in cash and many people lack bank accounts, the resulting currency shortages caused widespread disruption for businesses, consumers and banks.7 Indeed, some observers warned that demonetization brought serious risks, including the potential to undermine confidence in India’s economic management and reduce economic growth.8,9


However, the sudden move also resulted in an immediate shift to electronic payment services, especially mobile B2B payments. The value of digital transactions swelled more than 40 percent by December 2016, according to the Reserve Bank of India.10 New B2B payment services were launched, and some mobile payment services reportedly saw transaction volumes increase by 300 percent or more.11,12 In addition, a new government-developed payment app was downloaded some five million times and processed some 700,000 transactions within four days of its launch.13


The Drive Toward a Cashless Economy ?


In fact, some experts say that the demonetization should be viewed as part of a bigger picture: The Indian Government’s ambitious efforts to shift from an overwhelmingly cash-based economy to a greater reliance on digital payments. As Shiv Vadivelalagan, of payments consulting firm Glenbrook Partners, put it in a blog post: “...within weeks, the demonetization pitch changed from eradicating black money and fake currency to accelerating India’s journey towards a cashless economy. After all, if you don’t have access to cash, it’s likely that you will at least consider using an alternative.”14


While enacting policies to ease the currency shortage, the government also implemented several measures to encourage businesses and consumers to adopt digital payment services, Vadivelalagan observed. These included reducing or waiving taxes on some electronic payments, providing free point of sale systems to merchants in villages, and offering discounts when digital payment methods are used to buy products from some public sector companies.15


Furthermore, the government had previously implemented several major initiatives to promote digital payment services starting as far back as 2006, Vadivelalagan noted. Those efforts include a massive biometric national identity system that can be used to verify and secure payments; and a set of application programming interfaces (APIs) that enable payment services to access national payment platforms.


Mobile Payment Services Soar


Following demonetization, millions of Indian citizens who might not have credit cards or even bank accounts were “leapfrogging into mobile payments” due to their convenience, The Wall Street Journal reported, although mobile B2B payments still accounted for only a small percentage of total transactions. If the trend continues, it could even make automated teller machines redundant in India by 2020, according to an Indian government economic policy expert quoted by the Journal.16


With more than 600 mobile subscribers, India has become the world’s second-largest mobile communications market after China, according to GSMA, a mobile communications industry group.17 Fewer than half those devices are smartphones, GSMA says, so India has also implemented a service that lets residents make payments with basic feature phones.18,19


Trends After Currency Reintroduction


Though digital transactions continued to increase for several months after demonetization,The Hindu noted that in April 2017 government-provided data showed a resurgence of cash and a decline in some forms of digital payments. The newspaper attributed the trend reversal to the issuance of new replacement currency, and to charges for point-of-sale transactions that discourage smaller merchants from accepting electronic payments. Use of mobile wallets continued to grow, however.20



India’s demonetization in late 2016, along with a range of other government initiatives, has driven rapid adoption of digital payment services, especially mobile B2B payments. Though it remains to be seen whether that trend will continue, some experts believe that demonetization was a major step in the country’s development from a primarily cash-based society to one in which digital payments play a major role.

Mike Faden - The Author

The Author

Mike Faden

Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.


1.“Demonetization Is Catalyzing Digital Payments Growth in India,” Federal Reserve Bank of San Francisco;
2.“Demonetization Roulette: India’s unusual approach to creating a cashless economy,” PaymentsViews;
3. “India – Market Overview,”;
4.“Trade in Goods with India,” United States Census Bureau;
5.“Rs 500 and Rs 1,000 notes pulled out of circulation immediately: PM Narendra Modi,” The Times of India;
6.“Why India wiped out 86% of its cash overnight,” BBC News;
7. “The effects of India's currency reform? "Chaos" say analysts,” U.S. News & World Report;
8.“India’s Demonetization Debacle,” The Wall Street Journal;
9.Demonetization Roulette: India’s unusual approach to creating a cashless economy, PaymentsViews;
10. “Threat to cashless economy? After demonetisation push, digital transactions recede,” Hindustan Times;
11.“India’s MoneyOnMobile Enters B2B Payments,” ITBankNews;
12.“India’s demonetization is tightening the payment startup race, but the winner could well be the Indian government,” Quartz Media India;
13.“5 million users download BHIM app in four days,” Live Mint;
14.“Demonetization Roulette: India’s unusual approach to creating a cashless economy,” PaymentsViews;
16.“Could India’s Cash Blitz Kill Off Cards, ATMs?,” The Wall Street Journal;
17.“The Mobile Economy India 2016,” GSMA;
18.“Overview of *99# Service,” National Payments Corporation of India;
19.“Demonetization Is Catalyzing Digital Payments Growth in India,” Federal Reserve Bank of San Francisco;
20.“Cash is back as digital payments dip on cost,” The Hindu;

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