India’s Demonetization Is Having A Domino Effect On Credit, E-Commerce

Digital wallets are suddenly ubiquitous, but bigger changes are to come.

India’s Demonetization Is Having A Domino Effect On Credit, E-Commerce
[Photo: Flickr user OXLAEY]

When graduate student Drew Newman went on vacation to India earlier this month, he found a nation in the throes of transformation. “Even in small cities, you’d see handwritten signs on tuk-tuks saying ‘We accept Paytm’ or another type of mobile payments system.”


It had been two months since Prime Minister Narendra Modi’s decision to remove 500 and 1,000 rupee notes from circulation—86% of the country’s overall currency—and the surprise shift in policy was still disrupting daily life for India’s 1.3 billion people, as well as foreign travelers. One day, Newman and his wife visited Kumbhalgarh Fort in Rajasthan. “The admission price was 400 rupees a person. I pulled out a 2,000 rupee note, and they didn’t have change,” he says. And yet, even as snaking lines continued to form at ATMs, “without exception everyone seemed to be happy.”

Interviews with business leaders in India confirm that impression: Citizens, by and large, see demonetization as an effective means to root out tax evasion and counterfeit currency, which has been linked to terrorism. Pundits in the U.S.—not to mention comics in India—have ridiculed the Reserve Bank of India for its management of the demonetization process. But Indians are looking beyond the short-term “cash chaos” and toward the policy’s longer-term benefits.

“They feel empowered,” says Karan Sharma, a director in the financial advisory group at Avendus Capital’s Mumbai office.

And so are technology companies. Digital wallet providers like MobiKwik and Freecharge have seen enormous jumps in activations; market leader Paytm, already well positioned thanks to its user engagement strategies and Alibaba backing, has gained 20 million customers. (As context, roughly the same number of Indians have a credit card of any kind.) In this first wave of adjustment, the big story has been local merchants’ adoption of digital payments point-of-sale solutions. On CNN, for example, a reporter visited a street food market and found snack-seekers buying samosas via QR code.

Yet digital wallets, and their effect on local vendors, are just the beginning. In the background, digital wallets are helping to construct an infrastructure that will better support credit and e-commerce, two areas in which India has been lagging behind Western economies and rival China.

Jainesh Sinha, COO of student loan startup GyanDhan, anticipates that his company will benefit in direct ways from the government’s new policy. In the past, families and friends would gather together thousands of dollars worth of cash to pay the tuition for a promising son or daughter’s college education (only 7% of Indian students take out educational loans, according to the Parthenon Group). Removing rupee notes from the system has made such arrangements more challenging.


“Now more and more people will have to turn to credit for paying for education, which is good for business,” says Sinha, who previously worked for Capital One outside Washington, D.C. Now back in New Delhi, he partners with banks to offer educational loans of up to $45,000, based on GyanDhan’s estimation of a student’s future income.

“People have gotten a taste of how convenient digital payments can be,” Sinha says. Even his local vegetable vendor, in his 60s, has started accepting Paytm. “For the first few days he was like, I don’t understand this, it’s fake money.” Now, like many other merchants, he sees that digital has its advantages.

Digital wallets are also paving the way for growth in online shopping, which has until now been hampered by “cash on delivery” payment norms. Four out of five Indian smartphone owners under age 35 “window shop” online, according to an eMarketer survey, but just 28% make a purchase at least once a week. Retailers like Alibaba, which is preparing to enter the market, are betting that digital wallets will start to change that behavior.

For Amazon and Flipkart, which have been fighting for primacy while grappling with India’s transportation infrastructure, e-payments present an opportunity to accelerate sales. Amazon has made significant investments in India and is increasingly well positioned, thanks in large part to the draw of its low prices (and despite some unfortunate cultural stumbles). The company has yet to unveil a proprietary digital wallet for consumers, but recently launched Prime.

Flipkart operates its own digital wallet, called PhonePe, which enables online shopping as well as bill payment and peer-to-peer transfer services. Down the road, it’s easy to imagine Flipkart, which has emphasized big-ticket items like electronics and appliances, using the wallet to offer customers credit in the form of loans or installment payments.

About the author

Staff writer Ainsley (O'Connell) Harris covers the business of technology with a focus on financial services and education. Follow her on Twitter at @ainsleyoc.