Not everyone lost in demonetisation

On 8 November 2016, the Government of India announced the demonetization of all ₹500 and ₹1,000 banknotes, which constituted about 86% of the value of the notes in circulation at the time.

The aim behind the government’s action was to combat tax evasion, counterfeiting and corruption. The government claimed that eliminating large denominations would make it harder to hide large amounts of cash. The abrupt nature of the move and the prolonged cash shortages that followed created disruptions throughout the economy, threatening the economic output of the country. The move was heavily criticized as poorly planned and unfair, and was met with protests, litigation, and strikes.

As a result of demonetization and its adverse effects on the economy, The Asian Development Bank cut its growth estimate for India for the financial year ending March 31 to 7% from 7.4%. JP Morgan expects growth to decline by half a percent to 6.7%. The cascading effect of demonetization – drop in sales, layoffs (in sectors like construction, textiles & jewelry) have all taken a big hit on the economy. According to some estimates, the cost for merely swapping out the demonetized currency is around 1.28 trillion rupees, or about $19 billion.

But not everyone lost out, e-wallet firms such as Paytm, Oxigen and MobiKwik turned out to be lucky winners and they won big. As per government data, the number of daily transactions has shot up from 17 lakh (November 8, 2016) to 63 lakh (December 7, 2016), a growth of 271%.

Huffington Post: In a single master stroke, the government has attempted to tackle all three malaises plaguing the economy—a parallel economy, counterfeit currency and terror financing.

According to a study titled Indian m-Wallet Market, within 12 days of the announcement Paytm raked in over 7 million transactions worth Rs 120 crore a day and was doing more transactions than the combined average daily usage of credit and debit cards in India. Now that is some serious business gain, all thanks to demonetization.

A lot of people were thankful for e-wallet firms for helping them tide through the tough days post demonetization, and rightfully so, but they failed to see how with every transaction they were losing the value of their money. Let me explain this using an example:

Mr. X buys Rs. 10,000 worth of goods online and he pays for it using an e-wallet. When the payment gateway receives the money, its charges TDR (transaction discount rate), on an average it will be 2% + service tax on transaction value. So payment gateway takes Rs. 230 ((10000*2%)*(1+15%)) out of Rs. 10,000. In most cases, the company pays 50% (Rs. 115) of its payment charges to the bank and the rest (Rs. 9770) to merchant. Upon receiving payment, the merchant will supply material to Mr. X. When the merchants supplies the product, the cost incurred (Rs. 230) is charged to Mr. X (either directly or by decreasing the value of the product to Rs.9,770 instead of Rs.10,000). Here is a visual depiction of the above transaction:

If we calculate the TDR for a large number of transactions we find that after about 70 transactions, 80% of the initial amount is lost as transaction fee alone (and 90% is lost after 100 transactions). Cash, on the other hand, does not lose its value in transactions. So going cashless does comes with its inherent problems, costs that the average Indian may not be aware about.

Is going cashless completely secure?

Although going cashless does seem like the way forward, we need to stop & think if it is completely secure. In December, Paytm servers were down for 1-2 hours, affecting a very large number of transactions. Paytm, in an official communication has also admitted to some fraudulent Paytm users who were part of an online scam. United Payment Interface (launched by RBI) uses a double factor authentication and is considered more secure according to bankers.

The Wall Street Journal: The long-term effects of India’s demonetization gambit remain unclear, largely because no other major economy has attempted such an experiment except during a crisis. But with growth slowing and job losses rising, the short-term prognosis appears grim.

Some experts feel it is RBI’s inefficiency when people pay small amounts like 10/20/50 using e-wallets, the institution should have done more to distribute smaller denomination notes post-demonetization. e-wallets are similar to carrying a self-signed cheque, very vulnerable to fraudsters. India is far behind other nations when it comes to dealing with debit/credit card frauds, we can only hope it is in a better state for e-wallet hacking and frauds.

Another talking point among experts is ownership, the single largest shareholder of Paytm is Alibaba, the world’s largest e-commerce company that is based in China. Although the idea seems far-fetched there are some who believe that with some pressure, Alibaba could get access to consumer spending and behavior patterns from Paytm. In a world where information is power, this idea should not be taken lightly.

Demonetization may have its pros & cons, and we are all more or less aware of it, but the flip side of it and its boost to e-wallet companies makes for a great case study. Some of the issues that may arise can be addressed:

  • The government can revise or enforce existing laws to ensure that parties outside the country (such as Alibaba) do not get access to sensitive data.
  • Data security must be regulated by an independent government agency that must set the rules & guidelines and enforce them from time to time. There must be necessary protocols put in place for cases of consumer fraud and the agency must be bestowed with necessary powers to handle such incidents.
  • The government can encourage the use of UPIs and use its low transaction fee as a selling point.
  • The government must bring about regulation in the transaction rates charged by e-Wallet firms and need to reduce these rates drastically. According to reports, this digital payments market will soon touch 2,000 trillion by FY 2021-22, even a small percentage of this market will be quite substantial.

Image Credit: Pixabay

The author is Founder Director of, a full service mid-market investment bank


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