Daily Fintech Conversations

Is Demonetization the Fintech moment for India?

Sopnendu Mohanty of the Monetary Authority of Singapore (MAS) called Demonetization the Fintech moment for India in an interview in The Hindu Business Line.

“moving to a digital currency or cashless operations is an answer to the growing need of the digital economy.”

I have copied a section from a Daily Fintech post two weeks ago that explains some background:

Paytm says thank you Mr. Modi
Lost in the US election news cycle, was a story from Mahatma Gandhi’s country that was quietly almost as earth shattering as Trump’s surprise victory.

In an effort to control the black economy (read, collect more tax revenue) and crack down on corruption, the Modi government did something that shook faith in Fiat currency. The government simply declared that 500 and 1,000 Rupee notes were no longer legal tender. Why is a bank note worth money? The answer is because we all agree that it is because government backs it with some variant of “I promise to pay the bearer on demand the sum of…” The Modi government move, labelled demonetization, breaks that contract with the people.

Indian people have always loved gold as a reliable store of value. Unlike gold, Bitcoin does not look good with a sari and won’t be any fun at a wedding, but it is a controlled supply store of value that no institution can take from you.

So, the Modi government just gave a huge boost to digital cash – perhaps not what was intended.

Nearly two years ago we reported about India’s first Fintech Unicorn, Paytm.

Paytm is not Bitcoin but it is digital money that has reached mass scale in a huge market.

Unlike some wounded Unicorns, Paytm recently raised a lot more money – $300m at a $5 billion valuation – which is a massive round for India.

According to Hindustan Times, Paytm transactions exceed combined usage of credit, debit cards in India.

Paytm is seizing the day with a new ad targeting demonetizationthat has ignited controversy (read, free media).

For a while, India was making all the right moves to foster innovation such as:

Digital Identity for the Unbanked

Payment Bank Licenses

Now, India has lurched towards control.

How do you think this will play out? Will it drive digital Fiat (Rupees on a phone) or Bitcoin? Or a bit of both?

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I might be in the minority of people taking a dim view of demonetization. About 10% of the population has high income levels and sophistication comparable to EU/US in terms of using digital payments, credit cards, and online banking. Smartphone penetration is only 30%. Around 25% aren’t even literate yet, let alone use smartphones and mobile wallets. Among the rest, a lot can manage simple tasks on smartphones but still struggle with tasks like resetting passwords, 2 factor auth, etc.

A big chunk of business is done in cash largely because its frictionless, and not necessarily to avoid taxes. This has been hit quite badly. Uber, Ola and other startups with deep pockets still process most of their customer payments in cash. On average, cab drivers, shops and small business owners I’ve spoken to said their business has dropped by 40-50% with no rebound even after a month.

The measure may be well intentioned, but its been pushed prematurely. Based on govt numbers, it is going to take anywhere from another 5-10 months to restore the currency supply. Personally, I’ve not seen much change in attitudes towards digital payments- small businesses have started accepting cards/mobile payments but will drop it the moment card companies charge a transaction fee. For now, most card processors and wallet companies have waived off fees.

BTC has a very small following, and unsure if buying BTC is legal due to central bank regulation. Apart from regulatory hurdles, the learning curve to adopt BTC is a lot steeper than credit cards/ mobile wallets, so thats unlikely as well.

I think it will be business as usual, and for those hoarding it, more gold, maybe silver.

This 100 day report seems to back your negative take.


Gaming the system - who would have guessed!