India's cash crisis may be a weak foothold for mobile
The reports at first seem striking: India's abrupt recall of its larger cash notes has caused a dramatic uptake in mobile payments, likely spurred by staggering lines at bank branches and ATMs.
But the conclusion that this crisis is the spark toward a mature embrace of mobile payments is at best premature, as there is a variety of arguments as to whether the government's move will create a permanent mobile payment spike or just a short-lived frenzy.
"Cash is likely to hang on a lot longer than people think. It may get an upswing as people grow more concerned about being tracked and having their data compromised," said Ben Jackson, director of the prepaid advisory service at Mercator. "There is no straight line path in payments."
India last week took 500 (about $7.50) and 1,000 rupee notes, or about 80% of the country's cash, out of circulation, citing concerns over people using cash to avoid taxes on larger transactions. The move was sudden, causing a run on ATMs and bank branches as the country's financial system absorbed the crunch of people swapping out their larger notes in exchange for the smaller 100 rupee notes, the largest currently available.
The move has caused both a banking and political crisis. Prime Minister Narendra Modi's offices reported death threats, and the prime minister addressed the nation over the weekend, reiterating the strategy was to remove corruption.
The country is planning to issue new 500 and 2,000 rupee notes as early as this week. But the confusion, the seeming lack of communication from the government and an overall push in India to get rid of paper money has caused an unnatural spike in mobile payments.
The Ola Money app had a 1,500% growth in downloads in eight hours. And Paytm reports users have increased the frequently of app use by nearly 600% while the company adds 10,000 agent locations. Ola Money and Paytm did not return requests for comment, though executives from both companies boasted to India's local media that this move heralded the end of cash. Paytm's Nitrin Misra told local press India would bypass plastic cards altogether and move into mobile, while Ola Money's Pallav Singh said it was the beginning of a significant step toward a cashless economy.
Observers with a little distance from these events were more skeptical.
"It's a promotional campaign for [mobile] sponsored by the government. It's mandatory consumption," said Richard Crone,a payments consultant, who says any P-to-P scheme could benefit, calling the India move a "leading indicator" that may happen in other countries. "PayPal can be used in India, and it can be used [in other markets]."
For a product that has been waiting for years to pick up speed, any sign of mobile adoption is good news. Beyond Starbucks' app and a recent spike in Apple Pay use that's partly due to geographic expansion, mobile payments have underperformed thus far, pretty much everywhere.
But even with the recent spike in India and a government that's high on digital commerce to replace cash, a crisis-driven expansion is likely not the way mobile payments will go mainstream, according to Jackson's argument.
About 5 million transactions happen each week in India, in a country of 1.3 billion people, Jackson said. "Even if all of those numbers made up one transaction each, that would still be less than one half of 1% of the total transaction volume," he said.
Additionally, the Indian government is not actually abandoning larger cash denominations, as has been widely reported, and it actually plans to circulate an even higher 2,000 rupee bill.
"The problem is the transition period is creating all kinds of havoc," Jackson said. "People without phones, people holding large amounts of notes and people without ID cards are all finding themselves caught up short by these events. Additionally, small businesses are finding that they have no customers."
Other countries are considering getting rid of larger bills—Australia is under pressure from UBS to remove its larger bills, giving the argument around improving security and deterring crime.
"It's a leading indicator in our current political environment. Governments are going to looking for new tax revenue and going after corruption is a safe way that transcends every political party, " Crone said. "There is payments infrastructure in India and in other markets such as the U.S."
But mobile can't fill the void if the mobile wallet providers aren't up to the task.
"In the case of Paytm, they have to hire a bunch of agents fast," Crone said, adding there's a risk corruption tied to the rapid addition new partners.
Cash is obviously not dying out. And even countries that have a reputation for contactless payments and being mobile savvy, such as the U.K., are still manufacturing and distributing new bills even as a third of the country predicts paper money will be obsolete by the end of the decade.
"Note, too, that everyone calling for the end of cash has a vested interest in cash disappearing, because it is a way for them to cut out a competitive payment type," Jackson said. "All of the platitudes about controlling crime or corruption or improving convenience are a smokescreen for the fact that cashless advocates stand to make a profit."
Mobile payment companies have an opportunity, but it's an indictment of the product if they need a government mandate to give up cash in order for people to adopt mobile wallets, Jackson said. "If we look at mobile payments in this country, then we can see that even in a country with an advanced payments network, mobile payment do not quickly and easily conquer the world"
The challenge facing the traditional card networks, such as Visa and Mastercard, is they have relatively low levels of card acceptance at physical merchants in India, said Michael Moeser, director of payments for Javelin Strategy and Research.
"If Paytm is able to build a larger merchant accepting network then it will be able to drive consumers to use their phone for more purchases," Moeser said. "Consumers in many countries are showing strong interest in using their phones and social media to transact for everyday goods and services...while much of India will go back to using cash once the current event gets resolved, there will be a segment of the population that will have switched to mobile purchases and this segment will continue to grow."