Has demonetization pushed up digital payments?

Has demonetization been positive or negative for Indian economy? It has become a political debate and we won't know the real answer; at least not in the near future. In any case, this question (and its answer) is beyond the scope of coverage of CIO&Leader.

What we ask, instead, is a more specific question that can be answered—and more importantly, is extremely relevant to our readers, which is: Has demonetization helped in pushing up digital payments?

As they say, there is your side of the story; there’s my side of the story and then, there is data. Let us take the data route.

We will try to explore the question by taking the data route.

We examine five data points here.

1. Value growth in credit card usage (PoS only)
2. Value growth in debit card usage (PoS only)
3. Value growth in retail electronic clearing such as NEFT, IMPS etc
4. Value growth in m-wallet usage
5. Value growth in other prepaid cards usage (excluding paper vouchers)

The card usage data shows that between August 2016 to August 2017, the monthly usage of credit card value has increased by 41%, which is significantly, though not disruptively higher than the growth in annual usage (in terms of value) witnessed in the previous three financial years 2015-16 (25%), 2014-15 (23%) and 2013-14 (25%). In short, demonetization has had some impact on driving credit card usage.

However, if one examines monthly data, it is clear that while the usage did go up significantly during demonetization period—between November and January—the growth, today it is at higher level than its January levels. So, it has been a more gradual growth. So, a definite conclusion is not possible. However, it is safe to say that demonetization did help in some manner in pushing up credit card usage.

The debit card usage data is not so ambiguous. Between August 2016 and August 2017 (the last month for which detailed data is available), the monthly debit card usage (in terms of value) went up by 93%, as compared to 31%, 27% and 28% growths in the previous three year (annual value). That’s a massive jump. Further, the monthly data shows that, unlike credit cards, the big push to debit cards came during the demonetization months of November 2016 to January 2017. In fact, the usage sharply dropped in February after availability of cash. It has been in the February levels in even now; that is close to 30% below the January peak.

So, it is much easier to conclude that demonetization had had a big impact on driving debit card usage in PoS or using them as a real payment instrument, rather than just withdrawing cash.

Of course, in case of both credit card and debit card usage, we have used the PoS usage only and not the ATM usage, as ATM usage is for cash.

The impact on mobile wallets has been significant too. Between August 2016 and August 2017, the monthly usage of mobile wallets in terms of value grew by 236% as compared to 152%, 198%, and 174% annual growths in the previous three years. It is a no-brainer than demonetization did push up mobile wallet usage. But what is more important is that unlike debit cards, the mobile wallet usage saw a more permanent growth and even today is at a level that is significantly higher than pre-demonetization months.

So, data suggests that mobile wallets gained immensely from the demonetization move.

Prepaid cards actually saw a lower growth in monthly value usage between August 2016 to August 2017. They grew 120% in this period, as compared to growth of 143% and 278% in annual usage value in the previous two years.

In short, demonetization has had no impact on prepaid card usage, not even during November to January, as the monthly data reveals.

Let us finally look at the retail electronic clearing data, which accounts for more than 90% of all retail electronic transactions in terms of value. In fact, all the other four payment methods we have examined here, account for just about 5% of retail electronic clearing like NEFT, IMPS and ECS.

The analysis of retail electronic clearing data shows that the monthly usage in terms of value grew 44% between August 2016 and August 2017, marginally higher than the 40% growth witnessed in the annual usage in the previous year (2015-16) and 38% growth witnessed in the year before.

Demonetization has very little impact on driving the growth of electronic bank payments.

So, what is the final conclusion? It depends on how you decide to interpret ‘impact’.

The significant growth in debit card usage and mobile wallet usage shows that demonetization did push up the usage of electronic payment in the segments that use them. The explosive growth in these two segments show that many users who did not use electronic payments earlier came into the ‘system’ and started using electronic payments.

To that extent, demonetization did democratize electronic payment in India to a great extent—not a mean achievement.

However, did it turn India into a digital economy by significantly pushing digital payments? The answer is a big no. More than 90% of the payments are through banks like NEFT, ECS and IMPS. That has not shown any major disruptive impact from demonetization.

So, it is wrong to say that demonetization turned India into a digital economy; it just prepared some ground for the change by bringing more people to the electronic payment system.  

How does it matter?

Beyond politics, why is this question—and answers—important for business?

The future strategy of most consumer businesses will depend on how the digital payment scenario evolves. Depth—more value transactions happening online—will have a different implication than breadth—a wider base of digital payers.

The implications for consumer businesses selling high value, low volume items like electronics, furniture etc will be different than the implications for low value, high volume businesses like retail, telecom, transport and FMCG.

A wrong assumption—like demonization has significantly increased the value of online transactions in India—will result I  wrong expectation and possibly wrong business strategy. Similarly, not taking into account the significant upsurge noticed in terms of spread of digital payments may cost companies in terms of opportunity lost while formulating future selling and distribution strategies.

Prime Hype DF 2016 EP