Demonetization – An Opportunity to Fast Track Digitization?
It isn’t very often that a single action can dramatically affect the lives of 1.3 billion people significantly, virtually overnight. On November 8th, the Government of India announced the demonetization of 500 and 1,000 rupee banknotes. As they together constitute more than 86% of the total value of all notes in circulation, the decision had profound implications. The aim of this ambitious step is to combat tax cheating, counterfeiting and corruption, however it is too early to ascertain exactly how successful this step will be. It can definitely be considered a bold step in the drive to shift the Indian economy towards a “less-cash” and eventually a “cash-less” model.
While the focus on the digitization of payments may increase as a result of this decision, the journey began long before this move. A recent report by Google and Boston Consulting Group (BCG) projects that by 2020, the size of the digital payments industry in India will be $500 billion; contributing 15% to India’s GDP. By 2020, non-cash contribution in the consumer payments segment will double to 40% and Indian consumers, are 90% as likely, to use digital payments for both online as well as offline transactions. Bill Gates recently commented, “The world will go cashless and India will move quite rapidly to a digital payments economy”. Digitization in payments offers tremendous opportunities. As indicated by a report from VISA – by reducing the cost of cash from 1.7% to 1.3% of GDP with digitization in payments, India can generate INR 4.7 lakh crores (about USD 70 billion) in savings by 2025. High smartphone penetration, growth in digital commerce, ubiquitous access to internet and broadband, changing customer behaviour and push by the central bank and the government are the key factors driving the digitization of payments in India. To capitalize on the demand, there has been a huge rise in the availability of digital wallets from non banking players. Banks are also introducing their own wallets and providing digital banking services such as social media banking, mobile app based banking and linking of bank accounts to the wallets.
According to Ericsson, smartphone subscriptions in India are expected to increase fourfold from 240 million in 2015 to 810 million in 2021. Today, more than 30% of smartphone users in India access their bank websites via smartphone, or use mobile banking apps. Reserve Bank of India data for December 2015 shows a fourfold, year-on-year growth in the value of transactions carried out via smartphones. These numbers clearly show that mobile can play a vital role in shortening the road to digitization. However, while mobile is clearly playing a strong role from a transactional perspective, its penetration in lending is much lower than other areas in banking. As an outcome of the demonetization, more than INR 21,000 crores (about USD 3.2 billion) has been deposited in Jan Dhan Bank accounts. This indicates that a large number of people, who were dormant earlier, would now take active part in banking. Mobile based banking can prove to be very effective in strengthening the bank’s connect with these new active users.
The technology exists for banks to provide their customers with high quality, seamless, mobile experiences across the entire loan lifecycle – from on-boarding to collections. The use of mobile in origination can help transform the on-boarding experience with anytime anywhere loan application capabilities. Mobile based loan servicing provides customers with the ability to quickly and easily make loan repayments without needing to visit the branch. Mobile based collections can help reduce the risks associated with float money, enhance transparency with real time updates and improve efficiencies in what has previously been a largely manual operation.
With demonetization set to give a huge boost to digitization in banking transactions, the stage is set for banks to extend this capability quickly to all customer facing areas including lending. It will be easier to move customers to digital now, as they are more willing to explore new ways of transacting. Speed is of the essence, but choosing the right technology can make or break a digitizing programme. The leaders in the field will definitely have an edge, but others looking for innovative business models by leveraging technology can easily steal the show.