01/02/2017 2:46 PM IST | Updated 02/02/2017 8:49 AM IST

How Demonetisation Changed The Behaviour Of Indians

Will it last?

Bloomberg via Getty Images

One word that has surely found its way into households today is "demonetisation". The entire country has participated in making this move successful since 8 November, when the government announced that ₹500 and ₹1000 notes would shortly not be legal tender.

It has been almost three months since 86% of India's currency was put out of circulation. This move resulted in roughly ₹14 lakh crore, part of which is considered "black money", finding its way back into the banking system. While the supply of cash is almost back to normal, the biggest change has been in the way people now pay for goods and services. One of the stated objectives of this move was to encourage non-cash payments, including cards, mobile banking, prepaid instruments and new methods like QR code and NFC payments. Before November, digital payments were growing modestly but received a shot in the arm with this decision.

Where debit cards used to contribute to 57% of card transactions, they currently account for 75-80%.

One can witness several interesting trends in consumer purchase patterns with the increasing use of cashless payments. Many small retailers, including grocers, vegetable vendors, milk suppliers etc. have started accepting cards and/or wallet-based payments for small and big ticket transactions. There has been a marked increase in cashless transactions, especially through cards and prepaid instruments. Debit card usage has increased tremendously—where debit cards used to contribute to 57% of card transactions, they currently account for 75-80%. Immediately after 8 November, we observed that the peak transaction time for credit and debit cards, usually from 7-9 pm on weekdays, stretched to roughly 1pm to 10pm. However, the average debit transaction size has reduced from ₹2500 to ₹1200 as people started using debit cards for smaller value transactions. Transaction failure was seen to increase as many first-time card users started using cards and dormant cards were also being used. As people get habituated to making card purchases, these numbers are likely to reduce in the coming few weeks. Other forms of payment have also seen a significant increase. According to recent RBI data, the use of debit cards at POS has increased by 67%, compared to October. M-Wallets and PPI cards have seen a growth of 39% and 13% respectively.

As more people switch to cards and other digital payment methods, security and fraud management are of paramount importance. As more new users, more transactions and more players enter the system, banks and service providers must ensure that security does not take a backseat. Apart from new technology and products, investments must be made into consumer education. It is important that consumers are made aware of the steps to take in order to safeguard themselves from possible fraud. Not sharing one's PIN and OTP, not giving card details to anybody claiming to be from the bank and memorising the PIN are simple ways to keep one's money safe. It is also the responsibility of banks, payment processors and other service providers to have a strong fraud management mechanism in place. At a time when the industry is seeing an avalanche of digital payments, they cannot afford to dismiss suspicious transactions and must ensure that KYC, merchant risk profiling, fraud detection and prevention etc. are operational and robust.

The use of debit cards at POS has increased by 67%, compared to October. M-Wallets and PPI cards have seen a growth of 39% and 13% respectively.

In the coming few weeks and months, there are ambitious plans for the industry, to be achieved by all players in toto. There is a target to install 1 million additional POS terminals across India in order to increase card acceptance. The government is also taking steps to ease the transition to digital payments. MDR (merchant discount rate) has been reduced and the surcharge for interstate terminal movement is being waived by some states. More such steps are also expected to be announced so that acceptance infrastructure in the country is improved.

What we have witnessed in the past two months is a result of an impetus from the government, aimed at encouraging digital payments among urban as well rural consumers. But once the sops and incentives are revoked, it will be interesting to see if non-cash payments have indeed become a habit with the average Indian. With more than 200 million mobile phone subscribers, the scope for digital payments is great but when the supply of cash is increased, one must wait and watch to see if people will revert to using cash or truly switch to using more convenient and digital forms of payment.

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