Demonetisation impact: Will cash continue to be king or will digital innovation take over?

On 8 November, 2016, taking the nation by surprise in a televised address to the nation, Prime Minister Narendra Modi, announced that bank notes would no longer be legal tender from midnight in order “to break the grip of corruption, fake currency and black money”. The 500 and 1,000 currency notes, which are worth around $7.50 and $15, are the largest notes in use in India which is still a heavily cash-intensive economy. All banks and cash machines were ordered to remain close on Wednesday, 9 November in preparation for the turnaround, prompting a late-night rush by customers to withdraw smaller notes from ATMs. Long queues built up outside cash machines before the midnight deadline as customers tried to withdraw 50 & 100 rupee banknotes. For the masses, one can sense bewilderment, resentment and even mild panic at the turn of events, as the step has already triggered chaos in homes and markets. Skeptics pointed out several flaws in the move, saying that it is bound to prove bad news for those who do not have a bank account in the country. About 49% adults in the country have no bank account while only 22% accounts are with debit cards, according to several research estimates. We got the news of the demonetisation on TV, just like everyone else. Half of India’s roughly 200,000 ATMs are NCR’s. But, we didn’t get a sample of the new cash those machines would be dispensing until a few days after Mr. Modi’s announcement, when a bank employee brought a few hundred fresh notes in a suitcase to the company’s office in Mumbai for testing. That was when we noticed a problem - the new bills were of a different dimension than the old ones. There was no choice, the cassettes within each ATM’s would have to be recalibrated to fit the new dimensions. The long, winding queues at banks and ATMs for even minor withdrawals is the most prominent image that comes to mind when most of us recall the first few weeks following demonetisation. However, the bigger worry was uncertainty and anxiety that most people faced in those early days. [caption id=“attachment_4207111” align=“alignleft” width=“380”]  Representational image. Reuters.[/caption] As the highly awarded American athlete, Lance Armstrong once rightly pointed out, “Pain is temporary. Quitting lasts forever.” There was pain for the common man but every treatment inflicts certain amount of pain before full recovery is achieved. It involved some level of trouble for the common man but was needed for the nation’s larger good. Demonetisation was an unprecedented step wherein nearly 86 percent of India’s currency in circulation was sucked out of the system. There was naturally some chaos in the initial days as banks and ATM operators tried to get their act together. The initiative required the government to maintain utmost secrecy for its success. Therefore, banks and ATM operators weren’t ready to handle the situation that unfolded on an urgent basis. Roughly Rs 14 lakh crore (15 billion Rs 500 notes and 6.7 billion Rs 1,000 notes) was taken out of the system and replaced with 10 lakh crore over a period of 4 months. This led to a substantial increase in the demand for cash, but due to the cash shortage the other problem we saw was a huge decline in transaction volume which impacted the industry. One must remember that 17,165 million Rs. 500 notes and 6,858 million Rs. 1,000 notes were in circulation on 8 November 2016 – the day demonetisation was announced. When such a huge chunk of cash is pulled out of the system, it is bound to impact the industry. Compared to 125 daily transactions before 8 November, an ATM was now recording 800 footfalls a day in the months of November and December. The entire ecosystem was actively playing its role - banks, CIT (Cash-in-Transit) agencies and ATM service providers. The surprise decision to recall the two-high value notes that accounted for 86% of the money in circulation triggered a huge cash crunch. A majority of ATMs ran dry for weeks as cash was in short supply and the machines had to be recalibrated to dispense the new notes. Due to the immense cash crunch all over India, only 30,000-40,000 ATM machines could only be refilled during that time. The first seven months after demonetisation were a huge challenge, there was a loss of customer confidence as ATMs went dry for a considerable period. A year on, this has changed; now, nearly 90 percent of the currency has been remonetised. Transaction levels are back to pre-demonetisation days (120-odd transactions across the ATM base). We are currently at the same cash levels as we were before demonetisation. We saw a major spurt in digital transactions during the demonetisation period, but after the currency has been remonetised, there is a clear drop in digital transactions, with cash transactions having gained prominence once again and consumers still want to use cash and rely heavily on ATMs. India has the third largest number of installed ATMs, behind China and the USA. With many challenges still to overcome, cash continues to remain the world’s most trusted and fastest form of payment. The ATM remains an extremely important element of the modern retail banking industry. It will continue to play an important role in how banks interact with consumers and deliver services. There are ongoing changes in the choices consumers have in the digital payments space. However, it should be remembered that a large proportion of consumers still want to use cash and rely heavily on ATMs. More importantly, consumers want to have a choice as to how they pay for goods or services and not be forced into one specific channel in what is becoming a fragmented payments landscape.   (The author is Managing Director, NCR India)