6 lessons from India's cash crisis

November 17, 2016 1:02 PM

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India's abrupt recall of its larger bills — a bid to crack down on tax evasion — was a crash course in how to adapt to a cash shortage. Was this an opportunity for mobile payments or a failing of the overall financial services system?

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India's abrupt recall of its larger bills — a bid to crack down on tax evasion — was a crash course in how to adapt to a cash shortage. Was this an opportunity for mobile payments or a failing of the overall financial services system?

Employees work at their desks at the One97 Communications Ltd. headquarters in Noida, Uttar Pradesh, India, on Thursday, May 14, 2015. One97, which operates PayTM, think they have an edge as the country is now in the midst of a smartphone boom, and younger Indians are shunning branches and turning to apps for their banking needs, mirroring global trends. Photographer: Kuni Takahashi/Bloomberg

Kuni Takahashi/Bloomberg

Mobile wallet motivator?

Mobile money apps like Paytm and Ola money had striking growth in new users and frequency of use after India's cash recall. The companies said the event heralds the end of cash, but others are more skeptical. "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," said Ben Jackson, director of the prepaid advisory service at Mercator. "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."

People stand in line to exchange Indian five hundred and one thousand rupee banknotes outside the Reserve Bank of India (RBI) headquarters in New Delhi, India, on Thursday, Nov. 10, 2016. In a surprise announcement late Tuesday, Prime Minister Narendra Modi banned 500-rupee ($7.50) and 1,000-rupee notes effective midnight, sweeping away 86 percent of total currency in circulation. Photographer: Anindito Mukherjee/Bloomberg

Anindito Mukherjee/Bloomberg

Run on the bank

Many Indian residents were not so eager to give up cash. After the 500 and 1,000 rupee notes were recalled, residents formed massive lines at banks and ATMs to withdraw 100-rupee notes, the largest still available. Until the cash recall, over 80% of the bills in circulation in India were 500 and 1,000 rupee notes.

older Indian five hundred and one thousand rupee banknotes

A customer holds up Indian five hundred and one thousand rupee banknotes while waiting to exchange the bills at an India Post branch in New Delhi, India, on Tuesday, Nov. 15, 2016. The Indian government is battling to keep cash dispensing machines running after efforts to ease withdrawals failed to keep pace for the fifth straight day. Photographer: Anindito Mukherjee/Bloomberg

Anindito Mukherjee/Bloomberg

Smaller bills in short supply

A week after the abrupt recall of larger notes, bank branches and ATMs were still unable to meet the demand for cash withdrawals. That said, the daily and weekly limits for cash withdrawals have been raised, with the goal of enabling small businesses to pay wages in cash, according to Bloomberg News. India also repeatedly extended the suspension of toll collection on national highways.

Muhammed Arif hands over an Indian one hundred rupee banknote to pay for his purchase at a street stall in Modinagar, Uttar Pradesh, India, on Wednesday, Nov. 9, 2016. Over a week since Prime Minister Narendra Modi shocked the nation with the withdrawal of large denomination notes there was no sign the government had managed to print enough notes to replace its withdrawal of 86 per cent of currency in circulation. Photographer: Anindito Mukherjee/Bloomberg

Anindito Mukherjee/Bloomberg

Bad for business

Rather than switch to alternative payment methods, many Indian residents who favor cash simply stopped shopping. This was particularly devastating for sellers of perishables; Azadpur Mandi, Delhi's largest fruit and vegetable market, reports sales dropped as much as 50% with fruit prices dropping as much as 25%, according to Bloomberg News. As banks and ATMs ran out of cash, it created an even greater strain on workers who had to miss work to wait for even a small amount of money to become available to withdraw.

Mastercard Inc. credit cards are arranged for a photograph in Washington, D.C., U.S., on Monday, Oct. 24, 2016. Mastercard Inc. is scheduled to release earnings figures on October 28. Photographer: Andrew Harrer/Bloomberg

Andrew Harrer/Bloomberg

Good timing?

India's cash recall came just as Mastercard was preparing to launch its Masterpass QR wallet in the country. The move follows an ongoing global expansion of Masterpass QR, including 32 countries in Africa. Mastercard is working with India's Ratnakar Bank to integrate Masterpass with the issuer's OnGo digital wallet in the form of a virtual prepaid Mastercard. The launch could help Indian residents who could not obtain cash but also were unwilling to use India's other alternative payment methods.

An Australian one-hundred dollar banknote is arranged for a photograph in Sydney, Australia, on Monday, July 4, 2016. Australia's failure to make a decisive political choice coupled with ongoing Brexit fallout point to the central bank waiting a month to assess the implications before resuming interest-rate cuts. Photographer: Brendon Thorne/Bloomberg

Brendon Thorne/Bloomberg

An example to follow

Despite the issues India has faced, UBS Group AG has urged Australia's government to follow India's example, according to Bloomberg News. The goal would be to accelerate the shift to digital payments; 92% of Australia's currency is in A$50 and A$100 notes, with the latter being extremely rare, according to UBS. ATM transactions are also on the decline in Australia, concurrent with a rise in credit card use.