A blessing in the long term - Demonetisation could be boon for businesses

There seems to be a lot of short term anguish in the aftermath of the demonetisation move. But if we look closely, we can see the tremendous potential that the move has for benefitting Indian businesses through a digital push.

A study conducted on children in the age group of three to six years found that cash makes children selfish, even if they don’t know its value.

What if all the physical cash disappeared overnight? What would the world around us look like? How would our day-to-day transactions and the ones between businesses get affected?

In a world before demonetisation, we would have never imagined a digital life, with no cash with or around us. This thought would’ve been quickly dismissed as something impossible, at least in the short run.

Today, we are lucky enough to observe a big ‘What if’ transform from an impossible dream to a reality.

With the recent demonetisation move, 86 percent of the cash in circulation in India has become digital. This opportunity has much higher significance than we can possibly imagine.

Factors that will make the impact lasting and create a network effect

1. There has been much development in the last decade towards making digital transactions flawless and safe. Banks and fintech startups have been building products to make transactions digital. If you think about it, there are plenty of avenues for digital payments - wallets, UPI, IMPS, NEFT, RTGS, Credit Card, Debit Card, Prepaid Cards, Virtual Cards, USSD, Mobile Apps, SMS, IVR….phew....and what not. These are just the mechanisms for making a payment. There are a plethora of innovative solutions for accepting payments too.

The country has never been more ready - the payment infrastructure is all available to be utilised. All we needed was a push.

1. With the majority of cash being digitised, we now have to ensure that it stays digital. How do we accomplish this?

The withdrawal limit is Rs 25,000 for businesses and Rs 4,000 for individuals; add to that the inconvenience of standing in long queues making it almost impossible for a business to run the age-old way - completely with cash.

Due to the current cash crunch, the loss to businesses operating with cash is much higher than the perceived cost of ‘digital transactions’. Out of the Rs 13 lakh crore deposited in the banking system, only 20 percent has been withdrawn till now. This is due to the slow printing of notes and logistics issues. It may turn out to be a ‘blessing in disguise’ in the longer run since businesses will be left with no choice but to go digital.

How are banks helping reduce the impact on businesses?

With demonetisation, construction, transportation and trucking, and any other industry involving a large and mobile workforce of unbanked employees, almost came to a standstill. Drivers, daily wage workers and contract workers couldn’t get paid, and hence, couldn’t continue working.

The first two weeks after 8 November were the worst, and everyone, including banks and businesses, were recovering from the impact and trying to find a way out.

Banking is the backbone of the country, and the Indian banking industry has proven its mettle more than once. They have gone out of their way for financial inclusion, taking up initiatives that very often aren’t viable from a business standpoint.

This time, they are fighting on three fronts -

1. At the bank branches - converting all the old notes to either new or digital currency.
2. On the field - reaching out to each and every customer to help them go digital and make them aware about the benefits of the same. They have been open to partnering with startups as well.
3. Implementing the frequently changing limits and guidelines issued by the Finance Ministry.

How are SMEs adapting to the change?

The withdrawal of high denomination notes has led both SMEs and individuals to realise the benefits of paying with cards or mobile wallets.

MPOS service providers have seen a huge surge in the number of registrations by merchants. As per RBI data (July 2016), debit card spends on PoS were growing at a six-month CAGR of 2.6 percent month-on-month compared to 0.1 percent month-on-month for debit card spends at ATMs.

The current cash shortage will accelerate this shift of card swipes at PoS terminals and significantly change user behaviour to look at debit/credit cards as the preferred mode of payment. Even the mobile payment transaction volume in India is likely to see a CAGR of over 90 percent to reach $153 billion by fiscal year 2022, as against a meagre about $3 billion in the current fiscal.

Along with individuals getting accustomed to card and wallet payments, employees incurring business expenses on behalf of their company are also looking to pay and get paid by card. And corporates are realising the importance of this.

Take the example of drivers of trucking and transportation companies stranded on highways. Most don’t have a bank account. They are paid the entire cost of the trip, along with their monthly salary, in cash. Transportation companies are now giving prepaid cards to their drivers. They use the cards at toll booths (some of which have started accepting cards and online payments), petrol stations and for maintenance and repairs.

Even retail chain operators who primarily gave cash to their stores are now switching to cards and online payments for their day-to-day petty cash expenses and vendor payments. Consulting companies, hyperlocal businesses, and so on, with employees on the road, are also going digital.

This move by our Government may turn out to be a boon for SMEs in the long run - this is their (to an extent forced) opportunity to break through the shackles of age-old legacy systems of managing business expenses and payments, and embrace digitisation for good.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)