Is demonetisation an independent event or a part of a larger trend? The paper hypothesises that demonetisation is a part of the transition towards a digital economy. This paper seeks to identify the required infrastructure for sustaining the impacts of demonetisation on financial technology and consumer behavior to ascertain if the impact will be temporary in nature.

1. DEMONETISATION:
PUSH TOWARDS A DIGITAL ECONOMY

2. Introduction
In a country where 95% of transactions happen through cash, demonetisation was expected to
have a visible impact on consumer spending habits – and it did. There was a massive shift
towards digital payments due to the cash crunch that followed this bold move.
However, a question arises – Is demonetisation an independent event or a part of a larger
trend? This paper hypothesises that demonetisation is a part of the transition towards a
digital economy. It views demonetisation as an integral step towards a better system of
payments.
For hypothesis to be true the shift towards digital payments must be sustained and not just a
temporary solution. Thus, to test the hypothesis this paper seeks to identify the
infrastructure required for sustaining the impact of demonetisation on financial
technology and consumer behaviour in the long run.
HYPOTHESIS VISUALISED

3. Methodology
1. The pre-requisites of a digital economy were identified and compared to the digital
ecosystem in India. This was done by referring to secondary sources of data:
a. MasterCard: MasterCard Advisors’ Cashless Journey
b. NITI Ayog: Digital Payments: Cards, USSD, AEPS, UPI, Wallets
c. TAT Capital: Demonetisation is the tool but cashless economy is the goal
d. Ernst & Young LLP: The case for Mobile Payments in India
II. Changes in consumer preferences were analysed through online surveys. The
objective was to understand the impact on spending habits in three key areas:
a. Preferred mode(s) of payment
b. Payment mode preferred for online shopping
c. Payment method while using Ola/Uber

4. Observations
Certain factors are correlated to consumers’ preference for cash and provide a measure of the
degree to which conditions exist for consumers to prefer digital payments.1 These factors fall
into four broad categories:
I. Access to Financial Services
This factor measures the availability of financial services and whether people use bank
accounts and digital payments. Banking penetration in India has reached 53%.2 The
Pradhan Mantri Jan-Dhan Yojana was launched in August 2014 to facilitate further
financial inclusion in the rural areas. By 1st June 2016, over 220 million bank accounts
were opened. Despite these efforts over 43% of account holders have not made deposits
or withdrawals in the past 12 months.3 Policy makers must realise that opening bank
accounts is not the solution.
Acceptance of technology such as e-payments is essential for extending the access to
financial services. Due to demonetisation a large part of the informal economy was
directed towards mainstream banking. However, this is not a long term solution.
It is important to tackle the root cause of the problem – poor financial literacy. Public and
private institutions need to come together to educate consumers on how to use mobiles as
a banking and payments platform to help build trust in the system. Small steps like
including financial literacy in the school syllabus will enable young minds to understand
the importance of savings and money management – thus making them likely to inculcate
better banking habits.
1 http://www.mastercardadvisors.com/_assets/pdf/MasterCardAdvisors-CashlessSociety.pdf
2 http://datatopics.worldbank.org/financialinclusion/country/india
3 http://indianexpress.com/article/india/india-news-india/in-india-bank-account-penetration-surges-but-43-
dormant/

5. II. Macroeconomic and Cultural Factors
Macroeconomic factors such as regulatory systems and political support play an
important role in the transition towards a digital economy. Cultural factors also have a
bearing on digital payments - like preference for cash, corruption and size of informal
economy.
Several political parties have expressed opposing views and asked for a rollback of the
policy. It is very difficult to move towards a digital economy under such circumstances.
On a positive note the Committee on Digital Payments has carried out research and
recommended that the Payment and Settlement Systems Act, 2007 must be replaced by an
updated legislation - Payment and Settlement Systems Act, 2017.
Interpretation:
 There is a high rate of co-relation (r = 0.934) between the percentage of digital
payments and the corruption perception index score.
 A culture of transparency and integrity is found where the consumers choose to
use non-cash methods of payment.
This indicates that in countries where the citizens are willing to move towards a
digital economy the corruption levels are much lower. Developing a culture of
transparency can support the transition towards a digital economy.
CO-RELATION BETWEEN CORRUPTION AND DIGITAL PAYMENTS

6. III. Merchant Sale And Competition
Merchant sale and competition measures the potential for adoption of new payment
solutions by merchants. While large merchants have adopted digital transactions, the
small merchants suffer from the following issues:
 low transaction volumes which lead to higher charges (merchant discount rates)
 monthly rental of hardware, various service fees and limited usage make upfront
investments in hardware unviable
 low-margin retail outlets find it difficult to afford transaction charges
With alternate ways of accepting merchant payments at the POS, both fixed and variable
costs can come down. The following are a few examples of such alternate ways of
payments1:
 QR code–based payments: Merchants are given a QR code to display. Customers can
just scan the QR code from their wallet app and enter the amount, which is
automatically deducted from the wallet or a linked account and a notification is sent to
the merchant.
1 http://www.ey.com/Publication/vwLUAssets/EY-the-case-for-mobile-payments-in-india/%24FILE/EY-the-
case-for-mobile-payments-in-india.PDF

7.  OTP-based payment: Merchant payments can also be made using OTP authentication.
Although this system has been adopted by some providers, widespread adoption is yet
to happen.
These methods eliminate the requirement of a physical terminal making rental and
consumables costs affordable. They take care of issues and costs related to merchant setup,
installation of terminal and dial-up network connectivity.

8. IV. Technology and Infrastructure
This factor measures access to new technology and rate of innovation. It also measures
quality of infrastructure that supports this whole technological framework.
The speed of mobile payment transactions is slow, especially at the POS. Moreover, in areas
of poor connectivity, transactions often fail or time out. This results in a poor consumer
experience, which discourages them from making mobile payments.
For India to move to a digital economy, it is critical to bring on board the masses that reside
in rural and semi-urban areas and not just focus on urban markets. Although there is growth
in mobile banking transactions and volumes, the real impact would be achieved when mobile
is adopted for day to day transactions and becomes the preferred channel for the delivery of
financial services.
For payments to happen digitally, the cost of on-boarding, funding, servicing and authorizing
has to be near zero. While Aadhaar has created a digital identity, it still relies on biometric
based e-KYC that requires expensive hardware and for customers to travel to a location
where they can authenticate themselves.

9. Survey: Analysing Changes in Consumer Behaviour Due To Demonetisation
 Number of respondents: 170
 Residents of Mumbai, Delhi, Bangalore, Hyderabad
 Average age: 32.5 Years
 Age range: 18-72 Years
I. Analysing Preferred Modes of Payment Before And After Demonetisation
 Preference for cash payments dropped by more than 50%.
 After demonetisation there is a twofold increase in the usage of e-wallets.
 Use of card payments has also increased considerably.
0
20
40
60
80
100
120
140
160
Cash Debit Card Credit Card E-Wallets
SHIFT TOWARDS DIGITAL PAYMENTS
Before Demonetisation After Demonetisaion

10. II. Analysing modes of payment: Online Shopping
 Sharp decline in preference for CoD mode of payment (60% decrease).
 Card payments accounted for only 50% of online purchases before demonetisation, now
they represent over 70% of online purchases.
 The data indicates that consumers that preferred CoD have either stopped buying online
or shifted to digital payment methods.
0
20
40
60
80
100
120
140
CoD - Cash on Delivery Payment by debit/credit card Not applicable - I don't shop
online.
MOVING FROM CoD TO DIGITAL PAYMENTS
Before Demonetisation After Demonetisation

11. III. Analysing Modes Of Payment: Ola/Uber
 Cash dominated as the preferred mode of payment before demonetisation
 After demonetisation the number of digital payments has doubled
 A personal interview of an Ola driver revealed that several regular users started using
Ola Money after demonetisation.
0
20
40
60
80
100
120
Cash Digital Payment (Ola Money/
PayTm)
Not applicable - I don't use
these services.
TRANSITION FROM CASH TO DIGITAL PAYMENTS
Before Demonetisation After Demonetisation

12. IV. Analysing Consumers’ Experience With Digital Payments
 Only 7 respondents continue to use digital payments due to unavailability of cash.
Most use it for convenience – this indicates a habitual shift in preference.
 Only 55% respondents agreed that digital transactions are safe while the rest were
either unsure or felt that they are unsafe. This indicates the need for building trust in
the consumers for better acceptance.
 An overwhelming majority claims that they will continue to use digital. This
emphasises the fact that the majority is using digital payments for convenience and
not due to the cash crunch.
0
50
100
150
Demonetisation Benefits Convenience Easy to Use Safety
WHY DO YOU STILL USE DIGITAL PAYMENTS?
55%
10%
35%
ARE DIGITAL
TRANSACTIONS SAFE?
Yes No Maybe
86%
7%
7%
WILL YOU CONTINUE
USING DIGITAL
PAYMENTS?
Yes No Not Applicable

13. Conclusion
India has to overcome several obstacles to facilitate the transition towards a digital economy.
Issues like low financial and digital literacy, low rate of smartphone penetration, regulatory
hurdles and poor response from rural areas are critical issues that need to be addressed. This
can be resolved through institutional initiatives, product and process innovation, a supporting
regulatory environment and channelized efforts of the industry players toward a common
objective.
There is a visible impact on consumer behaviour in urban areas. The change in the mode of
spending, induced by demonetisation, has improved consumers’ perception and acceptance of
financial technology. It has changed the spending habits that had developed over decades.
Thus, this paper concludes that demonetisation has played an important role in the transition
towards a digital economy – thus confirming the hypothesis.