What nobody told you about the great Indian banknote Shake-up
Since Indian Prime Minister Narendra Modi’s unexpected announcement on November 8 that, in its declared war on corruption and the informal economy, his government would be removing high-denomination banknotes from circulation, I have read a great many articles examining the issue from all sides. I could not get rid of the feeling that there was more to the story, so I decided to investigate further.
The decision to remove 1,000 rupee and 500 rupee banknotes from circulation, was certainly a bold move. Some considered it irrational, not properly thought out nor planned, with a likelihood of throwing India's economy into a dizzying turmoil. But maybe it was the decisive stroke that was required, from which would sprout rare opportunity and the growth of something new and healthy.
It is unlikely that any government would introduce such a traumatic policy without calculating all the considerations and implications. This particular decree removed from circulation 86 percent of all currency in India, giving citizens until the end of December to replace the obsolete banknotes to new ones. It would force those holding cash under their mattresses to go to the banks to exchange them.
Since the purpose of the move was not to harass underprivileged civilians, but to restrain the big fish in the country’s informal economy, citizens who needed to replace up to 250,000 rupees have been able to do so with no questions asked. But those exchanging banknotes worth very large sums of money are being asked to explain how they amassed so much cash, not to mention pay taxes owed. It is understood that much of black money now rolling in would have been used to pay bribes to corrupt government officials, politicians and members of law enforcement agencies.
Unsurprisingly, there have been numerous reports of wealthy looking for creative solutions, such as hiring underprivileged people to go to the bank with their cash for a commission. Others paid for products and services a year in advance or went on shopping sprees, buying gold, clothes, cars and other valuable items. The main thing from their perspective is that the black money does not get thrown in the trash at the end of the month.
FinTech in search of your wallet
The great Indian banknote upheaval is yet another signal of the beginning of the end of printed currency. Big money is no longer sits in our wallets. Let’s face reality. It’s time to move on.
Today FinTech rules. Overseeing technological innovation in the financial world, it instigated a revolution in how people borrow and lend money, pay for goods, purchase and transfer foreign currency. According to a recent KPMG report, global investment in FinTech companies totaled $19.1 billion in 2015, which was a massive 106 percent jump when compared to 2014, and a record year for VC-backed FinTech investment.
The chaos in the Indian economy created a demand for technological solutions in a country that is unusually well-equipped to adopt them. It may be a place where clean water is frequently not available, but almost everyone has access to cell phones.
The removal from circulation of high-denomination banknotes also serves the hi-tech vision of the Indian prime minister, who most probably has long preferred that the paper cash transactions be replaced by digital ones, which automatically create an electronic trail that cannot be hidden under the mattress.
So do the developers of international electronic payment systems, like PayPal and companies like Freecharge, today owned by the Indian retail giant Snapdeal, which provides an online facility to recharge any prepaid mobile phone, postpaid mobile and data cards. They clearly hope that Indians will begin using Fintech tools after a lifetime of making payments with cash.
In recent weeks, Indian e-wallet companies have a sudden surge in their customer bases and number of transactions registered. Paytm, the market leader, saw transactions rising by more than 300 percent in the days following the Indian government’s announcement. Currently, approximately 100 million consumers in India are using e-wallets as an option to make transactions.
The rising influence of Diamond-FinTech
The presence of black money diminishes the status of the diamond industry, and indeed some argue it is one of the main causes of the crisis in the business. FinTech helps bring our business out into the open, showing that we have nothing to hide.
One of the most pressing challenges facing our business is the absence of adequate bank credit, caused largely by a perception that our opaque industry represents an unacceptable degree of risk. The problem is largely systemic, for we work in an environment where not only is cash still king, but what bank credit is available is still often collateralized using hand-written checks.
But moving to an all-digital system of payments would not only make us more transparent, thereby enabling banks and other financial institutions to objectively calculate our risk potential, but it would also provide us access to a range of tools and products developed by the FinTech industry, which to date have been out of our reach.
How can it be that the credit card has made so few inroads into our business? In other sectors credit card companies are dominant. It comes at a price, certainly, but for them it is worth being able to provide terms of payment for clients while getting paid immediately, and being insured for payments courtesy of the credit card company.
Our industry's desperate effort to cling on to old habits and practices is counterproductive. Why is it that incidents like the Indian banknote upheaval are more likely to do damage assessments instead of finding opportunities in the changing reality.
This reminds me of a story. A man went out for a walk alongside a river and noticed another man fishing. He saw that he was keeping the smaller fish he brought in, but every time he caught a large fish he pulled the hook out and threw it back into the water. After a while, the man couldn’t resist anymore and asked the fisherman to explain his strange behavior. "It’s quite simple" the fisherman replied, "I only have a 10-inch frying pan.”
FinTech may be our 20-inch frying pan.