This is a sponsored article from Jupiter Asset Management.
If you want to lead your country into a brave new world of cashless payments, eliminating billions of banknotes overnight is not a bad way to start.
That is what Indian Prime Minister Narendra Modi did in November 2016 when he banned 500 and 1,000 rupee notes (worth around US$7 and US$14 respectively) with immediate effect.
With virtually no notice, 1.3 billion Indians found 23 billion banknotes they held with a face value of US$212 billion were no longer legal tender to spend in shops, markets, and petrol stations.
The reason given was to stamp out black market corruption and tax avoidance, although it transpired that only a tiny proportion of the eliminated notes were linked to illicit activity.
What happened was that the decision gave a significant boost to India’s already fast-moving journey towards a cashless society where hundreds of millions of consumers and traders, from the remotest village to the teeming cities of Mumbai and Kolkata, can make payments to each other without recourse to banknotes, cheques, or time-consuming ledger transactions.
One of the chief beneficiaries was Paytm – a digital first bank offering the most basic of payment services through mobile phones. Before Modi’s decree, Paytm had around 130 million digital wallet users. Within 18 months, this almost doubled to 250 million people carrying out 7 million transactions every day*.
Source: Reserve Bank of India (as published in The Wall Street Journal 31/5/2017)
Foundations of a cashless society
In reality, Modi’s dramatic move did not appear out of thin air but drew on two transformational long-term trends in India. Taken together, they have left India well-positioned in the pivot towards a cashless society.
The first trend is the liberalisation of India’s banks. After two rounds of nationalisation in 1969 and 1980, practically the entire banking sector was owned by the state.
Indian privately-owned banks only really emerged again in 1994 with the issue of nine licences. New banks such as HDFC, ICICI, and Kotak Mahindra were able to start from the ground up, combining new technology unhindered by legacy issues with an entrepreneurial zeal that prioritised profitable activity and opened up new areas such as mortgages and personal loans.
Publicly-owned banks, meanwhile, were hampered by archaic working practises and outdated IT platforms, and held back both by lack of capital and the need to serve the interests and priorities of the state rather than shareholders seeking a decent return on their capital.
Further liberalisation followed in the past decade as the rapid development of India’s mobile telephone and data networks brought connectivity to all corners of the vast country.
Two new classes of bank were created: Payment Banks – entities such as Paytm to allow simple non-credit banking activities – and Small Finance Banks to meet the needs of the hundreds of millions who had never had contact with banks before.
The second trend was set in motion by state-backed initiatives to lay the foundations for mobile digital payments through education and infrastructure.
While a dedicated TV channel, helpline, and school workshops have helped to spread the word about digital banking and cashless payments, the BHIM (Bharat Interface for Money) mobile payment app, developed under the aegis of the Reserve Bank of India, ensures money can be transferred instantly, seamlessly, and at no cost from one bank account to another through India’s national ID system.
Against this background, India’s private banks – driven by a culture that encourages risk-taking and experimentation and has a legacy-free technology infrastructure – are setting the pace.
HDFC, named India’s best digital bank this year by Asiamoney magazine, has been one of the leaders in rolling out cashless payment services to India’s consumers and businesses.
Moving beyond cashless payments via mobile, HDFC customers can now bank and pay for goods and services using Apple Watch, WhatsApp, and Facebook messaging apps, as well as Google Home and Amazon Echo voice devices.
The metrics behind HDFC’s success are notable. Pre-tax profit is up by 52% in the past four years and the share price has climbed 75%** over the same period. Rivals such as Yes Bank, ICICI, and Axis Bank are also pushing the envelope with innovation labs that tap into India’s burgeoning tech start-up sector.
While the privately-owned banking sector pushes forward, India’s state-owned banks continue to be plagued by inefficiency, weak balance sheets, and political interference. The state sector still accounts for two-thirds of banking assets and the Indian government is worried these problems are restraining economic growth.
Recent plans will see 10 existing banks consolidated into four new entities, although it will take time to see if they can provide greater competition for the private sector.
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This is a sponsored article from Jupiter Asset Management.