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1

DeMonetisation did not promote the uptake of digital transactions

Driving India towards a less-cash, digital payments economy was one of the aims claimed by the Prime Minister when he invalidated 86% of India's circulating currency. The reasoning was that India was a largely cash-based economy; if circulating cash was reduced, people would rapidly move towards electronic, or digital payment systems for their commercial transactions. That at any rate was the hope.

Did it happen?

Rupa Subramanya thinks it did. She claimed as much in a blog in the Hindustan Times. She accepts that the original aim of taking out black money has not been met, given that almost all of the Specified Bank Notes (SBNs) hav now been returned for exchange or deposit. But she goes on to say that her research shows that the secondary aim of pushing the country towards digital payments and away from a cash based economy has been achieved. To quote from her article:

....several key components of digital payments such as Point of Sale Debit and Credit (PoS) purchases, National Electronic Fund Transfer (NEFT), Immediate Payment Systems (IMPS) and mobile banking, are way above their pre-demonetisation trends

.....

The bottom line of the research conclusively demonstrates that there was a structural break after November 2016 with a permanent increase in digital payments and decrease in the relative importance of cash. Whatever you may think of the original goals and whether they succeeded, it’s clear digitisation is one demonstrable success story of demonetisation.

She expresses the use of digital payments not in absolute terms but as a proportion of total M3 Money. However, though she says she has published her findings,  they are not in peer reviewed journals. Rather the findings are published in research papers for the Observer Research Foundation - a think tank. I haven't seen these papers and therefore cannot comment on the methodology of the research. In any case she does not cite a source, nor does her article present the full results of her analysis. Her data source, though is the same that I have used earlier in a series of tweets and in a twitter Moment. This is the Reserve Bank of India's Database on Indian Economy.

I believe her conclusions are premature, they may even be misleading or wrong, based as they are not on absolute value of payments but on payment volumes as a ratio of M3.

I present here my own much simpler and more intuitive analysis of the RBI data set and draw very different conclusions.

Data and Methods: The RBI dataset consists of monthly transaction amounts for each of several different modes of digital transactions. The data goes back to 2004 and the latest available data is for August 2017, 10 months after DeMonetisation. Rather than look at just at the figures a few months either side of D-Day (DeMonetisation-Day if you are a fan or Disaster-day if you are a critic), I suggest it is best to look at the entire period. Since these are time series data (defined as data collected consistently with a defined periodicity - in this case monthly) the most obvious and simple technique would be to chart the data against time, draw a vertical line at D-day and look for a change in the trend . If D-Day did indeed result in qualitative sustained change in aggregate behaviour the change in trend would be obvious. I used the statistical programming language, R and the charting package ggplot2 to draw and annotate the charts. These statistical programmes are widely used in academia and business.

Results: The results of my analysis are best presented as a series of charts. They speak for themselves.

The key point to get is that by looking at the entire time series for each of the main digital payment modalities, two conclusions leap out immediately.

One, that in the first few months after D-Day there was a spurt the volume of payments made by digital means.

Two, for some payment modalities, they have subsequently fallen back to levels that were seen well before D-day. In particular retail electronic clearing, and plastic card volumes are effectively back on the same trend growth they always were since long before D-Day. Mobile banking transactions in particular were going up steeply in the months before D-Day was even a glint in anyone's eye; they went up even more steeply after D-day - and here's the crucial point, they have more latterly dropped right back. If we superimpose what we know about the re-introduction of new currency notes this looks like a perfect fit. As cash was re-introduced into the system, people began giving up on mobile banking transactions.

Another set of charts looks at the volumes (i.e number) of transactions.

Here there appears to be a small shift upward that, despite some month on month fluctuation appears to be settling down at a level clearly higher than anything seen pre D-Day. In the case of mobile transactions it is small-ish numbers and starting from a very low base; in the case of digital transactions its a step change from about 1.4 billion transactions a month to about 2 billion. But the volumes transacted appear not to have shifted much at all - it is in keeping with long-running trend and it is certainly not a step change.

Undoubtedly, there has been a steep growth in the number of Point of Sale outlets, as shown here:

Starting from a very low base, this is only to be expected given the huge Government push including cash incentives and subsidies for the take up of POS machines. The extend to which these have penetrated much beyond the largest urban centres and the plushest retail outlets is the big question. The last chart above is based on data published by NITIAayog

Conclusions. My analysis leads me to conclude that any effect of DeMonetisation on the use of digital payment systems has been transient, small and short-lived. Some change has occurred (POS terminals for example) but the fact that both retail electronic clearing and card usage is back on what I call 'trend growth' (i.e. on the same trend as obtained before D-day) would suggest that there has not been a structural change that can be confidently ascribed to DeMonetisation.

Post-script discussion. In all the commentary on Digital Payments insufficient attention has been paid to a most fascinating report that was published on Oct 5 by Visa India. Amitabh Kant, CEO of NITIaayog, wrote the foreword to this report. Nobody who read the detailed figures or had taken in the measured  recommendations in this report would have supported a sudden, cataclysmic and disruptive withdrawal of 86% of the currency, certainly not with the intention of promoting a digital payments economy. Among the key findings of the report are:

  • Cash usage costs the economy 1.7% of GDP (Note: borne largely by the State)
  • According to a 2014 World Bank survey, only 0.38 percent of women above 15 years old used the internet to make payments compared with 2.04 percent
    of men; 3.25 percent women had used a debit card versus 5.25 percent of men.
  • The cost of a point-of-sale (POS) terminal in India ranges from INR 8,000 to INR 12,000. The annual operating cost is INR 3,000
    per terminal. Low transaction volumes especially outside of Tier 1 cities, make it unviable for banks to expand their footprint into such segments.
  • RBI and the Govt of India already had a plan to transition to a less-cash economy.
  • If India  invested a total of INR 58,000 crores (USD 8.6 billion) over the next five years through tax
    rebates, it could not only expedite the pace of payment digitisation but also save about INR 70,000 crores (USD 10.4
    billion) in that period through a reduction in the cost of cash with a potential to save 4.7 lakh crores (USD 70 billion)
  • If we invested 60,000 crores and undertook a series of reforms and regulatory changes cash use could come down in 2025 from 1.7% of GDP to 1.3%.
  • In particlar see exhibit 7 of the rport which details the benefits from a sustained programe of policy changes as well as investments to improve the infrastructure for digital transactions. Effectively, a 5 year programme of sustained policy implementation and investment would potentially result in a growth of digital payments for Personal Consumption Expenditure from 4% to a whopping 36%, a drop in cash need from 11% of GDP to 10%.

 

4

Over the last few days, I've had many discussions with various people about going cashless. So far, I haven't met anyone who applied for internet access if they didn't already have or installed a payment app if they didn't already have, contrary to reports in media (which may possibly be largely limited to the metros). Here are some reasons I found out.

Ours is an area that would classify as a town though it has now been clubbed with several other towns into a city. It is close to Mumbai and a lot of people who work in Mumbai but can't afford to live there live here. About half the population is lower middle class and tenants in the properties of people in Mumbai who have purchased flats here as an investment - me too. There are also several people who are quite poor and live in slums and old buildings in small cramped quarters. In other words, there are few people who'd qualify as rich in this area or even well off enough to not care about monthly budgets - perhaps some of the more prosperous shop owners. Our building is probably among the most "posh" in this area and there are maybe 6 cars parked in the compound with a few hundred flats, and 3 of those are cabs.

Note: I am neither for, nor against the use of cashless transactions. It is a useful method for those willing to spend that little bit extra for convenience. It is invaluable for doing online payments and a handy record of spending in bank account doesn't hurt for those, like me, who cannot remember where they spend money five minutes later. However, forcing people to go cashless is extremely unwise, in my view. Regardless, this is merely a disclosure of where I stand and the below are not my views. 

Domestic workers

I spoke with several of these. My regular maid usually gets paid into her bank. Another I hired to help her out financially takes cash. Apart from these two, I spoke with about 4-5 others. Only one of them who was previously getting paid in cash is getting paid by cheque this time (she will be withdrawing the money for use, not spending cashless). Among the others, reasons varied. They found the bank intimidating and cash easy and familiar - is a common sentiment. All but one of the others didn't have their own bank accounts and did not want to deposit their income into the accounts of their husbands or other family members. The remaining one had a bank account in her village, and when she applied for a new cheque book, it got delivered to her village address, so she wants cash till she has a way to withdraw money. Only my maid has a smart phone that is compatible with an app (she didn't buy it, she is using my old one) and she uses it without an internet connection. The phone automatically connects to the WiFi when she comes into range, but she has never shown any interest in using the internet and is reluctant to do it now. In any case, I would never advise her to begin her introduction to the internet with a high stakes thing like payments.

Vegetable vendors

I've spoken with about a dozen of these. Most of them didn't know about apps. I informed them. They don't think their transactions are large enough to afford commissions to receive money on. Additionally, there aren't people buying. No one seems to have asked them if they will accept an app payment, so they don't think there is any point in using it unless people in the area adopt it.

Grocers

Business is very low for grocers, but none of them showed any interest. When people have money, groceries are a priority, and they usually offer credit to regular buyers at such times, so they don't think an app will add any business for them. Like the vegetable vendors, no one has offered to pay them by app so far.

Car mechanic

I spoke with one. Business is down enough to be as good as zero. No work other than emergencies like punctures is happening. No one has offered to pay him by app before, but he would consider it if there promises to be a good amount of business. We speculated on the possibility of vehicle owners being likely to own phones that could install such apps and perhaps trying to pay that way if he put up a board, but he didn't sound anywhere like he was headed for a download. He would have to upgrade his own phone first - it is not a smartphone. Another reason he was reluctant is that he would likely have completed the work first and then if the payment did not happen, he could suffer a loss. I explained that there was very little chance of that happening, but it is unfamiliar tech and he is not internet savvy and I couldn't with any sense of ethics recommend it beyond discussing it as a possibility for the same reasons as my maid - first experience of the internet being payments is asking for trouble.

Garments shop

I spoke with two. Both had near zero business and were very interested in the app. They had smartphones and had even experimentally downloaded after seeing all the ads. However, the problem is that no one is coming to their shops at all. Whether paying with cash or cashless. There are no customers at all.

Housewives

I spoke with several asking if they had considered buying using an app. All of them had some money (one of them having borrowed from me). All of them had priorities and were managing those priorities in the cash they had, which admittedly is very little. None of them were interested in using an app to buy anything. They would rather cut corners and buy when they had the money. Some were making do with dal and pulses and onions and potatoes they could get on credit from the grocer and skipping buying vegetables when they didn't have money, but they weren't interested in installing an app so they could buy clothes - for example.

I am also a stay at home mom, but I am cashless enabled, so to say, so writing my experience separately, because it is different from theirs. I follow news rapidly, and anticipated the problems with cash that would happen, so within the first few days, I had my money converted locally - without paying a single rupee as commission - in medical shops and such. I further withdrew money from ATMs at the crack of dawn to find smaller queues, knowing that people would be needing to borrow as well as my second maid would need a salary. I have cash. There is a Reliance Fresh where I can swipe my card, but I have not used any cashless payment at all since demonetisation, because I believe those unable to accept cashless methods are really suffering for business, so I'd rather spend in their shops.

People with jobs in offices

Most of these in our building are male, but there are a few women too. They mostly seem more inclined to save mone rather than use cards or apps. Most of them have cards. Most of them use cards to withdraw money from ATMs as possible. None of them use cards for anything except withdrawing money from ATMs, though they are aware, and one of them had used cards to make payments before and knows how to do it.

I didn't find any credit card users other than myself in our building and among people I spoke with. One woman whose husband works abroad has an add on card to his credit card for emergencies, but she has never used it. She is also the one who has used a debit card for purchases before.

4

 October, 2016: Imagine you are having a gynaec examination. With his rubber-gloved fingers inside you, the gynaec starts a casual chat about why you should buy his home-grown brand of condoms and intimate products. Creepy? Yeah, well, but that's how HDFC Bank and other private-sector banks work. Actually, HDFC Bank is like if your gynaec collects real-time information about when and with whom you have sex, what kind of sex you are habituated to, exactly when you menstruate, what kind of lingerie and sanitary pads you are currently wearing, etc. and then this gynaec goes and hires a bunch of MBAs and college freshers, calls them "Relationship Managers", lets them hang around his clinic pretending to be gynaecologists themselves till you start feeling comfortable enough to tell them about your intimate problems.

Then your gynaec goes and gives these relationship managers access to your information on their computer screens, with monthly targets for selling you condoms, sanitary pads and other intimate products. They call you and make you feel important by calling you a preferred customer, and giving you a platinum card. So, if your periods are four weeks late, you get a call that goes like: "Good morning, ma'am, I am Nikhil, your personal banker. May I interest you in visiting our abortion clinic? Oh, you don't want to abort? My apologies, madam. May I take this opportunity to gift you an early booking in a maternity home with whom we have a tie-up? We also have a tie-up with Amazon for incredible discounts on maternity gowns and chocolate-flavoured condoms this Diwali. When can I come and meet you to book your orders?"

Bankers are routinely privy to salary details, annual income, etc. that it is their business to know. However, the salesmen and women who hang around your bank have no business to know your financial details. HDFC Bank branches have a bunch of glib young men and women who are very approachable and go out of their way to fill up account-opening forms, etc. for you. Just because they sit inside the bank, you think they are "bankers" and you never hesitate to ask them to access your account on their computers. So these sales people get to know private things such as a huge cash-flow into your accounts when your life insurance policy matures, or you take VRS, or sell your house, or book profits in the share market.

If you are flush with funds, your "personal banker" says, "Sir, can I interest you in our tax planning products to reduce your income-tax and capital-gains tax liability?" Alternatively, if you are struggling to pay credit-card bills, frequently overdrawing your current-account, breaking fixed deposits prematurely, etc., your relationship manager nudges you to take a personal loan or gold loan which he knows you are unlikely to repay in time. Loan disbursal lets him meet his monthly targets and earn commissions, and when you default on repayments, heavy penalties and foreclosure of your gold loan helps the bank reap handsome profits. Predatory lenders used to be called loan sharks and pawn-brokers! How the times have changed!

HDFC Bank is like if your gynaec collects real-time information about when and with whom you have sex, what kind of sex you are habituated to, exactly when you menstruate, what kind of lingerie and sanitary pads you are currently wearing, etc. and then this gynaec goes and hires a bunch of MBAs and college freshers, calls them "Relationship Managers", lets them hang around his clinic pretending to be gynaecologists themselves till you start feeling comfortable enough to tell them about your intimate problems.
Customers are set up for systematic long-term exploitation by HDFC's bankers and non-bankers acting in concert.

Here's a real-life anecdote: An elderly couple walked into an SBI Bank branch to fill up their 15H form, so that TDS would not be deducted on their interest income. A friendly-looking lady sat them down at her desk, filled up their forms for them, and persuaded them to invest Rs 3 lakhs in SBI Mutual within 15 minutes. The only reason that the elderly folks trusted this woman is that they thought she was a full-time bank staffer, whereas she was actually a freelance sales agent! .

Another anecdote: ICICI Bank organized free Aadhar Card camps in the foyers of a residential building in a posh Borivali neighbourhood. While one solitary minion sat in in the foyer taking fingerprints, mugshots, etc., half-a-dozen bank officials hung around persuading the waiting people to open accounts with ICICI Bank, and visited their homes on various pretexts. And they were pushy – it was very difficult to say no to them! Why are banks so keen on opening lots of accounts? Because it "provides customer base for ongoing cross-sell through branches". In other words, every account holder is a potential customer for credit cards, loans, etc.

And now, back to HDFC Bank. Let's look at their online behaviour.
As a customer, I have given my email address to HDFC Bank to enable them to keep me informed of my account balance, etc. Here's an example of an acceptable email from HDFC Bank:
But then HDFC Bank doesn't stop at that. Here's an example of a salesman-like email, which is tolerable only because debit cards are an intrinsic part of modern banking:
But HDFC Bank doesn't stop at selling their own products either, they try selling you other companies' offerings, earning advertisement revenues like a newspaper company. Here's an example:
Surely, advertising Amazon's festival sale is beyond the boundaries of the client-banker relationship. Advertising cannot be considered a part of a bank's regular activities. Is this why we give the bank our email address? Using the bank's customer base as a captive market for selling the products of other companies is abuse of trust and misuse of the client's information!
HDFC Bank earns a large proportion of its revenues from third party product sales, fees and commissions. See this slide from HDFC's investor presentation:

Bottomline: In their mad race for year-on-year growth, retail bankers are crossing over some boundaries of the client-banker relationship. HDFC Bank is abundant in examples of this unwholesome trend.

These may not necessarily be adequate grounds for filing complaints to RBI or the banking ombudsman, or for going to consumer court. But this distasteful behaviour shows a tendency to exploit the customers' ignorance, dependency and blind trust in their banks.

[Please share your experiences. Email or call me.]
ISSUED IN PUBLIC INTEREST BY
Krishnaraj Rao
9821588114
krish.kkphoto@gmail.com


POSTED IN PUBLIC INTEREST BY
Suliman Bhimani
9323642081
sulaimanbhimani11@gmail.com