Demonetisation: The cash conundrum

Digitisation of banking

Over the last five years the UK has seen a dramatic increase in contactless payments, with £2.9 billion spent last year, up 184% from 2015. Sweden is expected to become cashless by 2020 and South Korea is encouraging people to give up their coins. Those societies are all linked as they aim to evolve into cashless economies with ‘paperless banking’.

The most controversial cashless story at the moment is from India. At the end of last year the news of India’s demonetisation monopolised the front pages of global news outlets, Prime Minister Narendra Modi, announced overnight India’s outstanding INR 500 and 1000 notes would no longer be viable. This announcement wiped out 86% of the cash in circulation and has caused cultural shifts in the country.

The consequences of demonetisation in India are numerous. The major challenge is aimed at banks. As the data on their customers changed overnight, with a huge population cashing in their unusable notes, banks are now having to relearn who their most profitable customer is, with the accurate understanding of personal worth now visible.

There are a variety of reasons becoming cashless is increasing in popularity. Looking at India in particular there are clear reasons from both the government and consumer as to why this change needs to occur.

Why India is becoming cashless from the government point of view

Reduce ‘Black Money’

A fundamental reason for the move to ‘paperless banking’ was to try and reduce the amount of ‘Black Money’ circulating in India's economy. The shock change has lowered money laundering drastically and decimated the counterfeit market. There have also been negative side-effects with a sudden run on other notes, cash shortages and increased stress on banking infrastructure.

Decrease the ‘Unbanked’ population

Another aim of this change was to encourage the previously unbanked to start depositing and holding money in banks. This boosts India’s growing economy with more people banking the government is now able to regulate taxes easier. This policy has completely changed the way people bank, the least profitable customer for a bank could now become the most profitable, as they deposit their life savings into the bank in one fell swoop.

Regulations

Finally, off the back of this scheme the government will now have a greater understanding about the population. With increased data on their citizens, the government will be able to bring in fairer regulations regarding wages, movement of people and other social reforms.

Increase in FinTech firms

With demonetisation, the government will encourage people to start ‘paperless banking’, with increased adoption of contactless and card payment methods that will help boost India’s already thriving FinTech sector.

Why India is becoming cashless from the consumer point of view

Digital Banking

Technology is becoming more prevalent in people’s daily lives, affecting their homes, cars and education. It was only a matter of time before the modern consumer wanted their banking system overhauled. This move away from cash and towards online banking platforms gives customers 24 hour banking, realtime access to their accounts with prescriptive data which aids smart financial decision making.

Redesigning the customer relationship

As more people deposit in banks, banks get a greater overview of the general wealth of the population and their customers. These additional figures supply the bank with new data points, which can then be used to gain a more informed view of their customers, this puts banks under greater pressure to use this new data to redesign customer relationships.

Customers now expect their needs and wants to be met by their bank. This digital transformation is enhancing the bank's existing understanding of their customers’ habits, so there is a shift towards a more customer-focused paradigm that wouldn’t have been possible in a cash-focused economy.

The future for banking in the digital world

Banking will be almost unrecognisable in the next five years, due to new regulations, evolution of payments and the resulting shift into new customer-centric banking. The average customer is still drawn to cash, to try and pull the individual away from it banks either need to implement shock legislation, such as with India, or they improve their FinTech capacities to make it quicker and easier for people to make digital payments. This requires banks to have technology which pulls the right data at the right time to deliver personalised customer experiences. Whichever option a bank selects they must keep their customers at the centre of their decision.