Indian Demonetization & Rupee Reform: The Uber Moment Fintech Needed?

When Indian Prime Minister Narendra Modi announced in November that the country would no longer use its R500 and R1000 (approximately $7.50 and $15.00) currencies — which make up 86 percent of all cash in circulation in India — observers questioned the wisdom of the monetary decision.  Why?  As The Economist described,

“[I]t is dramatic: central banks usually balk at moves that call into question the legal worth of the notes they issue.”

Citizens and observers said that it was a “chaotic” decision, a major “disruption” that required citizens to exchange notes or deposit them within about a month and a half, or else lose the cash value.  However, the seemingly radical monetary move may be just what fintech — and a global economy seeing increasing digitalization — needs.  Founder and CEO of Faircent.com Rajat Gandhi claims that it is the “Uber moment of fintech”.  He explained;

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“When Prime Minister Narendra Modi announced the decision to scrap Rs 500 and Rs 1,000 notes, one sector [fintech] was suddenly thrust into the limelight. Indeed, companies operating in the fintech space are scrambling to take advantage of the new situation.”

How exactly is this situation comparable to Uber, a ride-sharing company?

“Uber couldn’t have been possible without everyone having a smart phone, a robust digital payment solution and, most importantly, GPS-enabled mapping system from Google. Similarly, the e-money-driven, cashless India envisaged by the government may just provide the right platform for fintech to bloom in India.”

As huge amounts of cash were taken off of the market over the past weeks and individuals were forced to deposit them into banks and ATMs, there will be an increase of reliance on digital wealth management.  With 86 percent of the currency in circulation theoretically out of sight, we should see a shift from “cash is king” to increased digital banking.  But, it will take time, especially in areas of a large country where the informal economy still persists, according to The Economist;

“The prospect of life with little or no cash, at least for a few days, cheered those who think Indians should be switching to smartphone apps and card-based payments, which are easier for the authorities to track and tax. That laudable aim will take time in a country where nine out of every ten workers still toil in the informal sector. Though the number of Indians with bank accounts has risen sharply thanks to a government financial-inclusion scheme, most savings are still held outside the banking system. One-fifth of total economic output is said to be informal.”

Faircent.com is India’s largest peer-to-peer platform, and Gandhi believes that P2P lending, in particular, will be able to pounce on the increasing digital economy opportunity that PM Modi has lent much time and effort to developing.  Aside from the overall modernization and digitalization that fintech offers, P2P is a product within the fintech umbrella that shows most potential in this environment because according to Gandhi;

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“Lending as a business has been highly restricted to a limited number of banks and other formal lending institutions. This has led to very few innovations and a large part of our population staying outside the formal credit sector. Lending as an asset class is most profitable in a credit-starved country like India. … P2P unlocks the supply side by connecting individuals who have surplus money to lend with the ones seeking a loan. Add technology into the mix and you get a powerful tool that can negate the problems traditional banks face. At Faircent we are building the infrastructure for a technology and data-driven credit appraisal system.”

Fintech entrepreneurs and banks moving toward digitalization must move quickly on Modi’s sudden monetary reform to ensure that success occurs rather than a disaster.  As economists have warned,

“India is not the first country to introduce abrupt, drastic reform of its currency. But the precedents—including Burma in 1987, the former Soviet Union in 1991 and North Korea in 2009—are not encouraging. Burma erupted in revolt, the Soviet Union disintegrated and North Koreans went hungry.”

India’s rupee reform scenario is coming at a time when the fintech sector exists to a large enough extent to fill in the disruption — a phenomenon that did not exist in the 1980s to 2000s in other countries.  India’s government must thus work closely with such fintech companies to steer the ship in the right direction, averting monetary disasters from this sudden currency reform.

Gandhi is optimistic and predicts that startups, P2P lending platforms, and government can work together to ensure that fintech sees success next year.

“The [2016] year will end for the Fintech space in a flurry of activity. Expect 2017 to be a strong year for Fintech players with P2P playing a bigger and more decisive role.”

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