Despite its noble intentions, the recent demonetisation drive by the Indian Government has led to a lot of suffering for the common Indian due to the ensuing cash crunch. Businesses have invariably hurt as well due to reduced spending by consumers. Although reliable data is yet to surface, the move has certainly achieved its desired effect of increasing bank deposits, improving tax compliance and putting the fear of God into tax evaders. However, there have been benefactors of the move as well. Prominent among them have been financial services companies such as Visa and MasterCard and vendors of card payment processing machines.
Credit cards eat into the already thin margins of the retailers. The 2-3% of the purchase cost charged by credit card companies is borne by merchants. But they have several benefits ranging from convenience to security. This may have been the watershed moment Visa, MasterCard, and even Paytm were looking for, given the extremely low the penetration of electronic payments is in India. To know just how low the penetration is, take a look at this week's chart that shows what percentage of non-cash transactions by country.
Around the world, an estimated 85% of consumer transactions are carried out using cash. Singapore and Netherlands have a percentage of electronic transactions at over 60%. The US has a high credit card penetration but surprisingly over half the transactions in the country are conducted using cash. In Japan- one of the most advanced economies- only 14% of consumer transactions are made with non-cash instruments. In China, 10% of consumer transactions are made electronically and they have growing at a scorching pace thanks to the rapid expansion of online retail. In India, a miniscule 2% of the consumer transactions are made using non-cash methods. As a result, there is a lot of room for growth. The prospects of homegrown players such as Paytm are bright.