PAYTM and India’s Cash Driven Economy: Opportunity for Online Payments

The immense opportunity for online payments in the world's fastest growing major economy

On November 8, 2016, the Prime Minister of India, Narendra Modi, stunned the nation and the world with an unprecedented television appearance in which he declared all Indian currency notes of INR 500 and INR 1000 denominations invalid. [1] This rendered approximately eighty-six percent of the country’s cash notes outdated overnight. [2] The Ministry of Finance followed this address with a notification in The Gazette of India outlining its intentions for this change and the steps that the people should take to exchange the now invalid currency notes at banks across the nation. [3] The Government explained that the notes were being withdrawn to combat counterfeiting of high value notes, to tackle unaccounted wealth (known as “black money” or money accumulated by income tax evasion), and to address the financing of criminal activities that affect economic and national security. [3] In place of the old notes, the Reserve Bank of India would release new notes of INR 500 and INR 2000 with higher security features making them harder to counterfeit. Customers could exchange notes in limited quantities against a valid form of government identification for authorities to track and release replacement notes. [4] [5]

Logistical Challenges of Demonetization

The implementation of this bank currency phase-out and replacement with either existing lower denomination notes of INR 100 or less or with the new issue notes of INR 500 and INR 2000 would prove to be an immense logistical challenge with wide reaching inconveniences for consumers and businesses across the nation. With an economy heavily dependent on spending in the form of physical cash notes and relatively low penetration of electronic forms of payment, the sudden withdrawal of the majority of the country’s cash led to long customer queues outside banking outlets where people waited to exchange their money. Businesses refused to accept the currency notes, auto-rickshaw drivers were not able to ply, [6] and a temporary spike in gold purchases was observed as people sought to dump the old currency notes. [7] People’s ability to spend on critical health care needs was severely impacted [8] and in some instances Air Force planes were readied with cash fresh from Government mints for places where it was needed the most. [2]

Source: Truelancer Blog. 2016. Freelance Payment Options in India - Truelancer Blog. [ONLINE] Available at: [Accessed 18 November 2016].
Source: Truelancer Blog. 2016. Freelance Payment Options in India – Truelancer Blog. [ONLINE] Available at: [Accessed 18 November 2016].
Paytm: Opportunities for Online Financial Transactions Exposed

Despite the seemingly insurmountable logistical challenges of replacing eighty-six percent of the world’s second most populous country, economists believe that the move will have long term benefits for the country per the stated goals of the Government to eliminate tax evasion and criminal financing activities. [2] Aside from the logistical challenges and expected benefits, the Government’s move highlights the wide and untapped potential for businesses in the field of digital cash and online payments. For example, a study commissioned by the Institute for Business in The Global Context has found that less than 35 percent of Indians over the age of 15 years have operated a bank account and less than 10 percent have used any kind of non-cash financial payment instrument. [9] It is commonly known that ecommerce players and online retailers have to provide consumers with mechanisms to pay for goods and services using physical cash. Flipkart, a dominant online retailer in the country, is known to accept cash payments at the door when delivering goods to a house. In the light of such challenges and opportunities, online payment companies like Paytm can find strong value.

Paytm: Online Payments in India

Paytm was founded in 2010 and offers online shopping and online bill payment facilities. [10] In the days after the Indian demonetization announcement, Paytm used its “Nearby” feature to allow consumers to find merchants that accepted digital wallets in their vicinity, saving consumers from the burden of sourcing scarce cash. [11] The Company was reported to have generated transactions at the rate of 25 million in six days following the Prime Minister’s announcement, a total of INR 150 crore (1 crore = 10 million). [11] With growing online shopping and a governmental push for financial inclusion [12] [13], Paytm has a unique opportunity in a fast growing, under-tapped and strongly aspirational market. Paytm’s recent partnership in the taxi ride sharing segment that traditionally used cash is another example of its potential for reaching untapped consumers. [14]

Challenges and the Future

Given the rising opportunity for non-cash payments in India, competitors as well as established financial institutions can be expected to compete more aggressively in the Indian payments sector. Additional challenges of addressing the rural-urban gap in access to online finance and potential risks of fraud and cyber security could come into play in Paytm’s growth path. The eyes of investors and the public will be on Paytm to see how it responds to the challenges, growth opportunities and risks that it faces in the world’s fastest growing major economy.

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[1] 2016. PM Narendra Modi Bans Rs 500, Rs 1,000 Notes In War On Black Money. [ONLINE] Available at: [Accessed 18 November 2016].

[2] 2016. The Strange Consequences of India’s Unprecedented Banknote Ban – Bloomberg. [ONLINE] Available at: [Accessed 18 November 2016].

[3] Ministry of Finance, Government of India. 2016. The Gazette of India. Notification S.O.3407(E). [ONLINE] Available at: [Accessed 18 November 2016].

[4] 2016. With High Security Features, New 500, 2000 Rupee Notes Hard To Fake. [ONLINE] Available at: [Accessed 18 November 2016].

[5] Reserve Bank of India. 2016. Press Release: 2016-2017/1144. November 08, 2016. [ONLINE] Available at: [Accessed 18 November 2016].

[6] Shashank Bengali, Parth M.N.. 2016. Cash chaos in India: An unprecedented ban on large bills backfires on the poor – LA Times. [ONLINE] Available at: [Accessed 18 November 2016].

[7] Reuters. 2016. India’s shock bank note ban sparks cash chaos | Reuters. [ONLINE] Available at: [Accessed 18 November 2016].

[8] CNN. 2016. India’s cash crunch impacts health care – CNN Video. [ONLINE] Available at: [Accessed 18 November 2016].

[9] The Institute for Business in The Global Context. 2015. The Cost of Cash in Indai. [ONLINE] Available at: [Accessed 18 November 2016].

[10] Paytm Shop. 2016. Online recharge | mobile recharge for prepaid & pay postpaid [ONLINE] Available at: [Accessed 18 November 2016].

[11] The Economic Times. 2016. Paytm finds Rs 150 crore bounty offline – The Economic Times. [ONLINE] Available at: [Accessed 18 November 2016].

[12] Online shopping in India to grow by 78% in 2016: Study | Latest Tech News, Video & Photo Reviews at BGR India . 2016. Online shopping in India to grow by 78% in 2016: Study | Latest Tech News, Video & Photo Reviews at BGR India . [ONLINE] Available at: [Accessed 18 November 2016].

[13] Brookings India. 2016. Brookings India Modi’s financial inclusion push – Brookings India . [ONLINE] Available at: [Accessed 18 November 2016].

[14] Forbes India. 2016. Forbes India Magazine – Paytm: The wonder wallet. [ONLINE] Available at: [Accessed 18 November 2016].


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Student comments on PAYTM and India’s Cash Driven Economy: Opportunity for Online Payments

  1. Interesting read, I knew that rumors of high-denomination notes being removed from circulation have been pushed the last six months in the EU and US, but had not realized the action other countries had taken. One article describing the differences in using large vs. small denomination notes was particularly noteworthy, it states that £1m in twenties weighs more than 50kg – about 50 bags of sugar, while the equivalent in 500 euro banknotes weighs just over 2kg [1]. It would be interesting to measure how the switch to digital currency in India effect this move has on illicit markets.


  2. The payment situation in India is really similar to the situation in China. Chinese people skip from cash payment directly to online payments (alipay, wechat-pay) without using credit cards. I believe the online payment system and the digital currency have huge potential in the developing country as it not only facilitates the transaction but also collects huge valuable transaction data. The payment company can use these data as customer rating and credit rating, which is highly underdeveloped in emerging countries like India. Payment is a great way to link the current gap in the financial system.

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