Big noting in India - cash on the knocker

The Indian Government has got it in for cash. Or, perhaps more accurately, the black economy – which is cash based. The move to cull the highest-value notes on issue is the most radical but not the only interesting development in global payments. And perhaps a sign of things to come.

After all, the European Central Bank announced a similar measure in May, signalling the phase out the €500 note by the end of 2018. “Authorities increasingly suspect that they (€500 notes) are being used for illegal purposes, an argument that we can no longer ignore,” the bank said.

"Any moves to modify the capacity to use cash in an undisclosed manner could provide a boost to the use of currently available alternatives."
Mike Ebstein, Director, MWE Consulting

Digital currencies such as Bitcoin may be some distance away from mainstream application but electronic-card-based options are now well-established payment choices, particularly in Australia.

Despite that, Australia has seen consistent growth in cash holdings in the form of physical currency.  It’s an anomaly and the Australian Tax Office has a current research program, "Cash and the Hidden Economy", scheduled for completion in February 2017.

That research is intended "to understand, track and measure community behaviours, drivers, attitudes and perceptions of the cash and hidden economy; to seek empirical evidence to inform and drive future policy and tailored intervention strategies”.

According to media reports, the building and construction industry will be the next main target of the taxman's attempts to claw back revenue lost in an illegal cash economy.

The ATO reportedly estimates about 1.6 million businesses, mostly micro and small with an annual turnover of up to $A15 million, operating across 233 industries as possibly participating in the cash economy.

From this perspective, perhaps Australia is not that far removed from India and the moves to “demonetise” the 500 and 1,000 Mahatma Ghandi series Rupee notes.


The shock-and-awe removal of 5, 10, 20, 50 and 100 Rupees was taken to curb the supply of counterfeit notes being used in the black economy and in funding terrorist activities.

The 500 and 1,000 Rupee notes accounted for 86 per cent of the value of notes in circulation. The strike has resulted in chaotic scenes as Indians have only until 30 December 2016 to deposit or exchange their large denomination notes for existing currency or the Mahatama Ghandi New Series 500 or 2,000 Rupee notes.

Meanwhile in Australia, Reserve Bank statistics show the value of notes in circulation in Australia was $A72.1 billion as at October 2016.

This level has doubled over the last 12 years with the RBA noting in its 2016 Annual Report demand in the latest year was strongest for $A50 and $A100 notes.

The RBA A6 table shows the $A50 and $100 notes now account for more than 92 per cent of the value of all notes in circulation with the expected life of these notes being very much greater than for the smaller denominations.

Given the larger value notes are not being used as frequent payment options in a similar manner to $5, $10 or $20 notes, the obvious question is whether an Indian style move could be considered as an option for the Australian market?

Click image to zoom Tap image to zoom

One reported consequence of the decision to demonetise the 500 and 1,000 Rupee notes has been an increase in India in the use of both credit and debit cards, accompanied by a surge in demand for payment apps and digital wallets.

Australians have already shown a considerable propensity to embrace the convenience of cards and tap-&-go as well as more recently migrating to Android and iPhone applications to make payments.


The growth of electronic wallets is being monitored by the RBA's Payments System Board which noted in their 2016 Annual Report; "Apple Pay was launched in Australia in November 2015 for proprietary American Express cards and in April 2016 for ANZ-issued American Express companion cards and Visa cards.”

“In June 2016, Samsung Pay launched its mobile wallet application in Australia, in partnership with American Express and Citibank. Android Pay announced early in December it had partnered with a range of financial institutions to launch in Australia in 2016 and in July launched with ANZ, American Express, Macquarie and a wide range of credit unions using service provider Cuscal.”

“The Board notes innovation in mobile wallets can provide benefits in terms of consumer choice and convenience, with cardholders potentially able to consolidate a range of payment cards into a single ‘app’ on their mobile device."

Concurrent with the increase in notes in circulation and growth in card based payments, we have been seeing a dramatic decline in the appetite for cash as shown by the following graph.

What had been a relatively steady pattern for the first four years of the last decade has given way to a slide in activity per device; not as a result of growth in ATMs - which have been relatively steady - but by a fall in total cash withdrawals.

Click image to zoom Tap image to zoom

Australia does not have the counterfeit issues of the sub-continent nor the same exposure to terrorism. But the banknote data does suggest that as well as having a desire to squirrel big denomination notes away in times of uncertainty and low interest rates, there is a potent cash economy at work.

The ongoing penetration of retail payments by non-cash alternatives is continuing unabated and it is therefore no surprise the utilisation of cash at ATMs as well as at retail point-of-sale is diminishing.

Radical though they may be, the recent actions in India are an example of how governments can initiate actions to influence payment behaviour. Elsewhere, such as in Singapore and Sweden, policy is also moving the population away from cash.

It will therefore be interesting to see what results are obtained by the ATO's current research into the ‘Hidden Economy’. Any moves by the ATO and RBA to modify the capacity to use cash in an undisclosed manner could provide a boost to the use of currently available alternatives.

Moreover, these alternatives are poised to offer additional functionality, speed and value-add capabilities upon the completion of the New Payments Platform. Planned for a 2017 roll-out, the near to real-time payment capability of the NPP accompanied by the capacity for additional value-add data can be expected to provide a further dimension to the appeal of non-cash payment options.

Then it will be up to policy makers to decide whether more needs to be done to tackle the black economy.

Mike Ebstein is Founder & Principal at MWE Consulting

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

21 Nov 2016

The emerging Trump world order

Tony Walker | Author and Political Analyst

The Chinese word for crisis embraces the characters signifying danger and opportunity. Any reasonable consideration of a Donald Trump presidency must anticipate a period of considerable uncertainty well into 2017.

21 Oct 2016

Gold, the shining yellow: an Indian perspective

Tarun Gulabani | Senior Relationship Manager, ANZ

India is a country with 1.25 billion people and a large savings culture. It may be a broad generalisation that Asians are big savers but Indians live up to the reputation. And they save in different assets to elsewhere in Asia – particularly in gold.

28 Oct 2016

India’s daunting scope for growth

Jonty Ephron | Chief Risk Officer India, ANZ

India’s importance as an emerging market has been well known for almost two decades: it was one of the original BRIC – Brazil, Russia, India, China - economies championed by Goldman Sachs in the early 2000s.