Digital payments in Singapore: lessons from India’s 2016 demonetisation
Singapore's increasing shift to digital payments brings both opportunities and challenges. A study of India's 2016 demonetisation exercise reveals potential behavioural shifts in consumer spending, raising important questions for policymakers and consumers alike.
28 February 2025
Characterised by lower operational costs and greater financial inclusion, digital payments and mobile money are gaining traction worldwide and reshaping how commerce is conducted, at the same time changing consumption patterns as well.
In the study “Digital Payments and Consumption: Evidence from the 2016 Demonetization in India”, Agarwal, Ghosh, Li, and Ruan (2024) study a countrywide demonetisation exercise that occurred in India in November 2016, and investigate how it catalysed consumer spending and influenced consumption patterns through digital channels.
Here in Singapore, the government is encouraging the transition to a cashless society through various digital payment initiatives. In addition to developing apps like PayNow and PayNow Corporate – which were respectively launched in 2017 and 2018 – efforts are also underway to educate and support all segments of society, including seniors, to improve digital literacy and make the technology more inclusive and accessible.
Going forward, the government is seeking to consolidate the administration and governance of Singapore’s national payment schemes, at the same time enhancing cross border electronic payments with countries in the region.
As Singapore ramps up its move towards the digitalising money, are there lessons to be learnt from Agarwal et al.’s study?
Background
In November 2016, India’s Prime Minister Narendra Modi announced a nationwide demonetisation exercise that involved the removal of 500 and 1,000 rupee notes from circulation. Holders of these notes could deposit them at banks but would not be able to use them for transactions. The stated objectives of the policy were to weed out black money, remove fake paper notes, reduce corruption, tax evasion and terrorism.
At the time of the announcement, the demonetised 500 and 1000 notes accounted for 86% of currency in circulation, and following policy implementation, total currency declined by 75% and recovered only slowly over the next several months.
Given that India was a primarily cash-based economy, the monetary exercise represented a forced switch away from using cash. On the other hand, the economic costs associated with adopting digital payments were small for consumers as the ownership of bank accounts, debit cards and mobile phones were very common in India by 2016.
An implication of demonetisation meant that consumers who relied more on cash previously would be more affected by the forced switch to digital payments. Using the policy as an exogenous shock, Agarwal et al. deployed difference-in-differences methodologies to investigate changes in spending patterns across individuals with varying degrees of prior cash dependence.
Empirical design and findings
The study utilised anonymised consumer-level transaction data from a large Indian supermarket chain, covering purchases over 171 stores in 21 districts of five states from April 2016 to September 2017. For each individual consumer, the researchers measured prior cash dependence, defined as the share of spending paid by cash during the pre-shock period from April 2016 to October 2016.
On average, cash usage dropped from 70% to 57% following demonetisation for the sample as a whole, which consisted of more than 900,000 individual consumers, while the use of debit cards, credit cards and mobile payments increased.
The implementation of the demonetisation policy had clearly compelled cash-dependent consumers to adopt digital payment methods. As part of their strategy to isolate the causal impact of the policy, the researchers deployed various controls for socioeconomic, demographic and time fixed effects, and also ensured that both cash and digital payments were equally accepted in all supermarket stores in the data throughout the entire sample period, thereby creating a quasi-experimental environment where consumers could independently exercise a genuine choice to use cash or digital payments.
Having ranked consumers’ prior dependency on cash on a percentile scale, the study also found that digital payment rose by 2.94 percentage points and monthly spending increased by 2.38% for every additional 10 percentage points in prior cash dependence following the demonetisation.
Explaining the phenomenon
The study’s findings refute the notion of monetary neutrality – meaning that consumer valuation of products and services is independent of how money is represented. Instead, the observed behavioural changes reinforce the hypothesis that a consumer’s propensity to spend is correlated with monetary frictions such as the cost of accessing and holding money.
Cash, for example, involves storage cost, the time costs of traveling to a bank branch or an ATM to withdraw cash, and the risk of theft. Using digital payment instruments for purchases can lower these transaction costs, and hence explain the increase in consumer spending, especially by those most affected by the transaction costs.
Another explanation involves the “subdued endowment effect” of digital transactions. In brief, cash payment is perceived to be painful because the consumer has to physically endure the act of parting with their hard-earned money. On the contrary, card and mobile payments are perceived to be less painful as no money actually exchanges hands, hence the subdued endowment effect of consumers feeling less attached to their money.
An implication of the subdued endowment effect of digital payments is that it amplifies “present bias” or, in other words, the tendency to prioritise immediate gratification. Consumers with a strong present bias are more likely to make impulsive purchases, and Agarwal et al.’s study found that consumers switching over to digital channels were more likely to spend on “temptation goods” such as tobacco, carbonated drinks, sweets, and instant-prepared food.
Regression analysis found that every increase of 10 percentage points in prior cash dependency was associated with a 0.34-percentage-point increase in the likelihood of spending on temptation goods, and this effect was more pronounced among lower-income consumers. In contrast, consumers were only 0.08 percentage points more likely to spend on essential and utilitarian goods.
On the overall, following the forced switch to digital payments, consumers were found to be spending more, with a bias towards relatively frivolous goods aimed at quick gratification. Over the long run, such a behavioural pattern may lead to overspending and potential welfare losses.
Lessons for Singapore
Electronic payments in Singapore will become more pervasive in time to come. When consumers here switch over to digital money, will they likewise exhibit similar behavioural patterns as Indian consumers in the post-demonetisation environment? Should policymakers here consider such potential externalities?
Agarwal, Sumit is the Low Tuck Kwong Distinguished Professor at NUS Business School and professor of economics, finance, and real estate at the National University of Singapore.
Ghosh, Pulak is a professor of decision sciences, finance and public policy at the Indian Institute of Management Bangalore.
Li, Jing is an associate professor of economics the Singapore Management University.
Ruan, Tianyue is an assistant professor of finance at NUS Business School, National University of Singapore.