Digital Payments in India: A US$ 10 Trillion Opportunity

India has emerged as a global leader in the adoption of digital payments. India accounted for 46% of worldwide real-time payments in 2022, more than the other four leading countries combined. India has led the list of five countries in digital payments, with 89.5 million digital transactions in 2022. Almost 40% of payments (by value) are digital, contributing to a US$ 3 trillion digital payment market because of rapid expansion in digital infrastructure, UPI-led migration to digital, pandemic-led acceleration of shift in customer preferences, growing merchant acceptance network, and disruptive innovations by fintech companies. India's digital payments industry is at an all-time high and is predicted to more than triple to US$ 10 trillion by 2026. The next wave of growth is likely to come from Tier 3-6 cities, as indicated by the fact that Tier 3-6 cities have generated about 60-70% of new mobile payment clients over the last two years. Expanding merchant acceptance, digitising value chains, and establishing a financial services ecosystem in underserved segments are the key factors driving the rapid expansion of digital payments in India. The adoption of embedded payments via 5G and the Internet of Things (IoT), as well as the introduction of India's sovereign Digital Rupee, are expected to give additional momentum.

Digital payment transactions have expanded dramatically because of the coordinated efforts of the government, as well as all stakeholders involved, from 2,071 crore transactions in 2017-18 to 9,192 crore transactions in 2022-23. Various simple and convenient modes of digital payments, such as Bharat Interface for Money-Unified Payments Interface (BHIM-UPI), Immediate Payment Service (IMPS), and National Electronic Toll Collection (NETC), have seen significant growth in the last five years, transforming the digital payment ecosystem by increasing both person-to-person (P2P) and person-to-merchant (P2M) payments. BHIM UPI has emerged as the preferred payment mechanism of citizens, with 803.6 crore digital payment transactions worth US$ 157.51 billion (Rs. 12.98 lakh crore) registered in January 2023.

Overview of Digital Payments in India

Digital payments are one of the most crucial cornerstones of a financially inclusive country, as they assist to bring individuals together under an organised financial system. Digital payments in India are predicted to increase four times by 2026–2027, with a Y–o–Y transactional volume growth of 56% in 2022–2023. Moreover, digital transactions are predicted to expand 56% in a single year, from US$ 873.38 million (Rs. 71.97 billion) in 2021-22 to US$ 1.46 billion (Rs. 112 billion) in 2022-23. India is on the verge of another surge in digital payment transactions, due to new developments and the addition of new use cases.

This expansion can be attributed to measures implemented by the Government of India and the Reserve Bank of India (RBI) to promote digital payments, the advent of FinTech with new technologies to improve user experience, and PSPs building infrastructure to enable seamless transaction flows. Over the next five years, UPI is estimated to account for about 90% of total transactional volume in retail digital payments by increasing its acceptance to rural areas and tier 3 and 4 cities. Other instruments that are anticipated to expand include credit cards, the Bharat Bill Payment System (BBPS), and national electronic toll collection (NETC).

Timeline

Key Factors Have Revolutionized Digital Payments in India

• Rapid expansion of digital infrastructure

The India Stack infrastructure and the introduction of UPI have created the limitless potential to stimulate creative offerings and services to users. The JAM trinity, which stands for Jan Dhan, Aadhaar, and Mobile, has served as the cornerstone for the relentless growth in digital payments. So far, 440 million bank accounts have been opened through the Jan Dhan Yojana programme, 1.25 billion Aadhaar-based unique identification numbers have enabled KYC, over a billion mobile devices, and low-cost internet is used by more than 750 million people.

• Accelerated migration to digital led by UPI

The UPI system has supercharged India’s transition to non-cash payments, especially in person-to-person (P2P) fund transfers and low-value person-to-merchant (P2M) payments. UPI saw about 9 times transaction volume increase in the past 3 years, increasing from 5 billion transactions in FY19 to about 46 billion transactions in FY22, accounting for more than 60% of non-cash transaction volumes in FY22.  While UPI has revolutionised digital payments through interoperability and mandates, other rails such as the Bharat Bill Payment System (BBPS) have made the onerous task of bill payments a thing of the past, and the National Electronic Toll Collection (NETC) has digitised toll collections across the country.

• Shifting customer preferences for contactless driven by the pandemic

The acceleration of digital payments in India was a significant result of the numerous significant shifts in customer behaviour. Customers shifted to e-commerce and contactless digital payment methods to reduce contact and infection risk. Following the implementation of the lockdown in March 2020, a more than 50% increase in monthly transaction volumes was seen across UPI, BBPS, and Immediate Payment Service (IMPS) over the course of six months. In July-August 2020, there was a significant decline in cash usage among 50% of clients, with more than 60% migrating to UPI and digital wallets compared to previous years. Furthermore, 60% indicated a high likelihood of continuing to utilise digital payments in the future, a trend that is evident in the recent increase in digital payments.

• Increased merchant acceptance of digital payments

The ease of use and inexpensive setup and maintenance costs connected with QR codes have resulted in significant merchant adoption of digital payments during the last several years. Furthermore, the adoption of QR code placement at merchant point of sale (POS) has been significantly influenced by fintech businesses. QR payments are now accepted by over 30 million businesses, a 12x increase from just 2.5 million shops taking QR payments five years ago. QR code acceptance has also reached 75% of business-to-consumer (B2C) merchants. Due to this, merchant payments increased from 12% of UPI volumes in 2018 to over 45% in 2021.

• Tech disruptions and enablement by big tech and fintech

India had significant startup funding, with customer payment players receiving US$1.4 billion in investment in 2021. The advent of various new companies with diverse offerings, such as TPAPs driving payments at scale and niche businesses offering value-added services like Buy Now Pay Later (BNPL) alternatives or next-gen credit scoring with payments data, has favourably altered the digital payments market. With user-friendly transaction interfaces and new solutions, tech behemoths and prominent Indian fintech businesses have been key drivers of UPI growth in India among end users and merchants.

Benefits

• Instant and convenient mode of payment

Unlike cash, money can be transferred to the beneficiary's account instantly utilising digital channels such as BHIM-UPI and IMPS. BHIM-UPI has given access to various bank accounts in a single mobile app, making payments easier.

• Enhanced financial inclusion

People who may have been put off by the time and travel costs involved in physically contacting a bank outlet for transactions can now conveniently access the bank account digitally and get the benefits of being part of the formal banking system and becoming financially engaged. UPI 123PAY, which was just released, allows feature phone users to perform digital transactions over UPI in assisted voice mode, facilitating digital transactions and financial inclusion in rural areas.

• Increased transparency in the government system

Previously, cash payments were prone to "leakage" (payments that did not reach the receiver in whole) and "ghost" (false) beneficiaries. Benefits are now transferred directly to the target beneficiary's account (direct benefit transfer) using digital modes of payment.

• Improved speed and timely delivery 

In contrast to cash payments, which travel at the speed of the carrier, digital payments can be almost instantaneous, regardless of whether the sender and receiver are in the same town, region, or nation.

• Enhanced Credit Access

Unlike cash payments, digital payments automatically create a user's financial footprint, improving access to formal financial services, including credit. Banks and other lending institutions can use digital transaction histories to make cashflow-based lending choices for both retail lending and lending to businesses, especially small enterprises that may struggle to secure credit in the absence of verifiable cashflows.

• Safe and secure

Cash payment recipients not only frequently need to travel long distances to receive their payments, but they are also particularly vulnerable to theft. As many levels of authentication are necessary for transactions, digital payments in India are secure.

Key Initiatives Taken by the RBI in 2022–2023

• UPI123PAY

The RBI released UPI123PAY in March 2022 to allow feature phone users to make UPI payments. As a result, 400 million feature phone users will be able to use digital payments.

• DigiSaathi 

In March 2022, the RBI and NPCI established DigiSaathi, a 24x7 helpline with a website, chatbots, and toll-free calls that answers user questions and gives information about all digital payment products in order to raise awareness of digital payments.

• Framework for geo-tagging of payment system touchpoints

The RBI issued a framework in March 2022 to record geo-tagging information of payment system contact points provided by banks and non-bank payment service operators. The RBI requires the same information to monitor and understand the penetration of digital payment devices.

• Master direction – credit card and debit card – issuance and conduct directions, 2022

The RBI issued master directions for issuers in April 2022 to control the issuance and use of credit, debit, and cobranded cards. These rules aim to improve card security and ensure proper communication with cardholders.

• Ban on non-bank PPIs loading through credit lines

The RBI issued a warning to non-bank PPI issuers in June 2022 not to load their wallets and cards using credit lines. This has created an effect on the BNPL business because most non-bank BNPL service providers and PPI issuers were allowing clients to load their wallets using credit lines.

• UPI Lite

In September 2022, the RBI will introduce UPI Lite, an on-device wallet-based UPI system. Users can load up to US$ 24.27 (Rs. 2,000) in their wallets using this method, which can then be used to make payments offline. This would allow users to make UPI payments even in areas with little or no internet access.​​​​

• Linking RuPay credit cards to UPI12

  The RBI announced the linking of RuPay credit cards to UPI in September 2022. This will enhance the use of digital payments and benefit its stakeholders for the following reasons:

  • The absence of PoS equipment in rural areas.
  • Increase in credit card usage.
  • Payment facilitators earn money by charging merchants a merchant discount rate (MDR) for any UPI transactions done with a credit card.
  • An increase in sales to merchants since consumption is likely to rise.
• Inward, cross-border remittance through BBPS

In September 2022, the RBI implemented the BBPS cross-border payments for inward remittances. This allows non-resident Indians (NRIs) to pay utility, water, and telephone bills straight from their mobile phones.  

• BBPS open for all categories of payments and collections

In December 2022, the RBI enabled both recurring and non-recurring payments and collections across all categories. This will allow payments such as education fees, tax payments, and rent collections to be done through BBPS.

• Payment mandate in UPI's

In December 2022, the RBI enabled payment mandates in UPI. UPI users can utilise this functionality to set aside funds in their UPI-linked accounts for specified merchants, which can then be paid via multiple debits.

• CBDC

On December 1, 2022, the RBI launched a closed group trial project for both retail and wholesale groups. The RBI will conduct the trial in phases, beginning with four of the eight shortlisted institutions. The digital money will support both P2P and P2M categories.

Developments of Promoting Digital Payments in Other Sectors

• National Logistics policy

The Government of India intends to regularise the logistics sector to effectively manage it. Currently, the logistics business is highly defragmented, with a market size of US$ 1.94 billion (Rs.160 billion). The government intends to unify all logistics players under a single platform, the Unified Logistics Interface Platform (ULIP). Among other things, this platform will digitise most financial transactions in this sector, resulting in increasing digital payments.

• ONDC

The Open Network for Digital Commerce (ONDC) is an ecosystem that will transform the e-commerce sector by shifting away from a marketplace or platform-based approach. ONDC will allow small merchants and local retailers to build their operations online. The Indian e-commerce market penetration is currently around 8%, with ONDC aiming to raise it to 25% by 2024-2025.

Road Ahead

In 2022, the payment processing industry led the global market to contribute for more than a quarter of the total revenue. The growing popularity of e-commerce and the global shift towards speedy payments is prompting retailers to install payment processing systems in order to provide faultless checkout experiences to their customers. Due to increased QR code deployments, India will become a digital payment economy, with merchant payments emerging as the most significant driver of this growth, particularly in the offline segment. As more retailers accept digital payments, the emergence of a digital transaction trail will result in a dramatic change in access to credit for small merchants. Unlocking the US$10 trillion opportunity needs a few enablers. There is a continuing need to build customer trust through a comprehensive approach to fraud management, simplify digital onboarding and KYC, reduce strain on bank tech infrastructure, allow better economics for payment players, and, finally, strengthen the country's digital infrastructure. The Government of India is committed to expanding digital transactions in the Indian economy, thereby improving the quality and strength of the financial sector and the ease of living for citizens.