In recent years, various government initiatives and multiple financial technology (fintech) companies have been ins­trumental in shaping the digital payments landscape in India. Mobile payments have also witnessed a major shift with the proliferation of payment modes such as unified payments interface (UPI), mobile wallets, Bharat Interface for Money, Bharat­QR and unstructured supplementary service data.

According to latest data released by the National Payments Corporation of India (NPCI), India recorded UPI transactions worth Rs 7.7 trillion in October 2021 as against Rs 6.54 trillion in September 2021. These figures bear testimony to the positive shift in consumer behaviour towards di­gital payments. According to Razorpay, digital payment transactions have grown up to 76 per cent in the past 12 months, with several first-time digital payment users coming in. The report further states that by 2024, the share of real-time payments volume in overall electronic transactions will exceed 50 per cent and reach 71.7 per cent by 2025.

Growth trends

Although India’s digital payments market witnessed exceptional growth after demo­ne­tisation in 2016, the Covid-19 pandemic fuelled the growth and adoption of online transactions. While the pandemic was a mi­nor blip in the growth story of di­gital pay­ments in India as transactions saw a slight drop in the early months of fiscal year 2020-21, the level has now been restored to pre-Covid-19 times. In fact, there has been a V-shaped recovery post the pandemic, as the outbreak accelerated the shift to digital platforms with businesses now looking to integrate both online and offline channels to provide an omnich­annel experience to customers. Further, during the pandemic, users shifted to net banking and other digital payment facilities to avail products including essential goods, groceries, retail, medical supplies and education.

Additionally, there have been multiple driving forces behind the robust growth of digital payments in India. These include the launch of new and innovative payment pro­­ducts, increasing smartphone adopti­on, a growing need for faster payment mo­des, discounts and cashback on mobile wallets and UPI transactions, and a strong push from the government and regulators towards the adoption of digital channels.

For instance, the launch of new and in­novative payment products such as UPI, National Electronic Toll Collection (NETC) and Bharat Bill Pay Service (BBPS) have helped increase the adoption of digital payments. Since its launch in 2016, UPI has seen an exponential growth and has become the most preferred pay­me­nt product in terms of volumes. The co­untry expects the volume of UPI transactions to grow by seven times by 2025. With the government and regulatory push, BBPS and NETC have also witne­ss­ed a mammoth compound annual growth rate of 500 per cent and 123 per cent respectively since 2018.

On August 2, 2021, the NPCI launched a new digital payment solution called e-RUPI. e-RUPI is a digital voucher which a beneficiary gets on his phone in the form of an SMS or QR code. It is a prepaid vo­ucher, which can be redeemed at any centre that accepts its. For example, if the go­vernment wants to cover a particular treatment of an employee in a specified hospital, it can issue an e-RUPI voucher for the determined amount through a partner bank. To begin with, the NPCI has tied up with over 1,600 hospitals where e-RUPI can be redeemed. In the days to come, the user base of e-RUPI is expected to widen, with even the private sector using it to deliver employee benefits and micro, small and medium enterprises (MSMEs) adopting it for business-to-business transactions. Meanwhile, the emergence of im­p­ro­ved technologies is another key factor leading to the growth of the digital payments industry in the country. Together, these fa­c­tors are likely to cr­e­ate a revenue opportunity worth appro­xi­mately Rs 2.94 trillion by financial year 2024-25 for digital payment players as ag­ainst that of Rs 1.98 trillion in financial year 2019-20.

Evolving competitive landscape

With the volume of digital payments surging, new players are entering the market to leverage ever-rising opportunities in this space. Currently, PhonePe, Google Pay and Paytm are the leaders in the digital pay­ment space. In September 2021, Ph­one­Pe registered digital transactions worth over Rs 3.06 trillion while Google Pay registered digital transactions worth Rs 2.5 trillion.

Amazon Pay has also gained popularity in recent times in the digital payment space. Other players such as MobiKwik, PayU Money and Payzapp have made the digital payment space more competitive with their lucrative offerings. In terms of fintech start-ups, Cred is a company that has been witnessing an increase in its user base. In November 2021, Whats­App Me­ss­enger also launched its digital payments service.

Telecom operators such as Reliance Jio and Bharti Airtel too have their digital pa­y­ment applications and e-wallets. More­ov­er, banks have their own applications to fa­ci­litate digital payments and transfers such as immediate payment service (IMPS) and real-time gross settlement (RTGS) electronically.

Potential threats and challenges

The paradigm shift towards a cashless eco­nomy and increased volume of digital payment transactions brings with it various threats and challenges. Some of these are:

  • Security and privacy concerns: Th­rou­gh digital payment mechanisms, any am­ount of money can be transferred fr­om one end to another with the use of a one-time password or security pin leading to security and privacy concerns. Fu­r­ther, users add bank account details to various applications such as di­gital payment applications and e-comm­e­rce websites which involves greater exposure to data or security breaches.
  • System vulnerability: Deep penetration into the cashless economy implies that the power to regulate funds will be vested in the hands of a system. In any un­foreseen situation, if the cashless eco­nomy’s supporting system fails it would become a big problem for financial services to operate. For instance, the Visa outage in 2018 wreaked havoc for those relying on digital payments.
  • Increasing cybercrime: With the volume of digital payments soaring, there has been a growing concern about the increasing number of cyberthreats in the country. The National Cyber Crime Re­por­ting portal stated that over 290,000 cybersecurity incidents related to digital banking were reported in 2020.
  • Lack of stable internet connectivity: While India has taken a big stride forward towards becoming a cashless economy, providing seamless and secure in­te­rnet connectivity across the country is a big challenge. Internet connectivity has deepened its roots in remote areas of the country but stable connectivity is still an issue. Banks receive countless qu­e­ries related to transaction failures even now.
  • Awareness and adoption: Consumers still do not prefer mobile wallets as a safe mode for payment. Banks still have limitations on the number of withdrawals and levy monthly charges on online tra­n­sa­ct­ions. Awareness about digital payments and user interface education are required to instil confidence among users.

The way forward

Net, net, the future of digital payments in India looks promising. Although cybersecurity and digital payment fraud cases pose a big risk, the digital payments ecosystem can surely be strengthened, with organi­sati­ons, users and the government sharing the responsibility of securing digital pay­me­nts. Fur­ther, despite all the security con­cerns, instruments such as debit/credit cards are be­coming extremely popular in India with mi­llennials emerging as primary growth dr­i­vers. As per reports, the In­dian digital pay­me­nt industry is estimated to grow to $700 billion by 2022. More­over, the Re­serve Bank of India (RBI) forecasts a 50 per cent increase in mobile-ba­sed payment tra­n­sac­tions while payment systems such as UPI, RTGS and IMPS are li­ke­ly to register av­e­ra­ge annualised gro­wth of over 100 per ce­nt, according to RBI’s 2021 vi­sion document.

Financial companies too have stepped up their efforts to strengthen their payment infrastructure and have started offering adjacent services such as lending, weal­th management, micro insurance and the use of data analytics to offer more customi­s­­ed solutions for customers. In the future, the fintech industry will innovate further to pr­­o­vide safe and dynamic tran­sa­cti­on facilities for promoting digital payments in the country.