The Covid-19 pandemic accelerated the adoption of digital services in India, leading to increased demand for and acceptance of for digital payments. Companies such as Swiggy, Zomato, Amazon and Apollo started preferring digital payments over physical transactions. This increasing demand by consumers was backed by a supportive regulatory environment. Based on a study commissioned by Forrester Consulting on behalf of Fiserv, Inc., 63 per cent of Indian consumers are likely to look for alternative options for their payment needs, with 46 per cent indicating that they will reduce spending if they are allowed to use their preferred channels of payment.
The total number of digital transactions in India is larger than the US, the UK, Germany and France combined. The Union Minister for Railways, Communications, Electronics and Information Technology, Ashwini Vaishnaw, shared this info at the World Economic Forum, held in Davos in January 2023. This change has, in part, been brought about by the development of a unified payment interface (UPI) in the country.
The rise of UPI
UPI was developed by the National Payments Corporation of India (NPCI) in 2016. It is a mobile payment method that allows the user to transfer funds from one bank to another, instantly and free of charge. To transfer money through UPI, customers need to have a UPI ID, which is a unique identification for their bank account. Each UPI ID is protected by a four- or six-digit personal identification number, without which the transaction is not possible.
UPI was India’s leading digital payment platform in 2022, registering a 70 per cent increase in the number of transactions to reach 74 billion and a 54 per cent increase in value. According to a report by Worldline, the India Digital Payments Annual Report for 2022, payment modes, such as UPI, debit and credit cards, and prepaid payment instruments, saw about 87.92 billion transactions valued at Rs 149.5 trillion. UPI alone clocked over 74.05 billion transactions in volume and Rs 126 trillion in value. The report stated that by end 2022, 54 per cent of the UPI transactions volume was person to merchant (P2M).
Recently, the NPCI extended the timeline for compliance with its new limitation rules by third-party app providers who exceed the volume cap of digital payment transactions, by two years to December 31, 2024. This move was made taking the present usage and future potential of UPI into account. It is expected to bring ease to digital payment platforms such as PhonePe and Google Pay, which use UPI to facilitate payments.
Key benefits
In the past five years, digital payment modes such as Bharat Interface for Money-Unified Payments Interface (BHIM-UPI), Immediate Payment Service (IMPS) and National Electronic Toll Collection (NETC) have recorded substantial growth and transformed the digital payment ecosystem by increasing person-to-person (P2P) as well as P2M payments.
Digital payments provide numerous benefits over physical transactions. They are instant, convenient, enable the beneficiary to get the amount immediately through digital modes such as BHIM-UPI and IMPS, and make it easier for users to receive payments in their accounts. This enhances financial inclusion, as it removes the need to go to bank outlets for transactions. The recently launched UPI 123PAY enables feature phone users to make digital transactions through UPI in assisted voice mode, facilitating digital transactions and financial inclusion in rural areas. Cash payments have always been subject to “leakage” (payments that do not reach the recipient in full) and “ghost” (fake) recipients, especially in the case of social security benefits sent by government transfers. Now, these benefits are transferred to the beneficiary through the direct benefit transfer mode of digital payments. In comparison to cash payments, digital payments are virtually instantaneous, regardless of the location of the sender or reliever. They can be in different districts, states or even countries.
NTEC allows customers to make electronic payments at NTEC-enabled toll plazas on the highways without stopping at toll booth, by the use of radio frequency identification technology. Another payment solution, the Bharat Bill Payment System (BBPS) provides an easily accessible and interoperable bill payment service to consumers through various digital channels such as internet banking, mobile banking, mobile aps and BHIM-UPI, allowing citizens to make easy bill payments at any time, from anywhere. Digital payments also automatically save the user’s financial footprints, thereby increasing access to formal financial services such as credit. Banks and other lending institutions utilise the history of digital transactions to take cash flow-based lending decisions for both retail and business lending, including for small businesses which might face problems in getting credit in the absence of verifiable cash flows. These transactions are more convenient than cash payments. Digital payments in India are considered secure as multiple levels of authentication are required, such as the recipient’s bank account number and the user’s UPI pin.
Future forecast
The governor of the Reserve Bank of India (RBI), Shaktikanta Das, has stated that a total of 10.50 billion retail digital payment transactions worth Rs 51 trillion were processed in January 2023. Of these, UPI-based transactions accounted for Rs 13 trillion. In the payment system operators’ conference held in Kochi on March 18, 2023, he pointed out how transparent the RBI had been in terms of its data releases and keeping the ecosystem up to date. On March 6, 2023, the RBI launched the Har Payment Digital Mission with the underlying theme of “Digital Payment Apnao, Auron ko bhi Sikhao”.
The central government has played a pivotal role in encouraging digital transactions in the country. With all the new initiatives, the market will turn into one of the fastest growing fintech spaces, taking India’s digital market growth to $10 trillion by 2026 from the current $3 trillion. It is aggressively promoting digitalisation of payments, with the launch of a multitude of initiatives such as Digital Rupee, NETC, FASTag, BBPS and RuPay cards.
The evolving fintech landscape is witnessing a rising uptake of technologies such as artificial intelligence, machine learning, data science and blockchain. Paytech start-ups have started playing a vital role in this evolution. According to Escrowpay, business-to-business (B2B) payments will evolve to version 3.0 where digital, safe, quick and flexible commerce will be the new frontier. Through mobile payments, digital escrow in B2B will increase. By 2025, over 70 per cent of B2B transactions are anticipated to be digital, reducing the need for paper checks and invoices for enterprises. There will be an increase in accounts receivable. According to industry stakeholders, “Innovation in payments will continue to flywheel in 2023.”
As stated in many reports and reviews backed by industry heads, one can see the digitalisation of payments evolving to a grander scale in India. Digital payments offer great scope to put technologies in a single place as they make it possible to connect the typical daily payment destinations into one closed loop, and increase awareness to improve adoption levels among both consumers and merchants. According to the International Monetary Fund, the RBI has helped in spurring the digital payments boom. With pro-digital payment schemes, emerging trends and a surge in demand across cities, India is set to become one of the leading countries in terms of digital financial transactions.
