India has made significant strides in digitalisation and digital payment adoption. Consumers have transitioned from using digital payments primarily for cashback offers to incorporating them in their daily payment routines. In 2023, the sector is witnessing a surge in real-time payments, increased collaboration between traditional banks and financial technology (fintech) companies, improved access for customers, and the availability of a range of digital payment methods for customers. New-age products such as the unified payments interface (UPI), national electronic toll collection (NETC) and the National Automated Clearing House have been well received by consumers and are poised for future growth.
Growth trends
While India’s digital payments market witnessed significant growth following demonetisation in 2016, the Covid-19 pandemic further accelerated the growth and adoption of online transactions. India has emerged as a leader in digital payments in recent years due to a conducive environment for adopting digital payment modes. Several user-friendly and convenient digital payment modes, such as Bharat Interface for Money-UPI (BHIM-UPI), immediate payment service, and NETC, have registered substantial growth and transformed the digital payment ecosystem by increasing the number of person-to-person and person-to-merchant payments.
Moreover, several forces have contributed to the robust growth of digital payments in India, including the launch of new and innovative payment products, increase in smartphone adoption, growing demand for faster payment methods, discounts on mobile wallets, and strong regulatory support. While urban areas have been quicker to adopt digital payments, rural India is steadily catching up.
The value of digital payment transactions has increased by 58 per cent in a single year, from Rs 71.97 billion in 2021-22 to Rs 113.94 billion in 2022-23. Notably, UPI is at the forefront of the digital payment revolution, accounting for over 75 per cent of the overall transactional volume in retail digital payments in India during 2022-23. It has transformed the Indian digital payment landscape, and has emerged as the preferred choice for money transfers, particularly for smaller transactions, as reported by the Reserve Bank of India (RBI). In the first quarter of 2023–24, transaction volumes reached 24.9 billion and transaction value reached Rs 39.7 trillion.
In another milestone, UPI transactions exceeded the Rs 10 billion mark in a single month for the first time in August 2023. With the addition of new features and use cases, UPI is expected to cross 1 billion transactions per day by 2026-27. Meanwhile, UPI 123PAY and UPI Lite are expected to increase the adoption of digital payments in rural areas.
Fintech
Recently, the fintech sector has gained increased attention due to the use of technologies such as artificial intelligence (AI) and blockchain. Fintech companies are regulated by the RBI and are an integral part of its ecosystem. Fintech is currently evolving and is focused on understanding consumer behaviour to offer customised products. There is also a rise in collaborations between banks, non-bank financial companies and fintechs. This has led to the expansion of targeted customer segments, facilitated supply chain payments, and streamlined cross-border payments, with digital payments addressing customer challenges. As of April 2023, approximately 3,085 recognised start-ups were actively involved in the fintech sector.
In fact, rural fintech startups play a key role in bridging the urban-rural divide and promoting financial inclusion through collaborations with financial institutions and the government. By leveraging technologies such as Aadhaar-enabled payment systems and prepaid payment instruments integration into UPI, these start-ups can provide essential banking services and expand access to financial products for rural communities.
Other emerging trends
According to Juniper Research, the “buy now, pay later” model is gaining popularity among consumers. The study further highlights that India is expected to witness rapid growth in the segment, with the number of users projected to grow from 25 million in 2022 to 116 million by 2027. Interestingly, the model is gaining traction in Tier 3-Tier 5 cities and is expanding beyond electronics and groceries to extend to essentials such as healthcare, insurance, travel and even low-ticket items.
Further, mobile wallets are emerging as a popular payment option. Mobile wallets allow users to send and receive money from them and store it. According to a recent study by Report Ocean, India’s mobile wallet market is estimated to grow at a compound annual growth rate of 46.3 per cent, earning revenues of around $429.2 billion by the end of 2027. This growth can be attributed to the increasing number of smartphone users and growing awareness among consumers regarding the convenient payment options offered by mobile wallets. In addition, mobile point-of-sale technology is set to witness growth.
Stakeholder initiatives
Various stakeholders, including the RBI, the government and financial institutions, have taken significant steps to reduce transaction hassles and enhance the overall customer experience, both before and after transactions. Further, efforts are being made to improve traditional systems by leveraging the latest technologies, such as the Cloud, to speed up response times.
In a notable development, the Digital Personal Data Protection Bill, 2023 has been released to support India’s digital economy and its innovation ecosystem. The adoption of the Central Bank Digital Currency (CBDC) is another disruptive solution that has the potential to revolutionise retail and wholesale transactions. The RBI has opted for the implementation of both retail and wholesale CBDC in the pilot phase.
In another move, the RBI has raised the transaction limit for small-value digital payments conducted offline to Rs 500 per transaction, an increase from the previous limit of Rs 200. Furthermore, to promote the use of digital payment mechanisms across the country, the RBI has allowed offline UPI payments using near-field communication technology through a UPI-Lite on-device wallet.
Challenges ahead
Security issue
With the increase in the adoption of digital payments, there has been a corresponding increase in the risk of fraud, with UPI accounting for the highest volume. Counterfeit merchants and websites that offer substantial discounts are common culprits behind fraud, contributing to 57 per cent of all fraud cases in India in 2022. The RBI’s annual report for 2022-23 reveals that the maximum number of fraud cases occurred within the digital payment category, accounting for 49 per cent of the total 13,530 cases in the banking system during financial year 2023.
To address this issue, there has been a greater emphasis on implementing security measures and fraud prevention technologies in 2023. Banks are now using machine learning (ML) to detect possible threats within seconds. The RBI has also launched various technology frameworks such as Utkarsh 2.0, DAKSH and the centralised information management system. Start-ups and fintechs can also employ these base measures.
Limited stable internet connectivity
While India has taken significant steps towards becoming a cashless economy, providing seamless and secure internet connectivity across the country is a major challenge. Banks continue to receive numerous queries related to transaction failures due to poor internet connectivity, particularly in remote areas.
Technological illiteracy
A significant barrier is the limited digital literacy, particularly in rural areas. Many individuals are unfamiliar with the intricacies of digital payment systems, which results in hesitation and continued reliance on traditional cash-based transactions. Bridging the digital literacy gap through awareness campaigns, training and simplified user interfaces is crucial for wider adoption.
To encourage customers to adopt digital banking and raise awareness about safe digital banking, the RBI has been organising electronic banking awareness and training programmes across the country.
Outlook
Digitalisation is the inevitable path forward. To jump on this bandwagon, banks must adopt new-age technologies such as blockchain, AI, ML and data science. By leveraging 5G, 6G and upcoming technologies, industry players can improve their processes and provide efficient services to their customers. Despite the widespread use of digital payment systems in India, concerns regarding data privacy persist.
Going forward, new product launches, technological innovations, enabling policies and regulations, and customer safety measures can propel India’s digital payments industry towards diversification, improvement and unprecedented growth.
