The Digital Payments Revolution

India’s digital payments transformation is now a well-known story across the world. The country has seen unprecedented scale and adoption over the past decade, on the back of what is now arguably the most sophisticated digital payments infrastructure in the world. The enablers of this growth have been multiple – the government’s push for a cashless economy through the JAM trinity, technology innovations led by NPCI and FinTechs, and other catalysts in the form of demonetization and the Covid pandemic. The volumes speak for themselves – the number of digital payment transactions has grown from 6 Bn in FY16 to 88 Bn in FY22. According to BCG, 40% of payments in India today are digital, contributing to a US$3Tn digital payments market. This market is expected to more than triple to US$10 trillion by 2026, constituting nearly 65% of all payments.

The role of RBI and NPCI:

In 2011, RBI found that on average, each citizen made only six non-cash transactions every year, and around 145 Mn families had no access to any form of banking. RBI’s payments infrastructure efforts sought to solve for this situation. In 2012, RBI released a vision statement outlining the commitment towards building a safe, efficient, accessible, inclusive, interoperable and authorized payment and settlement system in India. NPCI was thus formed with the objective to integrate all payment mechanisms in India. Over time, the role of the RBI has transformed from being a regulator, operator, and facilitator to the creator of an environment for the structured development of the payments ecosystem.

Where UPI stands today:

The protagonist of India’s digital payments story has undoubtedly been UPI. From a 16% share of digital payments in FY19, UPI has grown exponentially, capturing 63% of the total digital payments volume as of FY22. The scale of UPI is astounding – it currently processes over 250 Mn transactions a day, a number that is expected to rise to 1 Bn by FY30. Over 300 Mn individuals and 50 Mn merchants currently transact using UPI. Given India’s young digitally savvy demographic, a rising middle-class, and deep smartphone and internet penetration, these numbers are expected to touch 750 Mn and 100 Mn respectively by FY30, reaching penetration levels similar to that of China.

One of the key tenets of UPI, which is also one of the biggest reasons for its success, has been its open-architecture, interoperable model. By allowing users of different payment apps to make

and accept payments through UPI, interoperability has not only accelerated adoption by creating transactional convenience but has also led to a healthy and competitive environment among payment providers. Users now no longer had to worry about making payments to merchants who only accepted only certain wallets and apps.

The trends in UPI usage have also been interesting. UPI’s rise to popularity started with high adoption for P2P (peer to peer) transfers. However, with increased merchant adoption and openness of users to transact across newer use-cases, the share of P2M (peer to merchant) transactions has been increasing – from 41% of all UPI transaction volume in 2020 to 47% in 2022. The average transaction value for P2M transactions has also increased, from ₹631 to ₹764 during the same period. This contrasts with the trend for P2P transactions, where the average transaction value has reduced marginally from ₹1,775 to ₹1,701. What is also interesting is an analysis of events triggering peak UPI volumes – contrary to what one might expect, the highest number of UPI transactions do not happen during an event like the Big Billion Day sale, but rather during IPL matches, where millions of users make micro transactions through fantasy gaming platforms such as Dream 11.

Challenges faced by UPI:

UPI currently accounts for a whopping 50% of all online financial fraud. Various devices such as phishing, malicious QR codes, etc. are commonly used to trick consumers. Part of the problem stems from the ease and newness of UPI; users are yet to fully understand and adapt to it. While card systems have over time developed robust systems for fraud prevention, this is yet to be fully addressed in UPI’s case.

Second, given UPI’s scale, the load on the existing Core Banking Systems is also a matter of concern, especially considering the sustained growth in UPI expected in the near future. Additionally, given UPI’s systemic importance, regulators also seem to be concerned about UPI market share being concentrated in the hands of a few players. This is the driving force behind NPCI’s order issuing a cap of 30% on transaction volume clocked by any single player. However, the deadline for compliance with this order has been pushed forth several times, with little clarity on how it might be enforced.

Where UPI is headed for the future:

In line with the core theme of the RBI’s vision – E-Payments for Everyone, Everywhere, Everytime (4 Es), NPCI and FinTechs are working on multiple innovations in the industry. While some new products have already been launched, others are expected to be launched very soon:

• UPI on Credit Cards – Ability to link and transact using credit cards in the UPI ecosystem. The UPI rails for credit card can drive significant disruption and can become an enabler for deepening credit card penetration
• UPI Lite – On-device wallet-based payment mechanism for frictionless, no-PIN payments for low-value transactions. This initiative will also considerably reduced load on Core Banking Systems
• UPI123 – IVR-based UPI payments for feature phones
• UPI Global – UPI-based payments for transacting in other countries

Further, initiatives such as the launch of the CBDC (Central Bank Digital Currency) by the government are expected to complement UPI rather than replace it, spurring innovation in the industry and possibly creating new use-cases for digital payments. The digital payments industry in India seems to be far from slowing down and is a space to keenly watch out for in the near future.

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