**Digital payments in India: a $10 trillion market**
**Overview of digital payments in India**
Digital payments are one of the most important building blocks of a financially inclusive nation as they help bring individuals together under an organised financial system. Digital payments in India are expected to quadruple by 2026-2027, with a year-on-year growth of 561 TP3T in transaction volumes in 2022-2023. furthermore, digital transaction volumes are projected to grow by 561 TP3T in one year, from $873.38 million (Rs. 71.97 crore) in 2021-22 to $1.46 billion (Rs. 112 billion rupees). India is on the verge of witnessing another surge in digital payment transactions due to new developments and increase in new use cases.
This expansion can be attributed to measures implemented by the Government of India and the Reserve Bank of India (RBI) to facilitate digital payments, the emergence of fintechs and new technologies to improve the user experience, and PSPs building the infrastructure for a seamless transaction flow. Over the next five years, UPI is expected to account for around 90% of the total retail digital payments volume as it increases acceptance in rural areas and Tier 3-4 cities. Other instruments that are expected to expand include credit cards, the Bill Payment System of India (BBPS) and the National Electronic Toll Collection System (NETC).
**The key factors that are revolutionising digital payments in India***
**Rapid expansion of digital infrastructure**
The introduction of India Stack infrastructure and UPI has created unlimited potential to inspire creative products and services for users.The JAM trinity, which stands for Jan Dhan, Aadhaar and Mobile, is the cornerstone of the continued growth of digital payments. To date, 440 million bank accounts have been opened through the Jan Dhan Yojana programme, 1.25 billion Aadhaar-based unique identifiers have been KYC-enabled, more than 1 billion mobile devices are in use, and more than 750 million people are using low-cost internet.
**UPI leads the acceleration of digital transformation**
The UPI system has fuelled India's transition to non-cash payments, particularly in the areas of person-to-person (P2P) fund transfers and small personal-to-merchant (P2M) payments.UPI's transaction volume has grown about 9 times in the last 3 years from 5 billion transactions in FY2019 to about 46 billion transactions in FY2022, which accounts for 60% of non-cash transaction volume in FY2022 above. While UPI has revolutionised digital payments through interoperability and authorisation, other channels such as the Bharat Bill Payment System (BBPS) have made the onerous task of bill payment a thing of the past and the National Electronic Toll Collection System (NETC) has digitised toll collection across the country.
**Epidemic leads to shift in customer preference to contactless payments**
The accelerated growth of digital payments in India is an important result of numerous significant shifts in customer behaviour. Customers are turning to e-commerce and contactless digital payment methods to reduce exposure and risk of infection. In the six months since the implementation of the blockade in March 2020, monthly transaction volumes for UPI, BBPS and Instant Payment Services (IMPS) have grown by more than 501TP3 T. Between July and August 2020, cash usage by 501TP3 T customers declined sharply, with more than 601TP3 T customers shifting to UPI and digital wallets compared to previous years. Additionally, 60%'s have indicated a high likelihood of continuing to use digital payments in the future, a trend evident in the recent growth of digital payments.
** Increased acceptance of digital payments by merchants**
Over the past few years, the ease of use and low setup and maintenance costs of QR codes have led to a significant adoption of digital payments by merchants. In addition, the practice of placing QR codes on merchant point-of-sale (POS) has been significantly influenced by fintech companies. More than 30 million businesses now accept QR code payments, up from 2.5 million shops five years ago - a 12-fold increase. QR code acceptance has also reached 75% of business-to-consumer (B2C) merchants. As a result, merchant payments have increased from 12% of UPI transactions in 2018 to over 45% by 2021.
**Technology disruption and push by large tech and fintech companies**
India has a significant amount of startup funding, with customer payments players receiving $1.4bn in investments in 2021. The emergence of various start-ups offering diversified products, such as TPAP, which drives mass payments, and niche players offering value-added services such as buy now pay later (BNPL) alternatives or next-generation credit scoring using payment data, has favourably transformed the digital payments market. With user-friendly transaction interfaces and new solutions, tech giants and established Indian fintechs have been the key drivers of UPI's growth among end users and merchants in India.
**Advantages of Digital Payments in India**
**Instant and convenient payment methods**
Unlike cash, funds can be transferred instantly into the beneficiary's account using digital channels such as BHIM-UPI and IMPS.BHIM-UPI allows access to a variety of bank accounts through a mobile app, making payments easier.
**Enhancing financial inclusion**
Those who may have wasted time and travelling costs by physically contacting bank branches for transactions can now conveniently access their bank accounts digitally and reap the benefits of being part of the formal banking system and participating in financial activities. The just released UPI 123PAY allows feature phone users to conduct digital transactions through UPI in assisted voice mode, promoting digital transactions and financial inclusion in rural areas.
**Promoting transparency in government systems**
Previously, cash payments were prone to "leakage" (payments not reaching the recipient in full) and "ghost" (false) beneficiaries. Now, benefits are transferred directly to the accounts of targeted beneficiaries through digital payments (direct benefit transfers).
**Increased speed and timely delivery**
In contrast to cash payments, which move at the speed of the carrier, digital payments can be made almost instantly, regardless of whether the sender and receiver are in the same town, region or country.
**Enhanced access to credit**
Unlike cash payments, digital payments automatically create a user's financial footprint, thereby improving access to formal financial services, including credit. Banks and other lending institutions can use digital transaction histories to make cash-flow-based lending choices for retail and business loans, especially for small businesses that may have difficulty obtaining credit in the absence of verifiable cash flows.
**Safe and reliable**
Not only do recipients of cash payments often have to travel long distances to receive their payments, but they are also particularly vulnerable to theft. Digital payments in India are secure as transactions require multiple levels of authentication.
**Major Initiatives taken by the Reserve Bank of India in 2022-2023
**UPI123 PAY**
The Reserve Bank of India released UPI123 PAY 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 Reserve Bank of India and the National Payments Corporation of India (NPCI) set up DigiSaathi, a 24×7 helpline with a website, chatbot, and toll-free number to answer user questions and provide information about all digital payment products to raise awareness about digital payments.
**Payment system contact point geo-tagging framework**
The Reserve Bank of India released a framework in March 2022 for recording geo-tagged information on payment system touch points provided by banks and non-bank payment service operators. The Reserve Bank of India needs the same information to monitor and understand the penetration of digital payment devices.
**Master Instruction Issuance and Execution Instruction**
RBI issued Master Instructions to issuers in April 2022 to control the issuance and use of credit, debit and co-branded cards. These rules aim to improve card security and ensure proper communication with cardholders.
**Prohibition of loading non-bank PPIs through lines of credit**
RBI issued a warning to non-banking PPI issuers in June 2022 not to use credit lines to load their wallets and cards. This had an impact on BNPL business as most of the non-banking BNPL service providers and PPI issuers allowed their customers to load their wallets with credit lines.
**UPI Lite**
In September 2022, RBI will launch UPI Lite, a device wallet-based UPI system. Users can use this to recharge up to $24.27 (Rs 2,000) in their wallet, which can then be used for offline payments. This will allow users to make UPI payments even in areas with little or no internet access.
**Links RuPay credit card to UPI **
RBI announced the linking of RuPay credit card to UPI in September 2022.This will enhance the use of digital payments and benefit its stakeholders for the following reasons:
* :: Lack of PoS equipment in rural areas.
* :: Increased use of credit cards.
* Payment service providers make money by charging merchants a Merchant Discount Rate (MDR) for any UPI transaction made with a credit card.
* :: Increased sales to merchants as a result of a potential increase in consumption.
**Inward, cross-border remittances via BBPS**
In September 2022, RBI implemented BBPS cross-border remittance inward payments. This enables Non-Resident Indians (NRIs) to pay utility bills and telephone bills directly through their mobile phones.
**BBPS open to all categories of payments and receipts**
In December 2022, the Reserve Bank of India (RBI) enabled recurring and non-recurring payments and collections across all categories. This will allow payments such as education fees, taxes and rent collections to be made through BBPS.
**Payment authorisation in UPI**
In December 2022, the Reserve Bank of India enabled payment authorisation in UPI.UPI users can use this feature to set aside funds in their UPI linked accounts for specified merchants, which can then be paid through multiple debits.
**CBDC**
On 1 December 2022, the Reserve Bank of India launched a closed group pilot project for retail and wholesale groups. The Reserve Bank of India will conduct the pilot in a phased manner, starting with four of the eight shortlisted institutions. The digital rupee will support both P2P and P2M categories.
**Promote the development of digital payments in other areas**
**National logistics policy**
The Government of India intends to regulate the logistics industry to manage it effectively. Currently, the logistics business is highly fragmented with a market size of USD 1.94 billion (Rs. 160 billion). The government intends to unify all logistics players under one platform, the Unified Logistics Interface Platform (ULIP). Among other things, the platform will digitise most of the financial transactions in the sector, thereby increasing digital payments.
**ONDC**
The Open Network for Digital Commerce (ONDC) is an ecosystem that will transform the e-commerce space by moving away from a marketplace or platform-based approach. ONDC will allow small merchants and local retailers to conduct business online. The penetration of the e-commerce market in India is currently around 81 TP3T and ONDC aims to increase it to 251 TP3T by 2024-2025.
**Concluding remarks**
The growing popularity of e-commerce and the global shift towards faster payments has prompted retailers to install payment processing systems in order to provide a seamless checkout experience to their customers. India is set to become a digital payments economy due to increased deployment of QR codes and merchant payments will be the most important driver of this growth, especially in the offline space. The emergence of digital transaction paths will lead to a dramatic change in the way small merchants access credit as more and more retailers accept digital payments. Unlocking the $10 trillion market will require a number of enablers. There is a need to continue to build customer trust through a holistic approach to fraud management, simplify digital onboarding and KYC, take the pressure off the banks' technology infrastructure, provide better economics for payments 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 as well as the ease of life of its citizens.
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