The future starts now: digital and electronic payments in India

“Cash is king,” the first-time traveler may have been told by someone who visited India a decade ago. “You’ll need cash for taxis, tips, all that street food you’ll want to eat. Shopping requires it, especially when there’s bargaining involved. Cards should work in the cities, but are hit-or-miss outside – don’t take electricity and connectivity for granted.” 

This advice wouldn’t have been wrong 10 years ago. But things have changed since then in this enormous country. A quick glance around after landing at an international airport in India will confirm what even the most cursory pre-travel research will have suggested: the payment landscape has changed dramatically in the last 7–8 years.

Advertisements for India’s homegrown e-commerce sites line the walk to immigration. Download the apps via QR code, enroll a payment card, and scan through the deals. Register for a local ride-hailing service while waiting for luggage. Stop at a counter helping foreign nationals register for the digital payment ecosystem that powers the new economy. Tap to pay for that last coffee before leaving the terminal. If taking a taxi, scan a QR code and pay the amount from a smartphone when the ride ends. If the passenger is getting picked up, they’ll notice the driver doesn’t have to queue up to pay for parking, or even insert a ticket in a machine – a tag on the windshield is read electronically and the money owed is automatically deducted, the process being repeated as they cross other toll plazas on the way to their final destination.

While cash is still important in the payments sphere in India – cash in circulation increased by almost 8% in 2022–2023, as compared with the previous year¹ – it is clear that the digital payments sphere is evolving rapidly. Let us examine why this is so.

A decade of change

Previously associated with being under- or even unbanked, India was seemingly caught in a contradiction between its globally lauded pool of young and upwardly mobile digital natives powering the engine of its largely urban tech economy, and a vast rural hinterland with limited access to the infrastructure that holds up the digital sphere.

However, bank account ownership between 2011 and 2017 more than doubled among adults, from about 35% to 78%.² This was in large part due to a corresponding government program to enroll Indian citizens into the formal banking ecosystem. This program drew on the wide uptake of the unique identification program, known as Aadhaar, a country-wide push to give every citizen a biometric profile and their own identification number. Internet penetration, mostly through mobile, went up at the same time. 

The combination of a large population with secure verifiable ID and a bank account led to a third innovation: instant account-to-account payments with QR codes at the front end. In 2016 came the introduction of the Unified Payments Interface (UPI) by the National Payments Corporation of India (NPCI). The Reserve Bank of India (RBI) was involved, as were numerous financial institutions. The regulator provided the right framework that attracted private players to build out their tech offerings and take care of the ground-level obstacles that confront such an undertaking.

“Nobody thought UPI would take off so soon,” said Tapesh Bhatnagar, Head, Digital Solutions, for the ePayments business at G+D India; he was reflecting on the surge in digital payments in India, in which UPI played a critical part. “But its success was based on the regulatory support and overall ecosystem that had been put in place.” Crucially, the government mandated that the whole UPI ecosystem would be free for users as well as merchants. That really helped uptake, and 2016 became when digital payments entered the consciousness of the vast majority of Indians. Account-to-account (A2A) payments between people who had linked their accounts to their phone numbers through their UPI IDs took off.

A few months later, in November 2016, demonetization of the currency took place. Certain large denominations were removed from circulation, triggering the need for digital payments, as the cash available to people was reduced almost to zero overnight. This led to some severe economic consequences; however, after a lull of a few years, cash in circulation has surged again. At the same time, it drove people to the payment apps that were now available on the UPI platform. The ingenuity and problem-solving of people on the ground came to the fore. As their customers didn’t have access to valid cash anymore to pay for goods and services, merchants of every size, from tea-sellers on the street to large stores, pivoted to QR codes that one could scan and credit from a mobile device.

“India has around 10 million point-of-sale devices,” said Tapesh Bhatnagar. “But it has nearly 300 million QR codes.” They are ubiquitous, pointing to how important person-to-merchant (P2M) payments are, in addition to P2P transfers. Bhatnagar stressed the free nature of these transactions: there is no charge to the user, and no charge to the merchant from their bank. Moreover, it is all in real time.

For many Indians, apps like BHIM, Paytm, Google Pay, and PhonePe are their portals to the ongoing digital transformation. Appreciation for the positive change being made can be gauged from the fact that UPI apps are now accepted for payment in countries beyond India’s borders, including the UAE, Singapore, France, and others.

Regulatory support from the government, continuing technical interventions from the NPCI, and innovative solutions from a growing network of payment service providers have whetted the appetite of the public. COVID’s restrictions obviously fed demand for contactless payment, but the market hasn’t reverted to old ways as the pandemic has receded. There are about 50 million merchants and 260 million distinct UPI users in the country.³ UPI processed over $1 trillion in digital transactions in 2022, a third of India’s entire GDP.⁴

UPI recorded over 12 billion transactions in December 2023 alone.⁵ According to Dilip Asbe, CEO and MD of NPCI, India has the potential to clock 100 billion transactions per day.⁶

Beyond UPI

However, growth in digital payments isn’t limited to apps plugged into the UPI ecosystem. Payment cards have seen a healthy uptick in terms of both users and transactions in the recent past, led mostly by credit cards. According to a recent study, transaction volumes for credit cards increased 30% year-on-year in 2022–2023 as against the preceding year.⁷

“Historically we have been a society that believes we should spend when we have money. We are not a credit society,” said Tapesh Bhatnagar. But there are signs that this is changing, he added. The numbers bear him out. India’s card payments market is set to grow at a compound annual growth rate (CAGR) of 18% between 2022 and 2026.⁸ This growth – primarily in the credit card market – is driven by an increasing preference for electronic payments among consumers, aided by improvements in payment infrastructure, and financial authorities boosting cashless payments, stated the report.

While UPI remains the preferred mode for smaller transactions, larger ticket items like white goods or flight tickets tend to be paid through payment cards. Better awareness of customer needs and desires is also driving credit card growth. “Banks and fintechs are finding new ways to entice customers, and creating value propositions around metal cards, eco cards, and the like,” said Tapesh Bhatnagar. With attractive features like interest-free periods and reward points, and strong to new demographics, this trend is likely to continue.

E-commerce thrives, but fraud is a challenge

Shopping for goods and services on the internet is the main driver for payments made online through both UPI transactions and payment cards. India’s e-commerce market is projected to grow from $83 billion in 2022 to $150 billion in 2026.⁹ This has a knock-on effect for payment cards as well, since E-commerce follows the “real-world” model of customers preferring credit cards for big ticket items.

There is also a marketing advantage to merchants and banks combining their customer databases to mutual advantage. “There is a trend of co-branded cards between merchant and banks that is pushing card payments. Almost all the e-commerce merchants, like Amazon and Flipkart, now have a co-branded card,” pointed out Bhatnagar.

However, things aren’t uniformly sunny. The RBI’s annual report for 2022–2023 states that card/internet fraud cases surged to almost 50% of total fraud cases.¹⁰ It is precisely in a situation like this that banks, merchants, and customers need a partner with a background in payments and expertise in security technology to help secure every transaction. Security technology specialists like G+D are contributing to a safer ecosystem in this regard.

It all depends on trust, said Tapesh Bhatnagar, which comes from the security solutions that gird the digital ecosystem. Fraud must be minimized, privacy ensured, and the user experience enhanced. “We recognize the imperative need for robust authentication solutions in e-commerce,” he said. This encompasses card payments, modern forms of authentication, including adaptive payment authentication, and tokenization.

Visions of the future in digital payments

India’s robust network of payment service providers and other fintechs is evolving quickly to service the needs of the huge population. The agility of fintechs lets them go to places a more “traditional” bank may not have ventured yet. This is important given India’s size. There are still places in the hinterland where it is physically difficult for banking services to be delivered. This opens up an avenue of mutually beneficial partnerships, where each party delivers something the other one needs. “In 10 years, we can see a future where the banks provide the infrastructure, and the fintechs deal with customers,” said Tapesh Bhatnagar.

Among other areas, G+D is present in India for Currency Technology and Financial Platforms. In the Financial Platforms space, G+D is positioned to facilitate the transformation of India’s payment ecosystem by providing robust authentication solutions. As India progresses confidently into a digital future, G+D India stands as a dependable partner, providing the security and trust that form the foundations of the evolving financial landscape.

Published: 04/03/2024