Understanding the Growth of Digital Payments in India

Growth of digital payments in India

The landscape of digital payments in India has undergone a remarkable transformation, particularly through the Unified Payments Interface (UPI). The surge in usage can be attributed to several factors, including the proliferation of smartphones, improved internet connectivity, and a significant push during the Covid-19 lockdown. UPI transactions skyrocketed from 2.23 billion in December 2020 to an astonishing 16.73 billion by December 2024, representing an impressive growth rate of over 651%.

Challenges Faced by Service Providers

Despite the rapid growth, service providers and fintech companies are encountering challenges in establishing a sustainable business model. UPI remains free for users, leading to proposals for implementing a nominal fee on transactions to help recover costs and generate revenue.

Innovations in the UPI Ecosystem

To enhance user convenience and broaden the adoption of digital payments, several innovative solutions have emerged within the UPI ecosystem. These include:

• UPI123Pay: Designed for feature phone users.
• UPI Lite: Facilitates small offline payments.
• RuPay Credit Card Integration: Allows linking credit cards with UPI.

Such innovations aim to expand accessibility and ease of use for a wider audience.

Rising cash usage

Interestingly, despite the surge in digital payment adoption, cash usage has also seen an uptick. Recent surveys indicate a steady increase in cash circulation, rising from ₹13.35 lakh crore in 2016-17 to ₹35.2 lakh crore by March 2024. This trend is attributed to factors such as:

• Low digital penetration in rural areas.
• Lack of familiarity with digital tools among certain demographics.
• Digital payment methods not significantly diminishing cash reliance.

Concerns Over the UPI Business Model

The government's mandate for a zero Merchant Discount Rate (MDR) on UPI transactions aims to promote usage, but this poses challenges for service providers. The lack of revenue generation limits the financial sustainability of the UPI ecosystem, raising concerns about the long-term viability of these services.

government initiatives

To address the challenges in the digital payments landscape, the Union Cabinet has extended a ₹1,000 crore incentive scheme focused on promoting BHIM-UPI (P2M) transactions. This initiative supports the establishment of a sustainable payment ecosystem through incentives and infrastructure development.

UPI in International Payments

India has positioned itself as a global leader in real-time payments; however, UPI's reach for cross-border transactions remains limited. Efforts are underway to expand UPI internationally, particularly for remittances and trade, which could enhance its global footprint.

Status of the NUE initiative

The New Umbrella Entity (NUE) initiative, aimed at expanding payment infrastructure beyond NPCI, is currently on hold. There has been little progress towards operationalizing this platform, which raises questions about the future of payment innovation in India.

Digital Payment Adoption Disparities

It is essential to note that the adoption of digital payments is not uniform across India. Usage remains low in semi-urban and rural areas, where a significant portion of the population has yet to embrace digital modes due to issues related to awareness and infrastructure.

Ensuring Sustainability of Digital Payments

To secure the long-term sustainability of digital payments, experts recommend revisiting the zero-MDR policy, enhancing user awareness, incentivizing small merchants, and developing a robust business model for service providers. Ensuring inclusion in this digital shift is crucial for effective governance and lasting innovation.

Frequently Asked Questions (FAQs)

Q1. What factors are driving the growth of digital payments in India?
Answer: The growth is driven by increased smartphone usage, better internet access, and the Covid-19 lockdown, which propelled UPI transaction volumes significantly.

Q2. Why are service providers proposing fees on UPI transactions?
Answer: With UPI being free for users, service providers are struggling financially, leading them to propose small fees to recover costs and maintain profitability.

Q3. What innovations are present in the UPI ecosystem?
Answer: Innovations like UPI123Pay for feature phones, UPI Lite for small transactions, and RuPay credit card linking aim to improve accessibility and convenience.

Q4. What is the impact of cash usage despite digital growth?
Answer: Cash usage has increased due to low digital penetration in rural areas and a lack of familiarity with digital tools, indicating ongoing reliance on cash.

Q5. How can digital payments be made sustainable in India?
Answer: By revisiting the zero-MDR policy, boosting awareness, incentivizing small merchants, and creating viable business models for service providers, sustainability can be achieved.

UPSC Practice MCQs

Question 1: What was the growth percentage of UPI transactions from December 2020 to December 2024?
A) 200%
B) 651%
C) 400%
D) 800%
Correct Answer: B

Question 2: What is a significant concern regarding the UPI business model?
A) High transaction fees
B) Zero MDR policy
C) Over saturation of market
D) Limited user base
Correct Answer: B