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Digital payments landscape of India has seen a massive growth over the past five years. India’s digital payments market is at a crucial point and is likely to rise more than three times from the current US$3 trillion to US$10 trillion by 2026, according to a report jointly released by BCG (Boston Consulting Group) and PhonePe.
As a result of this growth, digital payments will comprise two out of three payment transactions by 2026, states the report titled Digital Payments in India: A US$10 Trillion Opportunity.
There are several other inferences drawn in the report. The report says that digital payments will constitute around 65 percent of all payments by 2026, an increase from 40 percent currently.
Spike in acceptance of UPI
The report also states the UPI adoption will increase from 35 percent in fiscal 21 to 75 percent in the next five years.
The report also sheds light on the fact as to how the digital payments ecosystem has been positively disrupted by the foray of new players with diverse offering.
Prateek Roongta, managing director and partner, Boston Consulting Group, said, “India is set to become a digital payment economy as source of payments invert with 65 per cent transactions being done digitally by 2026, as opposed to 40 per cent transactions today. Merchant payments will emerge as the most powerful driver of this growth, especially in the offline segment due to growing QR code deployments. We expect that merchant payments will soon outpace person-to-person fund transfers.”
Central bank digital currencies (CBDCs)
Digital currencies have become quite popular in the past few years and even India is set to join the global push with the launch of the digital rupee, states the report.
Over 40 countries have worked upon CBDCs (Central Bank Digital Currency) primarily because of two reasons: driving real-time settlements, and improving transparency.
RBI's digital rupee is expected to enable real-time settlement across use cases. Real-time settlement would improve cross-border transactions by minimising foreign exchange risk and enable business-to-business payments by minimising counter party risks as potential for payment default and fraud would fall. There could also be reduced settlement risk due to use of blockchain technology in CBDCs.
On the top of it, the traceability and transparency linked with CBDC transactions could help in improving reversal and refund processes, which are currently manual and time consuming, thus adversely impacting user experience and trust.
Key factors of UPI adoption
The key drivers of UPI adoption in India include large global and Indian fintech players. These are supported by a large QR-code based merchant acceptance network, and user-friendly interfaces, innovative offerings and an open API ecosystem.
There are a number of levers for further growth of digital payments in India, states the report, which include simplified customer onboarding, growing consumer awareness, increase in merchant acceptance, access to credit by merchants, infrastructure upgrades and the setting up of a financial services marketplace driving growth in underpenetrated regions.
| By 2026: Massive shift to digital | |
| $10 trillion | Size of digital payments market |
| 65% | Proportion of digital payments of all payments |
| 75% | Ratio of UPI adoption |
(Source: BCG Report: Digital Payments in India: A US$10 Trillion Opportunity)
The report also highlights how IoT (internet of things), 5G (5th generation) and CBDC (Central Bank Digital Currency) will give fresh impetus to growth of digital transactions.
However, there are a set of challenges that stare at the UPI players at the moment that can play stumbling blocks inn unlocking the true potential. “A key challenge facing payment players across the board today is thin margins, which prompts players to increasingly transition to high-margin offerings while doubling down on digital payment growth,” the report states.