Home / Opinion / Views /  Digital payments growth: India’s stunning stride

Back in mid-2015, Nandan Nilekani made a presentation in Mumbai and a few other cities, articulating what he reckoned could be a “WhatsApp moment" in finance for India. Smartphones, he said, were going to be the banks for Indians. That would mean smartphones double up as a bank branch, and e-commerce replaces the conventional shopping experience. Government transfers made on digital channels, Nilekani predicted, promised a systematic redesign for reducing corruption. Prescient, you may say.

A committee on digital payments, which Nilekani headed in 2019, while noting that the retail growth in digital payments in the over five years since 2014-15 rose by a factor of 10x, set the bar higher still. The target is an additional 10x over the next three years.

Indians are adopting digital payments at a scorching pace. This digital stride has left China and a few developed country markets trailing digital transaction numbers. Government data shows that digital transactions grew close to 90%, from 232,000 to over 430,000 in the three years from FY19 to FY21. The growth was led by the United Payment Interface or UPI, the payment system the government-owned National Payments Corp. of India developed to enable immediate money transfers through mobile devices. According to an ACI Worldwide report for 2020, India was at pole position with 25.5 billion real-time online transactions, ahead of China at 15.7 billion, South Korea-6 billion, the UK-2.8 billion, Japan-1.7 billion, and the US-1.2 billion.

Great digital success can be ascribed to several factors. First, the pandemic has been the key driver for adopting digital modes for making payments. By December, under UPI alone, 4.56 billion transactions, with an estimated value of Rs.8.27 trillion, were carried out since the UPI platform was unveiled in 2016. In the year 2021, UPI transactions worth Rs. 73 trillion were done.

The number of active users is rising every month. From 100 million three years ago, the Nilekani-led committee expects it to top 300 million this year.

That the rapid increase in the digital footprint has taken place in a country of vast swathes of unbanked and financially illiterate consumers has not gone unnoticed. Several countries have shown interest in learning from India’s digital financial infrastructure and ecosystem, especially for the high levels of security of transactions and relatively few instances of technical glitches or frauds.

The additional Factor Authentication or validation of a transaction through a PIN or OTP is seen globally as the Indian innovation responsible for the relatively low incidence of fraud. It is the chief reason boosting customer confidence, leading to more rapid digital adoption. The potential for financial inclusion is tremendous.

The credit goes to the Indian central bank and banks and lenders that jointly leveraged the indigenous strengths in technology and innovation of non-banks to build the infrastructure for offering a wide range of payment services. The emergence of over half a dozen unicorns (with a valuation of over $1 billion) in the Indian fintech sector, offering services ranging from payments to cards and multiple payment options, both rides on the secure and reliable digital financial infrastructure and contributes to the pace of adoption.

From the start, the RBI and the government recognized, sensibly, that light-touch regulation was the key. The risks are that pressures could arise for this regulatory stance to change, especially in areas of security of digital payment channels, level of frauds, transaction costs and consumer protection, including data sharing and privacy. That’s why there is a case for Indian fintech, which have benefited from open access to the payments infrastructure, to invest more in quality of service and compliance and digital literacy of customers, working hand-in-hand with banks and the regulator. A dispute resolution system should be built to handle grievances well before regulatory intervention will force it.

The government has done its bit by largely keeping out of the way, thankfully. Its role going forward should be in ensuring data connectivity and the state of telecom infrastructure, especially in the less urbanized parts of the country, while the central bank and the industry continue to focus on keeping transactions safe and costs low to onboard more Indians.

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