India’s digital payments market will grow to USD 10 trillion by 2026: Report by Boston Consulting Group and PhonePe

In a country witnessing rapid growth, it comes as no surprise that India also has one of the fastest-growing fintech landscapes in the world, driven primarily by the advancement in digital payments segment. A recent report by PhonePe and Boston Consulting Group concluded that India’s digital payments market will more than triple from USD 3 trillion to USD 10 trillion by 2026.

In 2015, the Indian Union government launched its Digital India programme, with one of the objectives to achieve a “faceless, paperless and cashless” status for financial transactions at grass-root level. In line with this, the use of digital payments continues to be promoted so that each citizen of the country can access digital payment facilities that are affordable, convenient and secure. The introduction of innovative reforms and technological advancements are further accelerating growth at an unprecedented pace.

When one thinks digital payments, UPI – India’s payment gateway – instantly comes to mind. The Unified Payments Interface (UPI) has been the flag-bearer of India’s fintech revolution – launched in 2016 by the National Payments Corporation of India (NPCI).

The UPI is an instant real-time payments system that enables inter-bank peer-to-peer and person-to-merchant transactions through mobile devices instantly.

In a span of just six years, India, primarily a cash-based economy, now leads the world in real-time digital payments, accounting for almost 40 per cent of all such transactions.

The mass adoption of UPI during the COVID-19 pandemic has extended far beyond the urban to even rural India, an effect that left the experts in amazement.

As the success of the UPI grows, so does its attractiveness and acceptance by other countries; for instance, on February 21, 2023, India and Singapore launched cross-border connectivity between UPI and its equivalent in Singapore called PayNow, enabling low-cost and faster cross-border transactions.

This initiative is also closely aligned with the India’s G20 financial inclusion priorities of driving faster, cheaper, and more transparent cross-border payments. It also generated interest from Latin American countries to use the system or one similar to it in their countries.

Along with this, the coming together of the Jan Dhan-Aadhaar-Mobile (JAM) trinity is further fuelling financial inclusion in India like never before. The Pradhan Mantri Jan-Dhan Yojana aims to provide bank accounts to the unbanked and Aadhaar — the flagship product of the Unique Identification Authority of India–is a simple and effective method to verify individuals and beneficiaries based on their biometric information.

These two programmes are closely linked with the mobile. The success of these programmes is evident by the numbers they reflect — the Jan-Dhan Yojana initiative has seen the opening of more than 460 million bank accounts and nearly 99 per cent of the Indian population now has an Aadhaar number.

Now, a global leader in the fintech space, India does not seem to be slowing down its pace in terms of disrupting traditional financial services. Reflecting this is India’s Finance Minister Nirmala Sitharaman’s announcement of the systematic introduction of the digital rupee by the central bank at the Union Budget 2022-2023.

The Reserve Bank of India’s (RBI) latest concept note highlights the digital rupee’s potential design choices and implications. In December 2022, RBI announced the launch of the first pilot for the retail digital rupee; this pilot will test the robustness of the entire process of digital rupee creation, distribution, and retail use in real time. Different features and applications of the eRs-R token and architecture will be tested in future phases of the pilot, based on the insights gained from this one.

In addition, the National Electronic Toll Collection (NETC) system has also witnessed substantial growth. With the FASTag now mandatory for all four-wheeler vehicles across the country at highways for toll collection, digital payments have received and are likely to record a further boost. The NETC is live across at least 429 toll plazas across the country, and more than 36 million FASTags have been issued to date.

The utility service provider, Bharat Bill Payment System (BBPS), offers online and on-ground bill payment services to customers. These include the payment of utility bills such as those for electricity, gas, and water.

Government initiatives aimed at building better infrastructure, particularly in rural areas, will lead to an increasing number of households with electricity and water supply, adding more demand for telecom and gas connections, and subsequently increasing the customer base of BBPS users.

As per a PwC report, by 2025-2026, new biller categories are expected to reach an estimated value of USD 14.5 billion with existing categories still accounting for a majority of the transaction value at an estimate of USD 27 billion.

While the vast majority of these payment solutions work in online mode, geographical barriers and lack of access to internet connectivity can hamper their growth.

Realising this, fintech companies are exploring the concept of offline payments. For instance, India’s largest private-sector lender HDFC Bank is attempting to execute digital payments in offline mode under the RBI’s Regulatory Sandbox programme.

If successful, this could drastically alter the digital payment landscape by leaps and bounds and accelerate financial inclusion in remote areas untouched by internet connectivity.