Digital payments industry is all set to fly high in the coming years. The industry is expected to more than triple from $3 trillion in 2022 to $10 trillion by 2026 (excluding large B2B/ G2B payments).
This was highlighted in a report titled, 'Digital payments in India: A $10 trillion opportunity' which was unveiled by the digital payments company PhonePe in collaboration with the Boston Consulting Group (BCG).
Non-cash payments will constitute nearly 65 per cent of all payments in India by 2026, up from 40 per cent now. It is also expected that UPI adoption will surge from 35 per cent in FY2021 to 75 per cent in the next five years, and digital merchant payments is expected to grow from $ 0.3-0.4 trillion today to US$ 2.5-2.7 trillion by 2026, the report said.
India’s digital payments market is at an inflection point, and as a result of this unprecedented growth, digital payments will constitute 2 out of 3 payment transactions by 2026, with contributions from across India.
The report predicts that India will become a digital payment economy, and merchant payments will emerge as the most powerful driver of this growth, especially in the offline segment due to growing QR code deployments. It is expected that merchant payments will soon outpace person-to-person fund transfers.
The report highlights how the digital payments ecosystem has been positively disrupted by the entry of multiple new players with diverse offerings driving payments at scale, and niche players offering financial services such as credit, wealth management and insurance. Leading global and Indian fintech players have been the key drivers of UPI adoption in India among end users, aided by merchants with user-friendly transaction interfaces and innovative offerings.
According to the report, multiple factors have contributed towards the growth of digital payments in India such as rapid expansion of digital infrastructure, accelerated migration to digital led by UPI, shifting customer preferences for contactless payments driven by the pandemic, increased merchant acceptance of digital payments and tech disruptions and enablement by big tech and fintech players.
According to the report, the UPI system has supercharged India’s transition to non-cash payments, especially in person-to-person (P2P) fund transfers and low value merchant (P2M) payments. UPI saw about nine times transaction volume increase in the past three years, from five billion transactions in FY2019 to about 46 billion transactions in FY2022, accounting for more than 60 per cent of non-cash transaction volumes in FY22.
The online payment ecosystem has been led by an open and inter-operable architecture with direct payments linked to a bank account, without the need to top up wallets. The report observes that UPI transactions are approximately nine times that of credit and debit card transactions today in terms of volume.
“We expect that merchant payments will soon outpace person-to-person fund transfers. At the same time we will increasingly see digital payments get embedded in all forms of commerce. We will also witness the progression from embedded payments to embedded finance. As more and more merchants begin to accept digital payments, it will unlock a significant change in access to credit for small merchants due to the creation of a digital transaction trail,” said Prateek Roongta, managing director and partner, Boston Consulting Group.
The report also highlights the crucial role of fintech players in driving the off-take of QR code placement at merchant point of sale (POS). QR payments are accepted by more than 30 million merchants, a 12 times increase from just 2.5 million merchants accepting QR payments five years ago. However, the growth in total number of POS machines, approximately 6 million in FY22 (including one merchant having multiple POS machines), has remained stagnant in comparison. Meanwhile, QR code acceptance has also penetrated among 75 per cent business-to-consumer (B2C) merchants. This has driven merchant payments, increasing from about 12 per cent share in UPI volumes in 2018 to more than 45 per cent in 2021. The report also observes that India saw substantial startup funding with customer payments players witnessing investment flows to the tune of $ 1.4 billion in 2021.
As per the report, in the future, digital payments will be driven by factors such as expanding merchant acceptance, infrastructure push and setting up of a financial services marketplace driving growth in underpenetrated regions, digitised value chains increasing digital payment adoption and IoT, 5G and CBDC (Central Bank Digital Currency) lending further impetus.
“While tier 1-2 cities have witnessed high acceptance of digital payments, penetration in tier 3-6 cities shows headroom for growth. The next wave of growth will now come from the tier 3-6 locations, as evidenced in the past two years wherein tier 3-6 cities have contributed to nearly 60-70 per cent of new customers for PhonePe,”said Karthik Raghupathy, Head of Strategy, and Investor Relations, PhonePe.