Future of UPI and Digital Payments (2024)

Synopsis: Several trends, such as the growing use of UPI, contactless payments, and cross-border payments, are shaping the digital payments ecosystem in India. In this article, we discuss these trends and developments in detail. The Unified Payment Interface (UPI) and digital payment methods have transformed how small businesses transact, increasing convenience and cost savings. The digital payments market of India is expected to grow at a CAGR of 50% and exceed 400 billion transactions in FY2026–27, up from 100 billion in FY2022–23.

This digital payments revolution has also spread globally, with more than 35 nations, including Japan and France, expressing interest in adopting India’s UPI system. This growth is driven by developments such as FASTags, the introduction of wallet integrations, and QR-based cash withdrawals on ATMs. But what’s next?

How will the upcoming trends and developments push UPI and the digital payments landscape in India even further? Let’s find out.

Drivers Of Digital Payments Growth

Here are some of the key drivers that are contributing to the growth of digitization in India:

UPI: A Complete Digital Ecosystem

UPI has simplified payments for millions of Indians because of its user-friendly features, accessibility, and ease, resulting in a more robust and inclusive financial system.

It accounted for around 75% of total retail transaction volume in 2022-23 and is predicted to reach 90% in the next five years. But that’s not it. By 2026–27, UPI transactions will reach 1 billion per day, compared to 1 million in October 2016.

The massive acceptance accelerated the launch of UPI 2.0, which had various comprehensive features such as:

• A one-time mandate: It allows customers to pre-authorize transactions and make payments later, while the merchants receive funds on the date of the purchase.
• Overdraft facility: It allows customers to link their overdraft accounts, enabling them to make instant transactions.
• Invoicing: It allows customers to review the invoices before payment, providing transparency and security and increasing their trust in small businesses.
• Signed intent and QR facilities: These features allow customers to verify the authenticity of merchants when scanning QR codes. Moreover, transactions can be processed more swiftly since there is no need to enter the app passcode for signed intent.

Moreover, recent changes to UPI, such as linking loan accounts and pre-sanctioned credit lines, are helping bridge India’s credit gap.

Cross-Border Payments Made Easy

Cross-border payments enable you to tap into a global customer base since it empowers you to accept payments from customers worldwide. This expands your reach and improves the bottom lines.

You can also use digital cross-border payment solutions to lower transaction fees and reduce processing times, making it a cost-effective strategy for your businesses.

This ease of payment has also increased the number of people wanting to buy goods from foreign merchants and multinational e-commerce firms.

Government Initiatives

The Indian government has been actively promoting the adoption of digital technologies through different projects such as Digital India, Make in India, and Startup India. It also provides different incentives, tax breaks, and subsidies to users and businesses who use digital payment systems.

Furthermore, the government’s attempts to provide incentives and establish infrastructure would help to create a more suitable setting for digital payments to grow.

Scope of Digital Payments: Future Trends And Developments

Digital solutions have come a long way in making transactions easier for consumers and businesses. Looking ahead, some key trends and developments that will further drive the growth of digital payments are:

Central Bank Digital Currency

India has announced pilots for its central bank digital currency (CBDC), the Digital Rupee. It is a digital form of paper currency, a legal tender issued and backed by the Reserve Bank of India (RBI).

They have the potential to transform digital payments by offering a secure, government-backed digital alternative to cash.

CBDCs can also increase financial inclusion, lower the cost of cross-border transactions, and mitigate the risks of handling physical currency.

Moreover, the Indian government’s ambition to extend the 'Bharat Bill Payment System’ (BBPS) framework to other types of billers of recurring and non-recurring payments is also likely to contribute to UPI growth.

Embedded Finance

Embedded finance integrates financial products and services such as credit, insurance, payments, and lending into the purchasing journey on non-financial platforms.

BNPL has grown in popularity among Generation Z and Millennials as a handy financing option, allowing consumers to spread out purchase payments.

BNPL players have also improved their services by providing real-time loans based on pre-approval requests, considering aspects like merchant reliability, fraud checks, and consumer payment history.

Different Payment Modes

Alongside the trends mentioned earlier, there are several emerging innovations slated to alter the digital payment industry, such as:

• E-Rupi: It is a voucher-based digital payment system that allows you to offer targeted financial assistance, discounts, or promotions to specific customer groups.
• Wearable payment devices: Integrating your payment systems with these devices allows you to reduce checkout time and streamline the payment process, which increases customer satisfaction.
• Voice payments: With this feature, you can cater to a broader audience, including older adults, the visually impaired, and those with physical disabilities.
• Biometric payments: It adds extra security to your transactions, reducing the risk of fraud and unauthorized access to payment systems.

These technologies are expected to improve consumer experience and promote loyalty and digital spending. Within two months of its inception, retail e-Rupi had a transaction volume of Rs 8 lakhs, and the Indian wearable market, which was valued at Rs 1.1 lakh crores in FY22, is expected to reach Rs 1.4 lakh crores by FY2030.

Impact of UPI and Digital Payments on Small Businesses

Earlier, small businesses often faced payment challenges, primarily due to the high costs associated with point-of-sale (POS) devices and card machines.

However, the widespread adoption of UPI has disrupted the traditional payment model and fostered financial inclusion, allowing even the smallest businesses to partake in the formal economy without significant financial burdens.

Here are some ways UPI has fostered financial inclusion among small businesses:

Cost-Effective Solutions: Managing transaction costs is critical for startups and small and medium-sized enterprises (SMEs) with limited resources. UPI promotes businesses of all sizes to accept digital payments by charging no transaction fees. This affordability allows even the smallest enterprises to participate in the formal economy.

E-commerce Integrations: Businesses can easily interface with multiple e-commerce platforms and marketplaces using UPI, allowing them to reach a more extensive client base. This connectivity has been critical to expanding online enterprises, allowing startups and SMEs to offer their products and services to customers nationwide effortlessly.

Cash Flow Management: Cash flow management is a critical concern for startups and SMEs, frequently resulting in business disruptions and growth constraints. UPI can help to speed up this process by allowing for rapid payment settlements. Businesses can receive payments immediately into their bank accounts, reducing the need for laborious reconciliation. Improved cash flow management enables startups and SMEs to pay suppliers, staff, and other stakeholders on time, promoting operational stability and growth.

Conclusion

The rise of digital payments continues to have a transformative impact on the Indian economy. It has improved transparency between parties, lowered corruption, and improved tax compliance.

Some significant trends driving the growth of digital payments in India are evolving technologies, one-tap transactions, and e-commerce integrations. Additionally, these trends simplify the payment process for small businesses, allowing them to gain a competitive edge, reduce costs, and improve customer satisfaction.