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Report on Digital payments system in India- Issues and opportunities

With the deep pervasion of internet services across the country, digital payments became a convenient and reliant form of financial transaction. Otherwise limited to credit and debit cards, the innovations led to creation of mobile wallets such as Paytm, Freecharge etc. Soon the concept was embedded into the banking and financial sector of the government and UPI (Unified Payment Interface) created a more secure and homogeneous system of digital payment. Since majority of our transactions have turned digital, the need to analyse its importance and future innovations become very relevant.

In light of prevailing conditions due of Covid-19, paper currency transactions have been limited due to safety issues as well as convenience in online purchases. The governor of RBI in a public service announcement also urged the people to use cashless transactions and reduce the use of paper currency. Even before the pandemic, the reliance on digital payment was enormous and thus it has been at focus of economist, finance experts as well as trade analyst. This report would provide a good read to all those associated with economic and market trends as well as students who are interested in fintech.

The history of digital transaction dates back to 1950’s with the advent of plastic money in form of credit card. In India, Andhra Bank was the first to introduce credit cards in 1981. With the development of Internet began the era of Online Banking. It was internet that shaped modern digital transactions and made possible all future innovations and growth. In India demonetization paved the way for Mobile Wallets such as Paytm, and consequently development of UPI (Unified payments Interface) by NPCI -National Payment Corporation of India in 2016. It was UPI that made inter-bank transactions possible on a real time basis.

At the confluence of economy and technology lies the concept of digital transactions. Demonetization process marked the onset of a digital payment- based economy in India. When the whole country was standing in front of banks and ATM, mobile wallet industry seized the opportunity and turned this crisis into stepping stone towards a digital India. At present, Total digital transactions in volume terms recorded a growth rate of 58.8 per cent during 2018-19. India has become one of the biggest players in the digital transaction market and Alibaba-backed Paytm, Google, PhonePe have a major stake in this sector. As fintech becomes a growing sector in India, it presents a myriad of opportunities as well as certain issues which may hamper the growth. Here We shall discuss and seek to analyse those opportunities.

Written By Mr. Gaurav Tripathi, Law Student at UPES, Dehradun.


  1. India- A growing market

India being one of the largest and fastest growing economies of the world, still relies a lot on cash transactions. CIC (cash in circulation) percentage to GDP is still very high in India. Before demonetization CIC was 12.1% and it could only jump back to 11.6 % in 2018-19 due to increased digital payment. Digital payments in India currently aggregate at $200 million. Indian digital payments are expected to reach $1 trillion by year 2023. With growing internet reach and 800 million mobile numbers linked to bank accounts, mobile apps such as PhonePe, Google Pay, Amazon Pay etc. are expected to grow and capture the market growth and further expand. Facebook’s Whatsapp Pay is also expected to launch soon. After such tech- giants comings into this sector, the trust of people has been growing and this has led to an increased volume of transactions.

  1. Turning Crisis to opportunity

With the current pandemic situation arises the question of future of money transactions with minimum human interaction and maximum security. This is where the UPI comes in handy. While almost every sector of economy has been hit by the corona crisis, fintech has seen some growth. Due to health concerns, some e-commerce websites and retailers have strictly limited their payment option to digital. According to National Payments Corporation of India, transactions by UPI reached an all-time high in the month of June, 2020. People who have previously never trusted and used these digital payment apps are now forced to do it. The process is so hassle-free and secure than once a user starts engaging in digital payments, cash transactions appear cumbersome and obsolete. With additional advantages such as gift vouchers and cash-backs, the user base of these apps will only grow in future.

  1. Transaction Records and transparency

All of India’s financial problems root from the fact that India has a very small tax-payer base and this forces the government to excessively tax the already tax-paying demography. With only 2-3% people filing for income tax, tax evasion is rampant. With the growth of online payments, the government will be able to better access the data and bring down tax evasion and eventually reduce tax rates and provide a general stimulus for the economy. Increase in tax-compliance by creating an electronic trail, reduce the cost of cash handling and building a habit in consumer for digital payment would create a robust and more integrated economy.

  1. Better access to government schemes and policies

With the increase in online payments, the government will be able to secure more data about transactions in various sectors and that would help in assessment of GDP as well as provide an insight for various financial schemes and packages. Thus, government can better gauge a digitized economy and make sector-specific government policies. Also, brining people on digital payment grid will make it easy for people to access various incentives offered by government. In this regard, Digital India programme was launched with a vision to transform India into a digitally empowered society and knowledge of economy. “Faceless, Paperless, Cashless” is one of the professed roles of Digital India.” Ministry of Electronics & Information Technology has been Entrusted with the responsibility of leading this initiative of “Promotion of digital transactions including digital payments.”

The growth in this sector has been exponential. Yet there are certain challenges to be met when moving towards a cashless economy. Some of them are:

  1. Mixed Indian demography

India’s demography is a mix of contrasting sections of society. The access to digital economy mandates the knowledge and availability of technology and internet. In the past few years, this accessibility has increased manifold yet there exists a huge population who are not connected to banking grid let alone digital payments. Therefore, the first challenge is to further increase the reach of banking facilities and internet service so people can acquaint themselves with this evolving method of transaction. Further, there also exists a good deal of population which is illiterate and without formal education and knowledge, the proper and judicious use of this service is a far cry.

  1. Transactional and Data security:

Indian economy has been slow to adopt newer method of money transactions as people have utmost trust in a by-hand cash transfer. A vast majority of people who have refrained from using digital payments have referred to security threat as one of the prime concerns. Online frauds and failed cash transactions often lead to the money falling through pitfalls or simply being stolen by organised crime racquets. With majority of digital transactions happening via mobile phones, the chances of a security breach exist, particularly when many mobile wallets and banking applications are not deploying hardware-level security to make online transactions more secure. Online transactions need to be made more secure, simple and ubiquitous to ensure people’s faith in cashless transactions. To safeguard the details of users, such a system should have the ability to tokenise, encrypt and authenticate data before use. With increasing instances of online hacking and frauds, the faith of people in digital transactions dwindles and this could slow down the pace for a digital economy.

  1. Monopolization by few big players:

Currently India’s digital payment market is captured by few big players. Indian market is dominated by PhonePe, Paytm, Google etc. and RBI has warned against concentration risk in retail payment sector. In its yearly report of 2018, The Reserve Bank said that it plans to encourage more players to participate in and promote pan-India payment platforms so as to give a fillip to innovation and competition in the sector. Some of these companies such as Paytm has taken an early-movers advantage and gained a large stake in mobile-wallet segment. Therefore, more new ventures are required for diversification of this sector as the growth potential is still enormous.


Digital payment is the future of economic transactions and any growing economy should update itself to seek the advantage it offers. Economic transactions in all sectors of economy are turning to cashless and for every industry to stay relevant and up-to date, it is necessary to upgrade to digital economy interface. More growth prospects emerge in the avenue regularly and more convenient and secure applications keep emerging. Our country is yet to fully harness the value this system of transaction offers but once fully put to action, it has the ability to solve a lot of India’s financial problems.

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