India Poised to Explore New Frontiers in Digital Payments with an Ever-Evolving Homegrown Innovation Landscape

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By Kamal Misra, Senior Director and Head of Banking, Capgemini Invent India

Caught in the web of a timeless infatuation with cash and currency notes, the Indian payment landscape is at the crossroads of antiquity and modernisation. As a large section of the demographic falls out of love with cash in favour of cards, wallets, online and other alternative payment modes, the corresponding flux is paving the way for a smarter recalibration of interoperability, user experience, convenience and cost.

India has traditionally been a cash-loving economy with an irrepressible penchant for its papers and mints. Industry data pegged cash usage at a staggering 80 percent of total payment transaction volume at the end of 2019; that has since dropped to about 60 percent today, thanks to several innovative measures. While the government’s demonetisation slingshot of the pre-pandemic era, which triggered the removal of certain high-value currency denominations from circulation overnight, may have prompted critical assessments of its efficacy, it has, for sure, whipped up a digital frenzy. As broadband and smartphone penetration usher in nimble digital habits, Indian consumers have taken an uncanny liking to “paying on the go”. To this end, the Government of India has set in motion a host of forward-looking initiatives to encourage the adoption of digital payments, principally helmed by the National Payments Corporation of India (NPCI). Unified Payments Interface (UPI) and RuPay serve as vital cornerstones of a vast array of evolving payment instruments, including wallets.

The battle for supremacy, territories and customers

Wallets have historically been led by banks, operators, merchants, tech players and financial-technology firms (fintechs) and are typically characterised by one of the following styles of operability: open, semi-open, semi-closed or closed. Open wallets, as the name suggests, promote full interoperability, allowing a complete range of payment transactions, such as fund transfers, merchant payments and cash withdrawals at automated teller machines (ATMs) and are mandatorily led by banks in collaboration with operators and retailers. Semi-open wallets are predominantly led by operators and facilitate transactions with merchants contracted to be part of the operator-driven ecosystem. Cash loaded onto wallets has to be spent on transactions within the ecosystem and cannot be withdrawn or redeemed. Semi-closed wallets allow merchant payments at identified locations—again, based on a contract with the wallet issuer. As in the case of semi-open wallets, withdrawals and redemptions are not permitted. Closed wallets are distinctively driven by e-commerce players that issue them to customers for exclusive transactions between the two parties. No withdrawals or redemptions are permitted with them, either.

UPI is a party to the spliced real-time payments (RTP) and application programming interface (API) innovations that propelled India into a league of 52 countries that bank on instant payments. Docked to a single mobile application (app) and integrating multiple bank accounts, UPI facilitates instant fund transfers between accounts through mobile phones on the back of quick-response (QR) codes. Customers are able to make instant payments using a virtual payment address. NPCI’s stats point to a gargantuan surge in UPI transactions in the last few years, culminating in close to 13 billion transactions by mid-2024. While RTP had been envisaged as a “bank-led” model, the inclusion of third-party technology companies (Google) and fintechs (PhonePe, Paytm) expanded the UPI canvas to net a larger user base. As per the Reserve Bank of India (RBI), UPI constitutes close to 80 percent of the total digital-payment volume in the country. Recent innovations embedded within UPI include near-field communication (NFC)-based UPI Lite X, payments through feature phones (UPI 123Pay) and artificial-intelligence (AI)-led conversational payments (Hello! UPI). On the basis of diplomatic exchanges, several countries, such as Mauritius, the United Arab Emirates (UAE), Bhutan, Sri Lanka, Singapore and France, have welcomed local UPI acceptance in select avenues.

Although wallets have been standing their ground and luring customers with incentives such as cashbacks, UPI is becoming increasingly popular due to its interoperability, ease of use and, most importantly, a credential-less virtual payment address (UPI ID), signifying better security. The icing on the cake, however, is that while UPI enables instant bank-to-bank transfers at zero cost, boosting its popularity, wallets continue to follow a multi-leg “payer-wallet-payee” journey involving a “convenience fee” levied for each transfer from the wallet to a bank account to compensate for the wallet-loading bank charges incurred. Stringent know-your-customer (KYC) norms for customer onboarding have proven to be a hurdle, too, leading to a mass migration to UPI, which has no such regulatory stipulations. Consequently, wallets have onboarded the UPI bandwagon, enabling QR-code-based bank-to-bank transfers.

RuPay, the domestic card scheme steered by NPCI, has seen accelerated espousals by consumers and merchants in the face of global big shots such as Visa and Mastercard. RuPay cards have constituted a whopping 60-plus percent of all debit cards in circulation and approximately 45 percent of the total debit-card transaction value in recent times. To promote wider acceptance on the merchant side and push digital payments, the government has done away with MDR (Merchant Discount Rate) charges on RuPay-based transactions in addition to UPI QR-code scanning and select modes. The National Common Mobility Card (NCMC) is based on RuPay, facilitating seamless transport-related payments across the country.

Data from NPCI suggests that digital payments as a share of the national gross domestic product (GDP) grew from 561 percent in 2015 to 769 percent in 2019, just before the pandemic struck. Bereft of socialisation in the period that soon followed, the population took this journey to unimaginable heights en masse. The total value of digital payment transactions is forecast to inch closer to the trillion-dollar mark by 2025.

On the merchant side, consolidation is in progress as cost-effective point-of-sale (POS) solutions rule the roost. The launch of Jio MPoS (mobile point-of-sale) by Reliance Industries a few years back, targeted at small customers, promised to be a major disruptor in this area. Coming as a one-time nominal investment of ₹ 3,000 and feeding on Jio’s (Reliance Jio Infocomm Limited’s) 4G network, this shopping proposition was armed with zero merchant-discount rates as well as a loyalty programme. Reliance has a grand vision of taking this digital avenue to more than five million small shopkeepers by 2025, according to the industry grapevine. While contactless NFC technology is making steady inroads, simple and zero-cost QR-code scanning aided by UPI seems to be gradually outpacing the former at shops and outlets as merchants dodge device-acquisition costs and transaction-processing fees. Merchants have been adopting UPI wholeheartedly due to the absence of processing charges for big-ticket transactions in the post-pandemic environment.

The groundwork for structural resilience is the key

The country’s digital-payment infrastructure has received a shot in the arm, with India Stack acting as its beacon. Touted as the world’s largest open-API project, India Stack continues to nurture a modular and component-based platform structure, harbouring multiple technology frameworks that are interconnected but operate in a mutually exclusive manner. Be it through the data-sharing rail harnessing a commoditised data marketplace (open banking), the identity rail channelising Aadhaar-based on-demand authentication (eKYC, DigiLocker) or the payment rail simplifying real-time payments (UPI, IMPS [Immediate Payment Service]), India Stack continues to mature and diversify.

The government-endorsed Pradhan Mantri Jan-Dhan Yojana (PMJDY) scheme and India Post Payments Bank (IPPB) continue to provide feature-rich, last-mile connectivity to the rural masses and gig economy through cost-effective access to financial services and products. Aadhaar Enabled Payment System (AePS) is a bank-led innovation that strives to provide a comprehensive payment solution to rural areas through POS (micro-ATMs) using Aadhaar-based authentication. Several fintechs are involved in crafting cost-effective innovations, such as smart kiosks and mobile ATMs, to bridge the digital divide between urban and rural India.

Open banking in India has been gaining momentum. The open-banking business model is anchored to a set of APIs that act as conduits for transactional and financial data from customers to be aggregated, analysed and monetised through the creation of new products and offerings by third-party tech firms and fintechs. What started with a handful of players a few years back, carefully stitching together layers of APIs and heralding a commoditised marketplace for open data, has matured into a well-defined structure, with banking APIs, digital and pseudo-neobanks, stack players and many others fundamentally steered by India Stack. As banks go about opening up the treasure trove of customer data and fintechs start crafting innovative offerings through their agile setups in a time-bound and competitive marketplace, the annexation of the banking value chain may have begun earlier than anticipated. The Account Aggregator (AA) framework is an offshoot that inherently streamlines financial-data sharing among financial institutions, such as banks, nonbank financial companies (NBFCs) and other regulated entities. This sharing is facilitated by account aggregators, licensed entities that act as intermediaries between financial information providers (FIPs) and financial information users (FIUs). Under the AA framework, consumers can consolidate their financial information across multiple institutions, such as banks, insurance companies and mutual funds, into a single dashboard. They can then share this data with FIUs, which can use it to tailor financial products and services, such as loans, insurance and investment advice. All the while, the system banks on consumer consent as the sole qualifying criterion to access their data, in the absence of which there is no flux.

The UPI use case pragmatically showcases how a well-thought-out open-banking approach can succeed nationally. The Indian open-banking story is replete with illustrations from P2P (peer-to-peer) credit, collections, KYC, AML (anti-money laundering) and fraud due diligence, reporting and other associated areas. A healthy collaboration among banks, fintechs, tech providers and regulatory agencies to promote API development and adoption will not only establish structural resoluteness but also cover the unbanked territories at the bottom of the pyramid through means and measures.

Certain dynamics in digital payments have brought unforeseeable challenges pertaining to security and data privacy. The Government of India has put its weight behind a mandate to curb the collection of user data beyond what is essential as per the functionality of a mobile app. This is tied to the Digital Personal Data Protection Act, 2023 (DPDP Act) and is categorically aimed at protecting user information from being compromised through acts of data theft, snooping and rigging. These RBI-led regulatory reforms have mandated stricter guidelines for customer onboarding, such as eKYC for wallets and even a cap on transfer amounts. Tokenisation of debit and credit cards, whereby a unique token masks the card details at merchant POS terminals and QR-scan points, is one of the RBI’s key security-related interventions. The central bank has even released a draft framework to constitute a monitoring authority for payments in the country and nurture guidelines around consumer protection, security and competitiveness. A national strategy around blockchain is being carefully debated within the legal perimeter, with due diligence around key use cases, including smart-contract applications and cryptocurrency. The strong urge for a central bank-regulated digital currency also features in a remarkable call-out. While the RBI had planned to set up a fintech-focused department encouraging digital banking and payments, it steered a regulatory sandbox to encourage digital lending and payment-related innovation amongst fintechs and startups.

Intention and innovation for a longer shelf life

While the global payment arena was busy toeing the line of disruptive innovation with regimental precision, India, until a few years ago, was happy to catch the proceedings from the pavilion end. But with a flourishing landscape dotted with opportunities to bring about much-needed parity, domestic players have jumped in with fervour. The onslaught of COVID-19 hastened the imploration, with several local and multinational firms rushing to get their acts together to expand the collaborative spectrum.

State Bank of India (SBI) and Titan Company (part of the Tata Group) came together to launch Titan Pay, which was integrated into the latter’s smartwatches—the first-of-its-kind domestic contactless-payment proposition. SBI account holders will be able to tap their Titan Pay smartwatches on Mastercard-based contactless merchant terminals to pay up to ₹ 2,000 in a secure environment. This is among a slew of innovations earmarked by SBI to facilitate innovation and enhance the user experience. In the MSME (micro-, small and medium-sized enterprises) sector, HUL (Hindustan Unilever Limited) and SBI announced a partnership to make easy credit accessible, as the small retailers, especially the ones at the bottom of the pyramid, jostled for survival. Through what is promoted as a “contactless” and “seamless” proposition, HUL’s retailers using the firm’s Shikhar app will be able to avail of the credit facility to make payments (UPI being a strong component) to the distributors enabled by integration with SBI’s YONO app. Further, retailers can place orders through Shikhar without the need for salesmen to visit their stores, thus creating a wonderful use case for touchless shopping ready to be cloned across the industry.

Visa unveiled a “network-of-networks” strategy (transactions can be initiated and completed in different networks), thus opening its erstwhile closed-loop stance to become interoperable and expand the payment propositions to diverse POS solutions, QR codes and various third-party apps (Google Pay). Google Pay, buoyed by a burgeoning rush on its native platform during the lockdown, introduced, in partnership with Visa, tokenisation to help consumers perform payment transactions with their credit or debit cards. This means Google Pay’s Android users can have unique virtual account numbers or tokens generated and assigned to the relevant card numbers that reside in encrypted form on their phones’ memories and are later harnessed to decrypt one-time keys for contactless (NFC) payments. Google partnered with Axis Bank and SBI to start with, while interested parties are expected to make a beeline.

In the past, several banks toyed with the idea of merging novel elements into their products and services aimed at enticing customers and gaining first-mover advantages. Although most of these did not prove disruptive, they did excite customers, who started becoming more assertive and pronounced in their demands, leading to widespread innovations later on. IndusInd Bank launched the Mastercard-branded Nexxt credit card with payment buttons onboard, helping customers choose amongst credit, EMI (equated monthly instalments) and reward-point options while making payments, with LED (light-emitting diode) lights indicating the final choice. Axis Bank introduced iris-based biometric authentication on micro-ATM tablets for Aadhaar-related transactions, eliminating the need to input any card-related details. Users simply had to get their eyes scanned for Aadhaar validation to happen. ICICI Bank incorporated voice biometrics for cross-border remittances through Apple Siri on its Money2India app. Axis Bank and Kotak Mahindra Bank had an interesting rendezvous with blockchain when they partnered with Ripple separately to graft this technology into their cross-border remittance services.

In recent years, fintechs have stepped on the gas to quickly gather their wits and courage to take on established conglomerates such as Amazon and Reliance. The turf happens to be none other than the retail storefront. The long-drawn-out lockdown during the pandemic rendered millions of small merchants penurious as customers flocked to the glitz and glamour of e-commerce. As UI/UX (user interface/user experience) talks hog cyberspace, most of these small-time merchants who are digitally illiterate stare at a potential wipeout in the absence of any significant federal endowments. The likes of Dukaan, Khatabook, OkCredit and Bikayi have enabled what may be called “digital storefronts” for small merchants who had not previously ventured beyond their small shopping establishments. Although lingering pain points persist pertaining to store management, operations and supply chains on the web, these interfaces at least provide a ray of hope for these merchants who dream of establishing parity with biggies at some point in their lifetimes. For fintechs, though, altruism may not be the core intent, as they may be looking at every potent opportunity to offload (sell) the venture to an Amazon or a Reliance and exit with a lucrative valuation.

Digital payments in India will continue to thrive on a fertile testbed driven by rising consumer participation, technology overhauls, regulatory pushes and cost optimisations. Home to one of the world’s cheapest data abodes, where a GB (gigabyte) costs as little as $0.09, growing broadband penetration will continue to usher in consumer-oriented transformations. Innovation is expected to play a key role, with artificial intelligence (AI) and machine learning (ML)-based best practices being adopted liberally. Costs related to ATM maintenance, cash-loading and logistics may see a substantial reduction as the brick-and-mortar presence paves the way for an all-round digital avatar.