Banque de France Bulletin no. 241: Article 3 India at the global forefront in digital payments

By Revelin David, Salez Paul

Thematic: Means of payment and currency in circulation

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Digital payments have grown exponentially in India in recent years, thanks notably to the real time payment system, Unified Payments Interface (UPI). The rise has largely been driven by the Reserve Bank of India (RBI) and the National Payments Corporation of India (NPCI), supported by commercial banks and India’s rich fintech ecosystem.
The growth in digital payments in India dovetails with the country’s goal to enhance financial inclusion, in an economy with a sizeable unbanked population and large informal sector, and where cash use remains all pervasive. The local success of UPI could also serve as a catalyst for the creation of a central bank digital currency, and foster efficiency gains in cross border payments, which remain costly and complex, as in all emerging economies.

1 Digital payments are expanding strongly in India, as symbolised by the rise of the real time payment system, UPI

Digitalisation, a major challenge for an economy with a sizeable informal sector and unbanked population

In recent years, India has experienced a revolution in retail digital payments. Thanks to the wide array of solutions on offer backed by public authorities, the country now ranks first worldwide for real time, account to account digital transactions, with a share of
over 40% of all such payments made throughout the world in 2021, well ahead of China.

As in other emerging countries, the rise of digital payments in India has been fuelled by increased internet penetration, notably via smartphones (54.2% of the population owned a smartphone in 2020, up from 4.7% in 2011), in an economy that remains predominantly informal – the informal sector accounts for at least 80% of jobs (Ramana Murthy, 2019) – and where a sizeable share of the population remains unbanked. The shift towards digitalisation was facilitated by the launch in 2009 of the national electronic and biometric identity scheme, Aadhaar, and the provision of a digital foundational infrastructure as a public good within the India Stack (D’Silva et al., 2019). It subsequently intensified with the demonetisation of the INR 500 and INR 1,000 banknotes in 2016, and then the Covid 19 crisis in 2020 21. The trend therefore serves a twofold objective: the modernisation of the economy and the expansion of financial inclusion, which is understood as ensuring the broadest and cheapest possible access to financial products and services for both individuals and firms.

UPI, a flexible and easy to use system that is growing exponentially

The rise of digital payments in India can be symbolized by Unified Payments Interface (UPI), a real time payment system launched in 2016 and available via smartphone app, where users identify themselves with a telephone number, a virtual payment address (VPA) of their choice or a QR code. The application requires users to have a bank account, connected either directly or via a bank
card. Since March 2022, UPI has also been made available to users of non smart mobile phones (i.e. with no internet connection), which still account for more than half of all mobile phones in use in India. …