P2M digital payments are riding the MSME revolution in India
-By Mintoak September 21, 2022 5 min read
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India is witnessing a digital boom mainly due to adopting digital technologies, demand for seamless payments, government measures, and widespread smartphone/internet penetration. As per stats by Forrester Research, the retail sector in India was worth $883 billion in 2021, with grocery retail share at $608 billion, and is targeted to reach $1.3 trillion by 2024. It is worth noting that the growth is led by small businesses, with 75% of the retail market share held by ‘mom-and-pop stores.

The Impact of Real-Time Payments

According to McKinsey’s Global Payments 2021 report, real-time payments have transformed the global payments ecosystem. The report states that India registered 25.6 billion transactions in 2020, an increase of 70% over 2019. Digital payment innovations like Unified Payments Interface (UPI) have helped India transition toward cashless payments. The National Payments Corporation of India’s (NPCI) latest July 2022 data shows UPI transactions (P2M and P2P) reached 6.29 billion transactions volume-wise and Rs.10.63 in value.

Likewise, Quick Response (QR) code solutions like BharatQR have further aided the digital payments revolution in the country. The Phone-Pe BCG report shows in India; there are currently over 30 million merchants who accept QR code payments; five years back, only 2.5 million merchants used to accept it.

The Future Outlook

The latest PhonePe and Boston Consulting Group (BCG) study highlights the acceleration of India’s digital payments sector, with the industry, expected triple growth to over $10 trillion by 2026.

Challenges and Opportunities

By 2021, digital transactions made up 40% of overall transactions, with merchant payments (excluding financial services/ corporate/ business/government payments) worth $3 trillion, driving digital growth. Digital payment systems have led the payment sector’s growth by offering a real-time, low-cost, flexible, dynamic, and multi-currency payment ecosystem.

Adoption Hurdles for Merchants

Preference for digital solutions has made merchants work towards adopting digital payments to provide fast, secure, and frictionless payment solutions to consumers. However, merchants face several transaction issues while adopting digital solutions - from recording and settlement to reconciliation. Business owners must invest more time in ensuring smooth operations to expand and generate more revenue. They cannot also drive footfalls and take feedback from their customer base.

The Phone-Pe BCG report spoke about know-your-customer (KYC) norms, frauds, and UPI outages as significant challenges merchants face while adopting digital payment solutions. KYC norms served as a critical reason for merchants to avoid digital payments and for customers to sign up on digital platforms, e-wallets, etc. Digital KYC norms are easier to manage.

However, end-to-end digital KYC functioning is still not easy, as full KYC requires either a video or a biometric device-enabled physical touch point. The report also spoke about scalability challenges, especially with bank infrastructure and technical declines across the dynamic UPI solutions. For instance, the rules of day closure vary between banks. So, there could be a mismatch between the regular reporting periods of the bank and the platform. This could lead to differences between transaction quantity and the number processed by the platform and the bank on a particular day.

Delayed payments could also impact daily operations for the merchants. For example, a bank would consider the total declines for the week, and on reaching a critical number, an additional fee gets charged from the merchant. It will lead to a reconciliation error if the platform does not take note of this.

As stated by the Phone-Pe BCG report, banks and NPCI, on average, get around 1.4% of technical declines in UPI transaction volumes, mainly due to system and network issues owing to the high demand UPI enabled transactions.

McKinsey’s Global Payments 2021 report states that merchant acquirers like banks can improve their service quality by considering options beyond core banking or core payments acceptance for offering solutions to merchants for adopting e-commerce.


Regulatory Measures and Solutions

To help merchants and small businesses adopt smooth digital payment solutions, the Reserve Bank of India (RBI) has stated that post-March 2022, only payment aggregator (PA) licensed by RBI can continue to operate PAs. This measure was taken to curb the number of PAs to eliminate operational bottlenecks and smooth operations. Further, only two interoperable QR codes will be applicable in India: UPI QR and Bharat QR. So, all payment system operators (PSOs) must use one or more of these two interoperable codes. It will also help ease the reconciliation and merchant settlement process and improve user convenience and system efficiency. Merchants must abide by the various rules and guidelines to avoid delayed payments, fraud, and cyber security risks.


The Indian digital revolution is expected to thrive owing to the measures taken under the Digital India campaign, including helping merchants ease their digital payment solutions, increasing the use of smartphones, and the availability of cheap internet, among others.The Indian digital revolution is expected to thrive owing to the measures taken under the Digital India campaign, including helping merchants ease their digital payment solutions, increasing the use of smartphones, and the availability of cheap internet, among others.