Worldwide Interest in India's Digital Financial Infrastructure
-By Priyasy Bokadia April 18, 2023 6 mins read

During the last five years, India's digital payment volume has increased at an annual pace of over 50%

Digital finance can transform emerging markets as well as developed economies. India's strategy is to treat digital financial infrastructure as a public good. It provides a significant case study whose findings are applicable to all economies, regardless of their stage of development. All residents now have a national digital biometric identity, effectively giving them full access to the banking system.

Small-scale transactions have gained popularity with retail customers due to the uproar of multiple payment system platforms in India, especially through UPI. UPI, an instant real-time system introduced by the National Payment Corporation of India (NPCI), integrates multiple bank accounts under one mobile application. Users can digitally make payments for goods and services via their mobile devices through UPI-based digital payment apps, including PhonePe, Paytm, Google Pay, and Amazon Pay. Likewise, customers can easily make digital payments through BharatQR—a single unified QR code that accepts payments via key payment networks like Visa and Mastercard.

The Indian payment system's design challenges the business case for standalone private payment systems by providing inexpensive and instantaneous payment services to citizens like UPI payments. The creation of a legal framework for data fiduciaries promises to make it easy for people to access the data generated by their online activities and control when those data can be shared. It is needless to say, financial infrastructure has a crucial role in a nation's economic development and financial stability.

Payments Vision Document - RBI’s contribution to the development of Indian Payments

The role of RBI has transformed from being a regulator, operator and facilitator to creator of an environment for the structured development of the payments ecosystem in India. Payments Vision documents of RBI have been providing the strategic direction and implementation plan for this development since 2001.

In 2001, the Reserve Bank of India (RBI) introduced the Payments Vision documents for the development of the payments ecosystem in India. Innovative payment systems like UPI have transformed the global payments and transaction banking environment at a rapid pace. Though the adoption of digital payments happened before, the COVID-19 pandemic accelerated the need for contactless and online payments. To help tap this growing opportunity, RBI has formulated ongoing strategic objectives based on the Payment Vision documents. These objectives ensure secure transactions that are easily accessible through affordable and effective payment systems across every sector in India.

The current Payments Vision Document 2025 expands on the Payments Vision 2019-21 document and lays out the plan until December 2025. It is important to recognize that initiatives may not necessarily be restricted by the Payments Vision but may also emerge from changing circumstances. For instance, the establishment of (a) RBI’s Innovation Hub; (b) a security framework for card transactions, such as a switch-on/off feature; (c) guidelines for limiting the liability of customers for unauthorized Prepaid Payment Instrument (PPI) transactions;(d) facilitating Online Dispute Resolution (ODR) got online payments; (e) a certificate of authorization for PSOs that lasts forever and many more were added over and above the responsibility outlined in the Payments Vision 2019-2020 document as per RBI’s Payments Vision 2025. These measures, coupled with the adoption of technology and innovation, have led to the speedy development of payment systems in India.

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McKinsey Global Payments Report 2022 stated that Asia–Pacific and EMEA saw a strong global payments revenue growth of 13 per cent across all regions. Global revenue growth of a whopping 57% was driven by the strong performance of Asia–Pacific, the largest regional revenue pool.

Meanwhile, India's use of instant payments continues to nearly double annually. The McKinsey Global Payments Report 2022 Meanwhile, India's use of instant payments continues to nearly double annually. The McKinsey Global Payments Report 20223 report further highlighted, over 300 registered banks, close to 260 million users, and nearly six billion monthly transactions were influenced by UPI. Digital payment apps like PhonePe and GooglePay in India have helped boost the payment sector in India. These developments have led the Indian Fintech sector to become a global leader of repute across the global payments landscape, including digital payments and seamless payment systems. In India, today, digital payments are available across a wide range of financial services, including bill payments, public transportation ticketing systems, cross-border remittances, and the like.

Innovative technology like Unified Payments Interface (UPI) and other alternative digital payment channels like BharatQR has revolutionized Indian financial services. For instance, during the last two COVID-19 waves, innovative technologies coupled with RBI regulatory relaxations helped most Indians maintain social distancing while making payments. As per RBI released Payment Vision Document 2019-21, more than 26 crore digital payment transactions get processed daily via these payment systems in India, with UPI accounting for over two-thirds share of such payments. These innovative digital technologies are helping customers, including small businesses, get fast, safe, and no-cost transactions. Indian consumers are increasingly getting digitally savvy, mainly owing to changing lifestyles and the need to adopt digital technology.

Digital Payment Sector Grows in India with Increasing Smartphone and Internet Users-

  • Cheap internet rates enabled smartphone penetration in India.

  • RBI's Payments Vision Document 2019-21 showed a rise of 99% in mobile banking users and 18% in internet users between March 2019 and September 2021.

  • These developments fueled the growth of the digital payments sector in India.

  • RBI data in Payments Vision 2025 revealed that the number of merchants accepting digital payment methods increased by over 500% from March 2019 to September 2021.

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In March 2022, the total digital payments rose significantly by 216% (volume) and 10% (value) compared with March 2019. The increasing use of digital payment apps has led to a decline in traditional banking modes like cheque facilities. For instance, during the above said period, the use of conventional paper instruments in total retail payments declined from 3.83% to 0.88% volume-wise and from 19.62% to 11.47% value-wise. Any financial innovation calls for making the system more inclusive and serving the interests of the public without disintegrating its overall functioning. The Indian financial infrastructure has been making the right moves.

However, digital payments are not the only way to tap users and small businesses. There is still a gap in acceptance infrastructure across ATMs and POS terminals. To improve and bridge this gap, RBI conceptualized the Payments Infrastructure Development Fund (PIDF) scheme, which was made operational in 2021. The scheme initiatives include digitally enabling both smartphone and feature phone users and secure transactions for both online and offline card transactions and user standing instructions.

In Conclusion,

India is Driving Financial Inclusion through the guidelines and a roadmap laid by RBI’s Vision Payments framework. The development of payment systems, innovative payment instruments, and digital infrastructure in India has inspired growth globally as well. Singapore is one of the nations that has embraced UPI. In 2020, NPCI International Payments Ltd (NIPL), a subsidiary of NPCI, released 'UPI-BHIM Global,' an international version of UPI in Singapore. This allows Indian residents in Singapore to make digital payments to merchants and enterprises in India in Indian Rupees. Similarly, the UAE has embraced UPI, with NPCI International Payments Ltd (NIPL) commencing a test initiative in 2021 with a key UAE bank. This pilot allows Indian residents in the UAE to send money to India in real time using UPI.

The leap in the payments infrastructure has piqued the interest of major global players in India Fintech’s digital payment apps. Also, India is the largest recipient of inbound remittances globally. UPI could play a significant role in driving trade and commerce with the country’s strategic partners, resulting in increased speed of transactions and reduction in remittance costs. Removal of pandemic-induced restrictions could further signal the proliferation of India’s digital payments systems to the global user. Additionally, the Reserve Bank of India serves as India's representative in a number of international organizations that set standards, including CPMI, the Financial Stability Board (FSB), and other payment systems. With RBI’s active participation in groups, such as task forces which are formed with an intention of improving the payments ecosystem, India’s G20 presidency in 2023 will transform the payments ecosystem across the globe.