By Gurbans Chatwal, Vice President, Global Services, Fiserv
The digital payment landscape in India is expected to see significant growth in the next 5 – 10 years, supported by a combination of government policies, technological advancements, progression from embedded payments to embedded finance, and changing consumer behavior towards contactless payments – all driving a transition from physical cash to digital code market projections for digital payments indicate a threefold increase to $10 trillion over the next five years. This growth is driven primarily by merchant payments which is expected to outpace person-to-person fund transfers.
Beyond the initial initiative of the government to seed bank accounts with Aadhaar and mobile numbers, technological drivers and policy dynamics driving the growth of digital payments have been expansion of account aggregator frameworks, pay later services, value added services on digital wallets, enablement of public financial management system facility (PFMS), Digidhan mission, and contactless payments.
Some of the other tech and social variables that have influenced digital payments which can be used to construct a digital index to measure or predict the level of digital payment adoption are:
1. Increase in the number of ATMs, point-of-sale (POS) terminals.
2. Efficiency of the banking sector seen through decreasing non-performing assets and cost of deposits.
3. Trust in the overall payments framework and banking system.
4. Past experiences with online frauds that could deter the usage of digital payments.
5. Demographic factors which determine the choice of digital payment methods.
But the advent of Central Bank Digital Currencies (CBDCs) represents a fundamental shift in monetary policy and financial infrastructure for digital payments. By issuing the e₹ (India’s CBDC), the RBI gains direct control over the digital currency, allowing for more effective influence over money supply. Some of the inherent benefits of CBDCs include democratizing access to financial services, reaching unbanked and underbanked populations, transaction efficiency, streamlining cross-border payments, and minimizing intermediaries.
Beyond economics, the challenge of CBDC adoption is embedded in answers to profound philosophical questions. First, CBDCs tie identity to transactions, raising concerns about individual autonomy and the right to financial privacy. As we transition from physical cash to digital bytes (e₹), we must contemplate the impact on our trust in centralized institutions. There are still many debates on whether decentralized alternatives (like cryptocurrencies) better align with individual sovereignty.
Despite the surge in digital payments, the growth of currency in circulation (CiC) continues, indicating that while digital payments are substituting cash for transactional purposes, cash demand is influenced by precautionary and store-of-value motives. The growth of the digital payment model in India is bound to face several challenges; and the ecosystem of government, banks, and private companies will have to address increase in fraud because of increasing digital footprint, limited access and awareness in rural and remote areas, , and lack of electricity and connectivity in remote areas.
