Last Updated on Aug 17, 2022 by Anjali Chourasiya

This article is authored by Dr Vikas V Gupta, CEO and Chief Investment Strategist at OmniScience Capital. The firm provides a scientific approach to equity investments in Global and Indian stock markets. Vikas believes that “Chasing Alpha leads to Risks and Chasing Safety leads to Alpha”. This insight is the crux of Scientific Investing.

With UPI, India has created something ‘truly special’ and is opening up a world of opportunities for micro and small businesses that are the backbone of the Indian economy.

Mark Zuckerberg, CEO, Meta Platforms, Inc. (Facebook)

According to a BCG-PhonePe report, India has total annual payments of US$ 7-8 tn in 2021, which is likely to double to US$ 15-16 tn by 2026. In 2021, the share of digital payments in the value of the total payments was 40% and is projected to grow to 65% by 2026. This translates to a 2021 value of cash transactions of US$ 3 tn growing at a 27% Compounded Annual Growth Rate(CAGR) to US$ 10 tn by 2026. Merchant payments are expected to grow at an even faster pace of 45% CAGR over the same period reaching US$ 3 tn from US$ 400 bn.

The above data clearly shows the importance and opportunity that digital payments present. According to the RBI (Annual Report FY 2022), there are 13 digital payment channels in India, viz., RTGS, AePS, APBS, ECS, IMPS, NACH, NEFT, UPI, BHIM Aadhaar Pay, NETC FASTag, credit cards, debit cards, and Prepaid Payments Instruments (PPI) (mobile wallets, prepaid cards, etc.). Except for RTGS, RBI classifies all other digital payment channels as retail. 


The highest value digital payments channels are NEFT, UPI and IMPS. However, UPI has emerged as the largest in terms of volume across all digital payment channels with a 64% share, while its value share is 18%. The average ticket size of UPI transactions is approximately Rs. 1,800 compared to Rs. 8,800 for IMPS and Rs. 71,000 for NEFT. For small transactions, UPI is preferred, while for mid-sized IMPS and for large NEFT. Credit and debit card transactions are just 20% of the UPI value.

Revolutionary UPI

While the rich digital payments infrastructure of India has made life simple for its citizens, the most revolutionary digital payments channel is the UPI. The ability to make nano-digital payments of even Re. 1 directly from one bank account to another, in real-time, via UPI (United Payments Interface) is a revolutionary ability unique in the world*. This wildcard to the world of fintech has completely revolutionised the way customers and retail businesses transact and function in India. 

All digital payment channels or instruments, specifically UPI, have completely changed the lives of common citizens. Gone are the days of standing in queues for hours to pay utility and other bills. The need to wait in queues at the bank teller, or the ATMs, to withdraw cash, has also been reduced significantly. 

Cash transactions have been reduced significantly at small merchants, like the fruits and vegetable vendors, kirana (grocery) stores, barbershops, auto and taxi rides etc. Many people carry very little cash in their wallets, which remains in their wallets for weeks.

Coming to UPI, nearly 6 bn transactions worth more than US$ 125 bn are carried out monthly. This translates to more than 50 bn annual transactions, in terms of volume, and US$ 1.5 tn in annual transaction value.

Statistics from June 2022 show that nearly 80% of the transacted value is classified as P2P (Person-to-Person) while the remaining is P2M (Person-to-Merchant). By volume, around 56% of transactions are P2P and the remaining P2M. However, it is likely that many P2P transactions are also transactions by small merchants and sole proprietors. 

According to official statistics, more than 100 mn QR codes have been deployed for merchant payments over the last 5 yrs at a CAGR of 109%. In fact, the UPI QRs have already crossed 172 mn and Bharat QRs are close to 5 mn by Q1 2022, according to the Worldline India Digital Payments Report.

With digital payments, a business can be transacted 24X7X365. Customers no longer have to worry about carrying exact change, don’t have to carry large amounts of cash, and the problem of soiled and torn notes is gone. Most of the time, one doesn’t even need to carry a wallet; carrying a phone is enough. 

Benefits for merchants

Merchants, too, have benefited significantly; probably, more than the customers. Loss of sales because the customer was out of cash in his or her wallet is a thing of the past. Losses on forced credit sales due to such situations, which eventually turned into bad debts, have significantly reduced. With UPI and RuPay Cards, the Merchant Discount Rates (MDR) charges are gone, thus boosting merchant margins by 2%. Suppose a merchant has operating margins of 10%, this is a 20% boost to their total income. Similar benefits accrue to online merchants on payment gateway charges.

While blockchain and cryptocurrencies still fantasise about delivering financial inclusion in some utopian future, the Indian digital payments ecosystem is already delivering it to billions of people. 

UPI can already be used on not just smartphones but also feature phones. UPI is also being rolled out, or is under discussion for roll-out, to other countries, including Singapore, UAE, Nepal, Bhutan, Malaysia, Thailand, Philippines, Vietnam, Cambodia, Hong Kong, Taiwan, South Korea, Japan, Australia and Russia. 

To get a picture of how advanced India’s digital payments ecosystem is, look at two quotes from the ACI Worldwide report on real-time payments.

“For a window on what this future looks like, we can look to India…”

India: still showing the rest of the world how it’s done

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Vikas Gupta
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