India’s Digital Payment Revolution: UPI’s Unstoppable Growth and Future Innovations

Vide a press release no. 2024-2025/2019, Mr. Puneet Pancholy, Chief General Manager of the Reserve Bank of India has published the Payment System Report, December 2024. This report covers important developments in the payment trajectory, and provides an in-depth analysis into the United Payment Interface, in addition to analysing the trends in payment transactions carried out using various payment systems in India during the last five calendar years up to 2024. RBI has decided to publish the report bi-annually on its website.

Prolegomenon

The buoyancy in the spectacular progress of Unified Payments Interface (UPI) and the plethora of digital payment options available, digital payments in India have registered a phenomenal growth. The transitional change in the needs & demands of the consumers have ushered the digital payment system to unveil options catering to every need of the Indian consumer namely – instant payment systems (UPI, IMPS), small value payment systems (PPI, UPI Lite), large value payment (RTGS), bill payment (BBPS), bulk payment (NACH), offline payment (UPI Lite X), government payments (NACH, APBS), toll payments (NETC) and many more.

Retail digital payments in India have grown from 162 crore transactions in the financial year 2012-13 to over 16,416 crore transactions in the financial year 2023-24 i.e., approximately 100-fold increase over 12 years. The remarkable growth in payment infrastructure and payment performance is also apparent in the Digital Payment Index published by RBI, which has witnessed more than four-fold rise in the last six years (445.50 for March 2024, base 100 as of March 2018).

Committed in providing peer safety & security, Government of India has introduced Payment Safety Measures such as the two factors of authentication, which incidentally, is still not mandatory in many advanced countries. The facility to switch on / off and set / modify transaction limits for all types of card transactions ensures that consumers have complete control over their payment options. Tokenisation of cards has within a period of two years seen large-scale adoption by consumers with over 91 crore card-on-file tokens created as on December 31, 2024.

Master Directions on Cyber Resilience and Digital Payment Security Controls for Payment System Operators (PSOs), aimed to enhance safety and security of payment systems by providing a framework for overall information security preparedness with emphasis on cyber resilience, which cover baseline cyber and information security measures for PSOs and ensure safe and secure digital payment

transactions have also been issued.

While domestic payment systems have become cheap and fast, cross-border payments remain expensive and slow. The Reserve Bank is focusing on interlinking the fast payment systems (FPS) with that of other countries to offer a seamless and less-costly cross-border payment experience. This mechanism and methodology of addressing the challenges in enhancing cross-border payments (i.e., high cost, low speed, limited access and limited transparency) has also been recognised by the

international standard setting bodies (FSB, CPMI, etc.). Last year the Unified Payments Interface of India (UPI) and PayNow of Singapore were interlinked through extensive collaboration between RBI and Monetary Authority of Singapore. Recent data shows that the cost of sending a remittance has come down noticeably.

Conspectus

Digital Payments in India have grown exponentially in the last decade. While in CY-2013 there were 222 crore digital transactions valued at ₹772 lakh crore, it has increased 94 times in volume and more than 3.5 times in value to over 20,787 crore transactions valued at ₹2758 lakh crore in CY-2024. In the last five years alone, digital payments in India have increased 6.7 times in volume and 1.6 times in value. This amounts to a five-year CAGR of 45.9% in terms of digital payments volume and 10.2%

in terms of digital payments value.

In the year 2016, National Payments Corporation of India (NPCI) had launched the Unified Payments Interface (UPI) which has emerged as the most used and preferred payment channel, and has revolutionised India’s payment ecosystem by consolidating multiple bank accounts into one mobile interface. UPI’s real-time, user-centric functions simplifying payments and extend digital payments to previously unreached segments. Since its launch in 2016, UPI has seen multiple enhancements. Key being UPI lite for small value transactions, UPI lite X for offline payments and UPI123 Pay for feature phone users. UPI processes over 16 billion transactions a month.

The report also signifies the growth of Cards (credit and debit) and PPI payment systems. At the end of December 2024, the number of credit cards has more than doubled to around 10.80 crore as compared to December 2019, when there were 5.53 crore cards in circulation. In contrast, number of debit cards have remained relatively stable, with a marginal increase from 80.53 crore in December 2019 to slightly more than 99.09 crore in December 2024. A bank group-wise analysis is presented to further

disaggregate these dynamic growth patterns in the card infrastructure. A similar growth trajectory is witnessed in card transactions as well.

The report exhibits an insight into the inward and outward remittances to and from India and other countries, a derivative from the World Bank demonstrates the global remittances for 2023 where India’s pre-eminence as the top recipient with $125 billion, significantly ahead of other countries like Mexico and China, reflecting the substantial contribution of its diaspora to the economy and foreign exchange reserves. The report also highlights that the cost of sending remittances to South Asia remains the lowest globally, although it still exceeds the Sustainable Development Goals’ target. Within this framework, India’s strategic position is further highlighted by its diverse cost efficiencies across several remittance corridors, with the Malaysia to India corridor being the most cost-effective.

Payment Systems in India

The origin of payments and settlements is as old as history of exchange of goods and services among humans. But as societies grew in complexity so did their needs around money and payments. Society moved from simple bartering to developing currency notes and coins in myriad forms. Later, increasing mobility of people spurred the trade among different societies and it necessitated the development of more efficient payment mechanisms which did not require carrying vast quantities of coins. Thus, the language changed from ‘promise to pay’ to ‘an order to pay’. These pay orders are very similar to present day drafts or cheques. The most important category of credit instruments that evolved in India were local language bills of exchange (called Hundis). Given the immature legal framework of the period, such informal letters would have been difficult to enforce.

Subsequently, as the banking system evolved, a legal framework was provided by enactment of the Negotiable Instruments Act in 1881 (NI Act), which formalised the usage and characteristics of instruments like the cheque, bill of exchange and promissory note. The NI Act provided and still provides the legal framework for noncash paper payment instruments in India.

With the advent of computers and expansion of banking services across the country, foundation for a more comprehensive electronic payment system was laid out in the form of Electronic Funds Transfer (EFT). However, there was no statute specifically designed to facilitate and oversee EFTs when it was started. The services were arranged by drawing up contracts between the parties to govern their mutual rights and obligations. There was a need for a separate law dealing comprehensively with payment system which covered certain transactional issues like payment finality, rights and obligations of the parties involved in electronic funds transfer, netting aspects, etc.

Hence, India enacted a separate law for Payment and Settlement Systems which has enabled an orderly development of the payment eco-system in the country. The Payments and Settlement Systems Act, 2007 (PSS Act) for the first-time recognised payments as a function different from a bank’s core functions, such as lending and accepting deposits. The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) is a central authority that has been established by RBI under the provisions of PSS Act, with the ability to regulate and supervise payment

and settlement systems.

The PSS Act empowers RBI to issue licenses / authorisations to payment system operators. These operators include entities involved in operating and maintaining various types of payment systems, such as Clearing Corporation of India Ltd. (CCIL) (Financial Market Infrastructure – Central Counterparty), National Payments Corporation of India (NPCI) (retail payments organisation),

card payment networks, cross-border in-bound money transfer operators, ATM networks, Prepaid Payment Instrument (PPI) issuers, Instant Money Transfer Operators, Trade Receivables Discounting System (TReDS) platform providers and Bharat Bill Payment Operating Units (BBPOUs), Payment

Aggregators, etc.

The Payment and Settlement Systems (PSS) Act provides for the finality of settlement in payment systems. Once a settlement is made in accordance with the prescribed procedures, it is considered final and irrevocable. The Act also includes provisions related to the protection of consumers using payment systems. It outlines the rights and liabilities of payment system operators. The Act specifies offences related to the violation of the provisions contained in the PSS Act, Regulations, Orders and Directions and prescribes penalties for non-compliance. These penalties may include fines and imprisonment. The act also provides for creation of a committee of its central board known as the Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), to exercise its powers and perform its functions and discharge its duties under this statute.

The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) commenced functioning from March 07, 2005 with the promulgation of the PSS Act and BPSS Regulations, 2008.

The Board is chaired by the Governor of RBI which is a Constituted Committee of the Central Board of RBI and it is the highest policy making body on payment systems in RBI. The BPSS is empowered for

formulating policies, setting standards, authorising and determining criteria for membership for regulating and supervising all payment and settlement systems in the country. The Department of Payment and Settlement Systems (DPSS) of RBI serves as the Secretariat to the BPSS and executes its directions.

BPSS consists of the following members, namely, (a) Governor is the Chairperson of BPSS; (b) Deputy Governors, out of whom the Deputy Governor in charge of the DPSS, is the Vice-Chairperson of BPSS; and (c) Not more than three Directors of the Central Board nominated by the Governor. Two Executive Directors (presently one) nominated by the Chairperson and the Principal Legal Adviser in RBI are permanent invitees to the meetings of BPSS. Further, person/s with experience in the fields of payment and settlement systems may be invited by BPSS to attend its meetings either as permanent or as ad-hoc invitee/s.

Major Regulatory Developments in Payment Systems in India

Payment Aggregators (PA’s) were brought under regulatory domain of RBI in March 2020 and designated as Payment System Operators (PSOs). These regulations were, however, applicable to PA’s processing online or e-commerce transactions. These regulations do not cover offline PAs who handle proximity / face-to-face transactions and play a significant role in the spread of digital payments. Keeping in view the similar nature of activities undertaken by online and offline PAs (who handle

Proximity / face-to-face transactions), it was announced in the RBI’s Bi-Monthly Monetary Policy Statement of September 2022 to apply the current regulations to offline PAs as well. This measure is expected to bring in synergy in regulation covering activities and operations of PAs apart from convergence on standards of data collection and storage.

The regulations primarily mandate that non-bank intermediaries that handle customers’ funds to be directed to merchants, obtain authorisation as a Payment Aggregator from the Reserve Bank of India (RBI). In addition, as part of sound regulatory practice, they establish baseline technology recommendations, corporate governance standards, customer grievance redressal mechanisms, and risk management practices. To ensure proper management of funds by these entities on behalf of their merchants, the regulations stipulate the use of specially designated accounts.

Tokenisation is the process of substituting actual card details with an alternative code known as a ‘token’. This token serves as a unique identifier for a customer’s card, enabling successful transactions.

The Reserve Bank of India (RBI) permitted device tokenisation in January 2019, and card-on-file tokenisation (CoFT) in September 2021. Since then, tokenisation has witnessed exponential growth, with over 91 crore tokens issued up to December 2024. These tokens have facilitated over 320 crore transactions, amounting to nearly ₹11 lakh crore. The adoption of tokens for e-commerce transactions has eliminated the need for merchants and Payment Aggregators to store actual card data. As a result,

nearly 98% of e-commerce transactions are now processed without using the actual card data. 

A framework for processing e-mandates for recurring transactions was introduced in August 2019 to balance the safety and security of digital transactions with customer convenience. The limit for execution of e-mandates without Additional Factor of Authentication (AFA) was earlier kept uniform for all categories at ₹15,000/-. In categories such as subscription to mutual funds, payment of insurance premium and credit card bill payments, where the transaction sizes are more than ₹15,000, a need to enhance the limit was expressed, therefore it was decided to exempt the requirement of AFA for transactions up to ₹1 lakh for the following categories: subscription to mutual funds, payment of insurance premium and payments of credit card bills. The others such as pre, and post-transaction notifications, opt-out facility for user, etc. shall continue to attract the ceiling of Rs. 15,000/-.

Courtesy: Reserve Bank Of India

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