Challenges & Future of Digital Payments in India

Demonetization gave a major boost to digital payments in India. Since then, the payments industry has been supported by technologies like ATMs, debit cards, credit cards, digital wallets and prepaid cards. Subsequently, the rise of Fintechs has led to the evolution of many innovative solutions for transacting digitally. With innovations like UPI, QR codes, and interoperable digital wallets etc, Indian digital space has a promising future.

The digital payment sector witnessed its share of ups and downs in the pandemic. Social distancing had a considerable influence on consumer behaviour and their ways of making payments. Owing to the government initiatives, local and new businesses embraced digital payments. This has helped many digital platforms to recover. However, despite the greater appetite for cashless payment system, the Indian economy largely continues to be cash-reliant.

Challenges to Digital Payments Industry

In today’s time, over 60% Indians use mobile and online banking mode for financial transactions. And many want to continue using digital payments in the post-Covid era. However, still 4 out of 5 payments are made using cash, and one of the reasons for this is the lack of internet access and penetration.

This major dependency on cash can also be attributed to the lack of adequate infrastructure. Currently, digital payment options heavily rely on smartphones which have in-built data connections, Bluetooth, and NFC. India is home to 800 million mobile phone users, out of which only 200 million are smartphone users. Of these devices, only 6 million are NFC-enabled. Therefore, approximately 85% Indians lack access to the necessary infrastructure needed for smooth functioning of mobile wallets. Even the hardware and software involved are bulky and costly. Thus, we need a universal and interoperable method for digital payments.

The government and private digital payment companies are consistently pushing for a cashless economy. But the pitfall is in the failure to have an established protocol in place for implementing digital payment methods. Technologies are in abundance but their penetration is lagging behind. Similarly, fintech startups which can reduce the cost burden for users exist, but adequate support for their expansion remains scarce.

Several consumers aren’t still confident about mobile wallets being a safe mode of payment. Lack of awareness about their benefits is still a challenge to the industry. We need to invest significant time and efforts to overcome this. For many customers, the option of using credit or debit cards is secondary to using cash. This limited understanding about the usage of digital payments is crippling for the industry.

The underlying cybersecurity risks, such as security breaches, further discourage people from making cashless transactions. Just like the industry innovates and introduces new forms of digital payments, similarly hackers are evolving new techniques.

The push for instant payment has also changed the regulatory landscape. Mobile wallets also need to be compliant with the legal requirements as laid down by the government. The pace and magnitude of regulatory changes in India are hard to keep up with for the digital payments industry.

Future of Digital Payments Ecosystem

The Covid-19 pandemic acted as a catalyst for the growth of digital payments in India. Now, mobile wallet landscape within India is expanding with the rise of different payment channels. Despite the underlying security concerns, instruments like UPI, debit/credit cards etc are becoming increasingly popular in India. Millennials are the primary growth drivers in this case.  

The payments industry witnessed a swift adoption of contactless payment options in India. Tap and go payments are booming all over with the help of new technology at payment terminals. Using Near Field Communication (NFC), credit/debit cards, and digital wallets on our smartphone or smartwatch, we can easily make purchases with just a tap on the screen. NFC enables a user to gesture their phone near an enabled device and share information without establishing a manual connection. Wearable devices too have risen as a primary driver of adoption of contactless payments. These eliminate the need to verify a user’s identity with a signature or PIN during the process of transaction.

Personalization has further led to the rise of voice-enabled banking. Voice interactions offer valuable insights into customer needs, behaviours and preferences. Using this information, banks and fintech companies can provide customized services.In addition, cryptocurrency has created immensely fertile opportunities for fintech startups. This new form of currency has led to the development of wallets which can store digital assets and swapped coin pairs to open new channels for customers to attain the value from their digital coins in the real world.

Moreover, fintech startups disrupting the existing digital payment landscape with advanced payment technologies using low-cost models are rising. These hold the potential to level the playing field and bring about financial inclusion. 

Summing Up

Government is making efforts in elevating these cutting-edge and novel technologies. A systematic penetration of these among the masses will considerably lead to a boundless and prolific cashless economy. It is essential to build an ecosystem that fosters innovative fintech startups and players that come forward with unique offerings in the digital payments space. This will, in turn, encourage more Indians to adopt a cashless and contactless economy. As digital transformation picks up pace, all sectors seek to promote cashless services, that will inevitably boost the market for digital payment in India.

Article Contributed by By: Mr Shubhradeep Nandi, Co-founder and CEO, PiChain Labs