digital payment: how can the government and RBI drive the growth of digital payments?

The explosion of digital payments over the past five years has largely been driven by UPI. India’s unified payment interface was built on a partnership model where technology-driven new era players (e.g. PhonePe, Google Pay) were able to work with traditional operators (banks/PSPs) to create a simplified user experience.

This framework is an experiment of the Reserve Bank of India (RBI) to facilitate innovation in a regulated space with the right safeguards and controls. The success of the UPI formula paves the way for many other such ecosystems in the country. Likewise, the RBI has a clear focus on interoperability across the payments space – the guidelines to make all payment wallets interoperable is another step in this direction.

Fintechs have been at the forefront of innovation in the UPI ecosystem – from creating simplified customer onboarding and transaction platforms (PhonePe, Google Pay, Paytm) to a large-scale merchant acceptance network based on QR code (PhonePe,

, Bharat Pe). This has been instrumental in driving UPI volumes over the past 2-3 years.

However, it is essential to note that the adoption of UPI still largely covers only metros, Tier 1 and Tier 2 cities. It is only in the last two years that the adoption of UPI in Tier 3 cities has started to reach reasonable penetration levels.

We expect to see a lot of innovation to address these hitherto under-covered segments – whether solving feature phones or solving low bandwidth/telecom network coverage through offline payments and creating new forms of acceptance (eg contact less payments) .

Payment apps are also expanding their offering to become a one-stop-shop for mobile customers. Many apps like PhonePe have succeeded in creating the network effect between merchants and consumers. These apps have the highest consumer activation rate given the frequent nature of payment transactions during the day/week/month. We’ve also seen payment service providers like Amazon Pay innovate and provide payment-linked credit like Buy Now Pay Later to their consumers.

How can we unlock more innovations?

A successful partnership and interface between incumbent banks and fintechs is essential for UPI. To facilitate such innovation, NPCI and RBI have set up the appropriate sandbox environments for experimentation, innovation, and testing of new solutions.

The UPI 123 and UPI lite solutions are examples of innovation emerging from the sandbox. Both address key penetration unlocks – telephone customer segments and offline payment methods. UPI lite in its current avatar is the first solution allowing banks to process transactions offline from the central banking infrastructure, thereby reducing pressure on the CBS platform. As we move forward, we expect to see a push towards enabling transactions in weak or no network locations.

However, it will take more than a sandbox environment to drive continued innovation in digital payments and lending:

  • Raise awareness and build trust in digital payment methods to attract more consumers and merchants, especially in Tier 3-6 cities
  • Enable payment service providers and other stakeholders to create appropriate business and business models (with the right consumer protectionism and keeping net neutrality in mind)
  • Clear and consistent guidelines regarding relationships between regulated banks and unregulated fintechs (e.g. data management, FLDG standards, co-branded card issuance, etc.)
  • Further investment in national payments infrastructure by all stakeholders (banks, PSPs, TPAPs) will help reduce technical failures and increase customer confidence
  • Here are some additional steps to build customer awareness and trust:
  • Real-time transaction monitoring with automated decisions and blocking fraudulent transactions when identified
  • Introduction of Multi-Factor Authentication (MFA) with integrated biometrics to ensure that the user account is not hacked or used by others without the user’s consent
  • Introducing default transaction limits for new users so that minimum speed checks can reduce harm to an individual

Having set a benchmark for P2P payments to be followed globally, India is now well positioned to increase the adoption of digital P2M payments in the coming years. With NPCI and RBI partnering with fintechs through the sandbox environment and payment players who are constantly innovating how to serve their merchants and consumers, we are entering an exciting new phase in payments innovation.

(Prateek Roongta is Managing Director and Partner, BCG and Vivek Mandhata is Partner, BCG)

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Elaine R. Knight