A customer uses an Apple Inc. iPhone to make a payment with a Square Inc. payment device in San Francisco, California, U.S., on Tuesday, March 27, 2018. In more than two years as a public company, Square has moved beyond its iconic payment dongle for reading credit cards to become a one-stop business manager for small and mid-sized retailers, providing loans, accounting, inventory tracking and e-commerce operations among its services. Photographer: David Paul Morris/Bloomberg

Ever since people moved from bartering goods to meet their needs, cash in one form or other has been king, and since the 16th century banks have been the monopolistic middle-men providing banking, loans, investments and other services.

Use of cash and the monopoly of banking industry began to face its first serious challenge at the start of the 21st century, with the rapid proliferation of FinTech firms offering digital payments. Earlier, if you needed something you had to either pay for it in cash or provide a draft or cheque to the seller. Digital payments allowed you to buy something by merely swiping a card or providing the card details online.

India, which has for ages been a cash-obsessed economy, is slowly but steadily turning to digital payments. Driven in large measure by progressive regulatory policies and support from the government, as well as the growing use of mobile Internet, Indian digital payment industry is coming of age. Digital payments, which currently are going through a transformational phase, are expected to witness a surge in the coming few years and bring about a paradigm shift in how money is moved in the Indian economy.

According to a report by Google and Boston Consulting Group (BCG), the Indian digital payments industry is predicted to cross $500 billion in the next couple of years and contribute around 15 percent to the country’s GDP. In the same period, alternate digital payment instruments like digital wallets, UPI, payment banks, Bharat QR are expected to grow fiercely and are forecast to double their contribution to 30 percent in the digital payment industry.

Digital payments started to pick up pace with the growth of e-commerce companies followed by emergence of digital wallet companies. To lure the consumers, the digital wallets doled out lucrative offers and cashbacks to get consumers on board using the payment channel. Thanks to the ease of use, attractive offers and increased smartphone penetration, the digital wallet companies were able to find their way to the consumer’s phone, as well as their pockets.

Growth in the digital payment industry growth is likely to be led by the rise in digital/mobile wallets. In its regular World Payment Report, the French consulting and outsourcing services company Capgemini expects mobile wallets to witness a compound annual growth rate (CAGR) of 148 percent over the next five years and reach $4.5 billion in the short-term by 2022.

The exponential growth of the digital payment sector is driven by multiple factors, including the ever-growing smartphone penetration, convenience to pay, availability of lucrative offers, rise of non-banking payment institutions, such as payments bank, digital wallets and others, as well as conducive regulatory policies from the government, and an increasing consumer willingness to embrace digital payment platforms.

The advent of next-generation payment systems like payment banks, digital wallets and BharatQR, is adding further momentum to digital payments in the country. According to the IDC Financial Insights report titled The Future of Payments in India: More Spectacular Growth Ahead, it is projected that digital payments in India will supersede cash by 2022.

Another key driver of digital payments is positive policy framework changes and government initiatives like launch of new payments systems like – UPI, Aadhar linked electronic payments and improvement of the digital infrastructure.

In a bid to expand their reach, the digital wallets have been encouraging customers to use them for offline point of sale (POS) transactions, such as at shopping malls, supermarkets, grocery stores, restaurants and petrol stations. These POS transactions are expected to become a major contributor to the digital payments platform in the coming years.

Another important pillar of the digital payment story are the online ticketing, travel and events companies like the Indian railways and private players such as Makemytrip, Yatra, Ibibo, Trivago (hotels), redBus (buses), and Bookmyshow (movie and event ticketing), who have encouraged consumers to transact online.

A recent survey showed that over 80 percent of existing digital payment users prefer the medium over other non-cash payment methods like cheques or demand drafts. Online shopping, payment of utility bills such as electricity, water and mobile bills, and purchase of movie tickets are the three things that an Indian user primarily pays for through digital platform An interesting aspect of India’s digital payment story is that it is going to be dominated by micro transactions of average value below Rs 100). The report by Google BCG predicts that 50 percent of person-to-merchant transactions will be under Rs.100..

Though it started relatively late, the Indian ecosystem of digital payments is pegged to have the most evolved system compared to 25 other countries which were surveyed by the US-based fintech leader FIS. In its fifth iteration of faster payments’ industry report titled Flavors of Fast, FIS said: “India’s Immediate Payment Service (IMPS) continues to be one of the most sophisticated and evolved faster payments schemes in the world. It is the only scheme in the 2018 report to receive a ‘5’ rating — the highest possible rank — on our Faster Payments Innovation Index (FPII).”

“Since launching IMPS, India has built one of the most evolved and sophisticated public digital payments infrastructures in the world,” commented FIS in its report. The parameters that FIS used to measure the digital payments in these 25 countries include round-the-clock availability of the services, adoption, and immediacy of payments; in all these metrics India topped other countries such as the UK, Singapore, Denmark, Switzerland, China, Japan, and others.

The IMPS was a system initiated by the Indian government in a move to radically modernize the Indian payment ecosystem, encourage more underbanked people into the financial mainstream, and reduce the reliance on cash. IMPS allows bank customers to use a mobile device, the internet and other channels to make immediate payments. One of the fastest-growing immediate payment services in the world, the daily transaction volumes on IMPS crossed three million a day.

The digital payment ecosystem is being transformed and the sector has witnessed tremendous growth, innovations and regulatory support over the last two years. The focus should now be to keep the momentum going with more support from the government and innovations, safety and convenience from the players to benefit customers and the Indian economy.

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