Bengaluru, India – With the Indian payment ecosystem undergoing a paradigm shift in recent years, digital payments in India is expected to constitute nearly 65% of all payments by 2026 and valued at around US$10t in that same year, according to a report by digital payments company PhonePe and the Boston Consulting Group (BCG).

According to the report, India’s Unified Payments Interface (UPI) system has supercharged India’s transition to non-cash payments, especially in person-to-person (P2P) fund transfers and low value merchant (P2M) payments. Not surprisingly, UPI saw about 9 times the transaction volume increase in the past 3 years, increasing from 5 billion transactions in FY19 to about 46 billion transactions in FY22; accounting for more than 60% of non-cash transaction volumes in FY22.

It also noted that a key outcome of the many significant shifts in customer behaviour was an acceleration of digital payments in India. Customers switched to e-commerce and contactless modes of digital payment to minimise contact and infection risk. More than a 50% jump was observed in monthly transaction volumes across UPI, Bharat Bill Payment System (BBPS), Immediate Payment Service (IMPS) over 6 months following the imposition of lockdown in March 2020.

Karthik Raghupathy, head of strategy and investor relations at PhonePe, said, “This indicates that digital payment has truly gained ubiquitous acceptance across the country. While Tier 1-2 cities have witnessed high acceptance of digital payments, penetration in Tier 3-6 cities shows headroom for growth. The next wave of growth will now come from Tier 3-6 locations, as evidenced in the past two years wherein Tier 3-6 cities have contributed to nearly 60 to 70% of new customers.”

Meanwhile, Prateek Roongta, managing director and partner at Boston Consulting Group, commented, “India is set to become a digital payment economy as a source of payments invert with 65% transactions being done digitally by 2026, as opposed to 40% transactions today. Merchant payments will emerge as the most powerful driver of this growth, especially in the offline segment due to growing QR code deployments. We expect that merchant payments will soon outpace person-to-person fund transfers.”

He added, “We will increasingly observe digital payments get embedded in all forms of commerce, we will also witness the progression from embedded payments to embedded finance. As more and more merchants begin to accept digital payments, it will unlock a significant change in access to credit for small merchants due to the creation of a digital transaction trail.”