Explained: How India overtakes the world in digital payments

NEW DELHI: The value of digital payments in India will triple to $ 1 trillion by fiscal 2026, from $ 300 billion in fiscal 2021 thanks to the government’s initiative to increase l financial access by combining no-frills bank accounts, the Aadhaar card and mobile connection, according to a report from CLSA.
“UPI accounts for 60% of total payments in volume and digital payments have grown from $ 61 billion in fiscal 2016 to $ 300 billion as of fiscal 21. Considering the increase in purchases online and digital adoption, we expect this figure to grow to $ 0.9 billion to $ 1 billion by FY26, or 30% of Indian consumption, “the report said.
Since its inception in 2016, the value of monthly UPI transactions has taken four years to cross the Rs 3 lakh-crore mark in September 2020. And in one year, it has more than doubled to reach Rs 7 lakh crore.

What fueled this boom?
Cheap internet data, the high penetration of smartphones and the Indian biometric ID card have fueled the rapid rise of online payment systems on mobile platforms, according to the report.
Currently, 250 banks are direct members of UPI, which means that they allow interbank fund transfers through UPI. There are over 50 UPI apps with Phone Pe in the lead. UPI is the largest retail payment system in the country in terms of transaction volume (14 crore transactions per day, October 2021), and one of UPI’s initial goals was to replace cash for low transactions. value.
Analysis of transaction data shows that 50% of transactions through UPI were less than Rs 200. RBI proposed to offer a simpler process flow by allowing low value transactions through an ‘on-device’ wallet. in the UPI application, which will preserve the resource bank system, without any change in the transaction experience for the user.
India has passed the world of digital payments
The country recorded more than 25.5 billion real-time payment transactions in 2020 – the highest in the world and 60% higher than China.

UPI transactions almost matched all debit and credit card transactions
In the aggregate value of payments made to merchants, UPI transactions almost equaled debit and credit card transactions. According to CLSA estimates based on transactions in the first half of FY22, UPI transactions at $ 187 billion are close to overtaking debit card transactions by $ 83 billion and debit card transactions. credit of $ 102 billion.
UPI transactions recently increased to $ 16 billion per month, which is almost equivalent to merchant payments made by debit and credit cards together.

Google pay and PhonePe Dominate UPI Application Market Share

Fintech players such as Paytm, Phonepe and Google Pay have gained dominant market shares in UPI payments, which are clearly on the rise and have already overtaken other forms of payment like credit cards and debit cards. . In fact, Paytm, Phonepe, and Google Pay have been active on both the issuance and acquisition side. As a result, they have built strong customer and merchant bases. In some cases, the number of users significantly exceeds the customers of the large banks.
However, UPI payments are not profitable because UPI payments are free while there is a merchant discount rate on debit / credit cards and the point of sale / gateway companies also charge a fee for the service, this is why UPI based issuers and super apps are diversifying into full financial service platforms including lending, distribution and non-financial services as they intend to capitalize on the large customer / merchant base that they have built up. Examples include Paytm, Phone Pe, Mobiwilk, Google Pay, Bharat Pe, Pine Labs, RazorPay, and CRED.
With the substantial increase in UPI volume, CLSA estimates that digital payments (debit cards + credit cards + UPI) from consumers to merchants have increased from 5% in FY16 to over 15% in FY21 and are expected to exceed 20%. % in FY22.
It is estimated that around 47% of all payments made by customers in FY 22 are made through UPI, and only 6% through mobile wallets.

CLSA expects in FY26 approximately 44% of payments to be accepted through payment gateways and aggregators, followed by 34% through QR codes and 22% through point-of-sale machines. (PoS).
Online consumption could grow from $ 72 billion in fiscal 21 to $ 237 billion in fiscal 26

BNPL market growing by 10%
Currently at $ 15-20 billion, Buy Now Pay Later (BNPL), Equivalent Monthly Payments (EMI) and Purchase Loans only account for 5-6% of digital payments. CLSA expects this market to grow five-fold to $ 100 billion by FY26, or 10% of all digital payments.
Remind me, what is BNPL again?
Buy-Now-Pay-Later (BNPL) is a short-term microcredit model, in which consumers have to pay little or no interest for both online and offline purchases. BNPL’s start-ups are partnering with meal delivery companies, travel booking players as well as grocery stores and other essential delivery platforms. Two types of BNPL products are offered:
A deferred payment model in which the customer must repay the amount after 14-30 days. These are generally low cost loans offered to facilitate payments to low risk customers.
A regular EMI model with a duration of a few months. It may or may not be at zero cost.
CLSA said the accessibility enhancement features and immediate availability of credit will help fintechs stay at the forefront of personal lending growth in India. BNPL digital space fintechs include Simpl, ZestMoney, PayU’s LazyPay, Capital Float, and Mobikwik Zip.
Interestingly, India is ahead of the global average when it comes to using BNPL in online shopping (3% share vs. 2.1% global average)

According to industry estimates by Redseer, only 10-15 million people in India have benefited from BNPL credit from digital-only players. In FY21, disbursements from these players amounted to $ 3.5 billion, or 5% of total online sales in India. This market can reach 10% of total online sales over the next five years. According to Lizzie Chapman, co-founder and CEO of ZestMoney, India will be the largest BNPL market in the world.

During fiscal year 18-1HFY22, BNPL companies raised nearly $ 2.6 billion in equity. Additionally, ZestMoney and Capital Float each raised $ 50 million, while ePayLater raised $ 10 million in September 2021.
Amount of the loan
According to a CIBIL report, 97% of fintech disbursements in 2020 were for an amount less than Rs 25,000, against 60% / 16% for NBFC / private banks. Indeed, a typical BNPL client is younger and has a lower earning capacity. Second, the shorter loan term implies that the ticket size has to be smaller for the MIL to remain relatively comfortable.
“With the rapid expansion, low cost personal loans account for 60% of the overall personal loan volume, while fintechs contribute 45% in number. Over 70% of personal loans are taken outside of Tier 1 cities, ”CLSA said.
The various Indian fintechs will gain importance
India is emerging as one of the largest fintech markets in the world and is ranked # 4 in the number of fintech unicorns valued at $ 50 billion. “While there are many factors contributing to the country’s digital successes, we believe that the role of government, regulators and industry bodies in the development of the Indian battery has laid the groundwork for digitalization and innovation. fast, ”said CLSA.
India currently has 14 fintech unicorns; 6 of the first 8 are payment companies

CLSA sees fintechs leading the expansion of India’s credit market and driving penetration with a 50-60% share of new credit and sub-prime clients.

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