Mobile payments have experienced stellar growth in India, in part enabled through the UPI protocol. 

Mobile payments have seen exponential growth in India. Multiple factors served as the foundations that allowed digital payments to thrive. In 2016, policymakers introduced a sudden and drastic shift in the currency system, forcing many to reconsider how they handled their cash. Simultaneously, a universal payment interface was launched to allow for easy payments and money transfer. Factor in the growth of smartphone adoption and a vibrant digital payment ecosystem was allowed to thrive. 

Rupee Demonetization 

On the 8th of November 2016, Prime Minister of India, Narendra Modi, announced that the 500 and 1,000 rupee notes would no longer be a legal payment method. The following days, weeks and months resulted in a vastly different monetary landscape. Citizens had till the 30th of December to deposit their notes at the local bank, with the now obsolete 500 and 1,000 rupee bills replaced by a new 500 and a 2,000 note. 

The sudden change of course, the BBC noted, was an attempt by the government to reduce illegal cash holdings and combat corruption. By introducing a radical change, which impacted 80 percent of all currency in circulation across the country, the Indian government hoped to generate several billions in uncollected taxes. Payments in India, meanwhile, were conducted for 90 percent in cash. A huge blind spot for a government looking to increase its budget. 

The abrupt change resulted in long lines at banks with citizens desperate to exchange their money, leaving many in a blind panic. ATMs saw their cash reserves drained. Buying daily necessities became difficult, especially for the majority of Indians who don’t have a bank account and the 300 million citizens without government identification. The BBC highlighted that police had to intervene in an attempt to restore order.    

Maganbhai Solanki, who waited for four hours to fill out deposit forms, told The Guardian that life had become completely paralyzed. He, like many others, rushed to their local bank after the news was broadcasted. Solanki arrived at the bank at 8 am the following morning, only to find him queuing for countless hours well into the afternoon. Some didn’t have the stamina to wait, he explained, leaving the line. 

Solanki however, didn’t have a choice, he added. His family didn’t have enough money to pay the milkman in the morning. Lawyer, Guru Birajdar, experienced similar issues, unable to buy a cup of tea. Having all his money in 500 and 1,000 rupee bills, he was forced to go straight to the bank to exchange his notes. The chaos was felt especially in rural areas of the country, The Guardian pointed out. 

Chaos ensues

The roughly 1.25 billion citizens living outside of major metropolitan areas, have limited access to banks, leaving many of the peoples stranded and desperate. Maid, Reshma Murthy, who sends money to her family back in her village, had no cash reserves. Murthy emphasized the Indian government should’ve given the people more time for households to get their finances in order.  

Finance Minister, Arun Jaitley, shortly after emphasized there wouldn’t be a roll-back for the announced demonetization efforts, criticizing those chief ministers of Delhi and West Bengal who he deemed spread unnecessary panic. Jaitley explained that the demonetization of high value notes was carefully planned, with queues at banks decreasing significantly. 

The 22,000 ATMs across the country meanwhile had been re-calibrated to handle the newly introduced rupee notes. Jaitley re-emphasized that the circulation of ‘black money’ had to be completed, serving as a vital step to bring order to the Indian economy. However, he regretted that the currency adjustment had inconvenienced citizens. But, the change was necessary to combat black and counterfeit money, prompting the government to let new currency flow into the system. 

Mobile payments take a flight

As the Indian government was phasing out cash payments, the National Payments Corporation of India (NPCI), an initiative of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA), launched the Unified Payments Interface (UPI). This digital protocol has played a vital role in accelerating the adoption of mobile payments across India. The UPI allows bank customers to communicate, enabling easy transfer of money. These customers can be consumers amongst themselves or merchant payments. 

The program launched as a pilot in April 2016, with 11 member banks participating in the scheme, who published their own mobile banking apps from August 2016 onward. The program proved a success as UPI-based digital payments started to grow exponentially as years progressed. In 2017, 17.9 million payments were made across India. This number skyrocketed to 915.2 million just a year later. Five years into the program, the amount of transactions had grown to 12.51 billion. 

In 2023, 83.7 billion UPI-based digital payments were recorded.  The success of UPI, The Banker pointed out, could be traced back to 2009, when the Aadhaar digital identity (ID) system was introduced. This digital verification number gave each Indian and foreign resident a unique 12-digit sequence which could be used for a wide variety of services according to the news outlet.  

Co-founder and chief evangelist at India-based software development firm Setu, Nikhil Kumar, told The Banker, that India was a pioneer in digital public infrastructure through its digital identification program. This allowed for nearly 1.3 billion Indians to request services digitally. Kumar added that this paved the way for opening bank accounts. 

The Indian government built upon the foundations of the Aadhaar digital identity system through the roll-out of its financial inclusion program, introduced by Prime Minister, Jan Dhan Yojana, which would grant access to citizens aged 10 years and above to open a bank account. As the digital inclusion program, locally known as Jan Dhan, started to roll-out across India, an impressive 500 million accounts were opened as of August 2023. 

The simplicity behind UPI is what made the program such a success, Kumar pointed out. The technology was straightforward. A simple protocol reminiscent of email, allowing for easy information sharing between two entities. UPI democratized payments, as it didn’t discriminate which payments could be included. The protocol could handle any type of payment. May it be between business or consumers. 

UPI accelerates mobile payments

In January 2020, India Global Business spoke with Rahul Chari, co-founder and CTO of India’s leading digital wallet company, PhonePe, asking his views on how UPI had created the vibrant digital payments ecosystem across India. Chari noted that UPI is the only API-driven interoperable real-time money transfer platform in the world that is specifically tailored to a mobile-based society. Adding that the program has allowed for many innovative payments solutions, resulting in an incredible high adoption of mobile payments. 

Chari commented that UPI was more secure compared to other digital payments, as its digital fingerprint is associated with the device it’s running on, which uses PIN-based authentication for increased safety. He admitted that the system is not immune to fraud through social engineering, which utilizes 2-factor authentication to gain access to people’s bank accounts. PhonePe, Chari explained, uses in-house technology to detect fraudulent transactions through a variety of signals, such as location, device parameters and other data points. This is translated into a risk score, which can allow or disallow a transaction in real time. 

While these issues remain, the convenience and seamless integration of mobile payments have seen massive growth across India since 2017, Chari noted. Adding that new technology adoption has traditionally seen higher pick up in Tier 1 cities, due to better infrastructure. But, thanks to increased smartphone penetration, less urbanized areas can enjoy innovative solutions just as easily. Cheap data plans and intuitive design accelerate momentum for smartphones across the Indian population.

We can see this rapid development in the smartphone penetration rate, which has been growing exponentially since 2009, where 1.43 percent of the population owned a smartphone. This number more than doubled in 2011, where smartphone penetration reached 4.7 percent. It doubled again by 2013, reaching 10.08 percent. In 2017, as UPI started to roll-out, penetration of smartphones set at 29.49 percent. 

At the time of Chari interview in 2020, smartphone penetration in India had grown to 54.23 percent. In 2023, 70.95 percent of Indians owned a smartphone. This figure is estimated to grow to 89.2 percent by 2030 and expected to reach 96.11 percent by 2040. The strong pick-up of smartphones has resulted in a flourishing QR-code ecosystem in offline stores, who are now becoming more welcoming to digital payments. 

PhonePe, Chari notes, has been able to ride this way, experiencing tremendous growth in Tier 2 and Tier 3 cities. PhonePe has on-boarded over 8 million merchants in 215 cities, with over 56 percent of transactions coming from Tier 2 and Tier 3 cities. The strong growth has also attracted companies like Google, who have been heavily pushing their Google Pay solution. 

The India fintech sector itself however, Chari pointed out, was still in its early stages, with UPI being one of its major successes, which saw adoption at an unprecedentedly large scale. The product is such a breakthrough in fact, it could be used outside of India. Chari’s predictions weren’t far off, as the Chief Operating Officer of NPCI, Praveena Rai, noted in August 2023, Sri Lanka adopted UPI. The solution is especially suitable for countries with low card penetration, where smartphones can be the next step for currency processing. 

UPI success

In September 2022, the International Monetary Fund (IMF), put a spotlight on the success of the UPI program, which has enabled the digital payments ecosystem to expand. The IMF highlighted that the UPI program was introduced to remove the ‘patchwork of rules and paperwork’ to keep the monetary system afloat. By creating a program that would allow banks to communicate with each other, currency agency could be eased for citizens and businesses. 

Chief Executive Officer at the, National Payments Corporation of India (NPCI), Dilip Asbe, told the IMF, that Indian central bank promotes a varied payment ecosystem, bringing new payment solutions such as RuPay to the general public and National Financial Switch cash machine network, which supports multiple vendors for easy money redrawal. Asbe commented that programs similar to UPI can’t thrive in countries where policymakers aren’t committed to democratizing the payment system down to the smallest value. 

Cashless payments have been particularly popular among younger generations, cofounder of arts and culture organization Cultre, Anjchita Nair, pointed out to the IMF. The organization based in New Delhi uses Razorpay for online transfers and Paytm for sales. Personally, he uses Google Pay, which is one of the most popular digital payment solutions in India. By using these solutions, Nair can reduce the hassle of handling small payments. 

The IMF added that the India Stack, an API that acts as the bridge between the different payment systems and one’s digital identity (Aadhaar), helped to accelerate digital inclusion. Dinesh Tyagi, CEO of CSC e-Governance Services India, which serves as the operator for electronic public services for rural communities across the country, explained that the Indian government had been heavily promoting the India Stack to ensure services would quickly integrate their solutions. 

Connecting to the India Stack was free for solutions providers, lowering the barrier to entry, allowing the program to quickly deliver new and innovative payments solutions to citizens and businesses. Making the solution free may have been the unique selling point that invited many start-ups and existing companies to venture into the space, as it allowed them to generate a profit over transactions. 

Cashless perils

The rise of mobile payments in India hasn’t been without its challenges and drawbacks. For all the fanfare around the near seamless roll-out of UPI and the dedication of the Indian government to remove corruption from society, there are fundamental issues that are still persistent in the country’s payment infrastructure. Many Indians were forced out of the economy and cash still remained an integral part of Indian society. 

In June 2023, Wailin Wong and Darian Woods from NPR spoke with senior research fellow at the Mercatus Center at George Mason University, Shruti Rajagopalan, reflecting on the abrupt decision from policymakers in India to drastically change cash payments in the country and brute force digital payments onto its citizens. India’s strategy to reshape its payment infrastructure serves a cautionary tale for other nations who aim to become cashless. 

At the surface, the transition to a cashless society and introduce new notes, looked a well-orchestrated endeavor, but according to sources who spoke with Rajagopalan, the then finance minister himself wasn’t properly informed about the upcoming announcement from Prime Minister Narendra Modi, leaving him with little time to get everything in motion to support the transition. The Indian central bank was equally uninformed.

The subsequent chaos that ensued left 105 people dead. People who were waiting in  lines to exchange their notes or at hospitals. Bank tellers themselves collapsed from exhaustion, Rajagopalan commented. Wong noted that much of the chaos could’ve been prevented with better preparation. If the Indian central bank had been informed in time, it could’ve distributed sufficient bank notes to support the exchange, instead of running into shortages across the many local banks across the country. 

The inability to pay in cash also led to a decline in labor force participation, with Rajagopalan referencing statistics from the Centre for Monitoring the Indian Economy, who found that an estimated 15 million were forced out of the job market. Households who didn’t have a bank account meanwhile, lowered their consumption between 2 to 7 percent compared to those who had a bank account. A development opposite to the ambitions set out by Indian policymakers. 

Cash still king

Cash payments still remain fairly much alive in India, despite the rapid rise of digital payments. A 2023 December special report from BBC correspondent, Soutik Biswas, showed that cash payments experienced growth instead of seeing a decline. Citing figures from the Reserve Bank of India (RBI), the amount of cash in circulation had grown by 16.6 percent in 2020-21. Higher than the average growth rate from the previous decade, which saw cash payments grow by 12.7 percent. 

As a percent of the GDP, cash experienced a similar Renaissance, with cash accounting for 14 percent of GDP over the same period and capturing a steady 13 percent over 2021-22. The findings seem counterintuitive to the rise in mobile payments, in great part supported through the UPI program. This has led to the so-called ‘currency demand’ paradox. In normal situations, digital payments substitute traditional cash payments. However the opposite has been observed in India. 

Biswas acknowledged that the UPI program has been an undeniable success, citing figures from ACI Worldwide and Global Data 2023, who found that India alone accounted for 46 percent of all global digital payments, reaching 89 million transactions. But, physical payments remain strong with India’s real estate sector becoming a safe haven for cash. Survey findings from LocalCircles found that 76 percent of respondents based in India purchased real estate through cash in the past seven years. 

Mobile payments in India take flight

Multiple factors have contributed to the sharp increase in mobile payments across India. The haphazardly put together plan to change the Rupee payment system by issuing new notes was perhaps the greatest driver that pushed digital payments to take flight. A lot can be said about its execution, which resulted in chaos at banks and ATMs across the country, with some losing their lives in a desperate attempt to pay for their next meal. 

As the dust settled, the Indian central bank introduced a universal payment scheme through UPI, a crucial element that strengthened currency democratization. With citizens having easy access to online banking through their digital IDs, setting up and handling digital payments became very easy. Add into the mix the exponentially growing smartphone penetration, which attracted a wide variety of payment providers, such as PhonePe, and the perfect conditions were created for digital payments to take a leap, reaching millions of citizens deep into rural India.

In January 2024, The Economic Times reported that Indians had completed as many cashless payments in a month than America in three months, citing figures highlighted by External Affairs Minister, S Jaishankar. He noted that the lives of every Indian citizen had greatly improved through the government’s efforts, made possible by policymakers who embraced the technology.

The next step

The mobile payments fairy tale in India hasn’t yet reached its happily after, however. Indian policymakers like to ascribe the success of the UPI program and the Rupee restructuring to their own brilliance and foresight. But, inadvertently they’ve pushed already vulnerable communities further away from properly participating in Indian society, with millions being forced out of the job market. 

A December 2022 paper by former Toulouse School of Economics (TSE) researcher, Hélia Costa, together with OECD economist Mauro Pisu and PhD graduate Vatsala Shreeti, argued that the demonetization efforts put by the Indian government has unjustly hurt citizens with limited access to banks. The researchers noted those living further away from a bank, were more exposed to the negative effects of demonetization. Policymakers in India will have to find new ways to include disenfranchised communities and ensure they can benefit from the rapidly evolving mobile payments market. 

Furthermore, cash remains king in the country. The rise of digital payments has benefited greatly from companies like Samsung, introducing low-budget smartphones specifically tailored to the Indian market. These low-end devices were able to reach the masses. Take into account the cheap cellular data plans, which turned smartphones into powerful payment machines, and we can spot why mobile payments have been allowed to grow so rapidly, whilst cash is still dominant.  

This trend was also observed by the researchers at the TSE, who found that citizens with limited access to bank branches were more likely to adopt mobile payments. These effects continued for two years. This was witnessed for both genders, with women benefiting more mobile payment solutions. Due to data limitations, not all effects could be properly mapped, but the first results alone provide great insights into the impact of rolling out digital, cashless, payments. 

As for business leaders and marketers, those operating within these economic conditions, will enjoy the benefits of high mobile and digital payment adoption. Especially those who deliver mobile applications can rapidly expand their customer base, if the solution has proper market fit.