Digital payments are on track to cross the 200 billion mark, but fintechs are yet to ‘earn’ from them

• Digital payments transactions in India are expected to cross the 200 million mark in the next three years.
• The Indian digital payments ecosystem grew at an annual rate of 49% in the past six years to 72 billion in FY2022.
• RBI's Payments Vision 2025 could have a pivotal role to play in the digital payments growth in India.

Digital payments transactions in India are expected to cross the 200 million mark in the next three years, Emkay Research’s recent report has revealed. The Reserve Bank of India’s recently released ‘Payments Vision 2025’ is not only going to boost digital payments in India but make them a strong ecosystem too, the report added.

The brokerage firm’s research shows that the digital payments transactions in India are expected to grow at a compound annual growth rate (GAGR) of 44% to reach 216 billion by fiscal year 2025.

The Indian digital payments ecosystem grew at an annual rate of 49% in the past six years. The online transactions — through UPI, credit cards, IMPS and other payment mechanisms — grew from 9.7 billion in FY2017 to 72 billion in FY2022.

This is where RBI’s payments vision documents comes into play

Emkay Research believes that the Reserve Bank of India’s (RBI) special focus on digital payments and the regulation of fintech companies — under the Payment Vision 2025 — is going to play a big role in the higher adoption of these new-age payments solutions.

The core theme of the vision document, released by the central bank of India last weekend, is based on four Es — e-payments for everyone, everywhere and everytime.

“To promote innovation, the RBI aims to explore a UPI-like system for cards, enable networks for IOT-based payments and interoperability for contactless transit card payments in the offline mode, and create payment systems for merchants. With the new initiatives, the RBI expects to increase digital payment transactions by 3x,” Emkay noted.

RBI’s decision to revisit the merchant discount rate (MDR) as well as the regulation to link credit card and credit components to UPI will have a role to play.

“Linking credit cards to UPI is another game changer as would globalization of India's Central Bank Digital Currencies (CBDCs)," Avinash Godkhindi, MD and CEO of global digital bank Zaggle, added.

Emkay Research believes that a comprehensive review of MDR — a charge paid by merchants to payments companies to accept online payments — could lead to relatively higher charges on credit card and wallet payments. This could also lead to introduction of MDR on UPI, which is currently prohibited and a long standing demand of players like Paytm, PhonePe, Google Pay and others.

UPI players too have the most to gain from it

“We believe linking credit cards to UPI is positive for spends growth, but without MDR, its acceptance in non-Rupay cards will be limited. Moreover, the reduction in MDR to improve affordability could be negative for card/wallet companies (SBIC, Paytm),” Emkay added.

Sameer Nigam, the founder of India’s biggest digital payments company in terms of UPI transactions, in September highlighted that currently 85-90% of PhonePe transactions are carried out using UPI that has "zero MDR".

For perspective, PhonePe actually processed nearly 7.6 billion transactions in the January-March quarter of 2022. A 90% rate would mean that PhonePe did not earn any money over 6.8 billion transactions.

Suhail Sameer, CEO of merchants payments platform BharatPe, noted that the Payments Vision 2025 shows the regulator’s intent and the roadmap to enhance the outreach of digital payments, instill customer centricity and ensure after and transparency in online payments.

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