The digital payment ecosystem has flourished over the last five years in India, with millions of consumers using prepaid payment instruments on a daily basis. The growth of innovative fintech firms, including PhonePe, Paytm, and Google Pay, has driven the exponential adoption of prepaid payment instruments. However, it is the Indian Government and the Reserve Bank of India that have laid down the founding stones for the growth of the digital payment ecosystem in India.
From launching the innovative Unified Payments Interface (UPI) to making crucial policy announcements, the Indian Government led by Prime Minister Narendra Modi has been central to the growth of the prepaid card industry. To avoid reliance on global corporations like Visa and Mastercard, who were also charging high affiliation charges to banking institutions, the government introduced the RuPay network, a homegrown payment system launched by the National Payments Corporation of India.
Over the years, the Indian Government has announced various policy measures to promote and drive the adoption of RuPay payment cards, including the mandate that RuPay cards will attract zero MDR. As India is a value-conscious market, zero MDR meant that offline merchants were happy to receive payments without any deductions. UPI, which also attracts zero MDR, has gained widespread popularity and acceptance among merchants because of this mandate.
As both UPI and RuPay cards operate on zero MDR, banking institutions are losing out on a potential revenue source. This has made them reluctant to issue RuPay payment cards, as banks are able to generate more revenue for themselves by issuing Mastercard and Visa payment cards. Both Mastercard and Visa do not agree to zero MDR. Consequently, to avoid losing 0.25% of the GDP to these US-based firms, the Indian Government has launched an incentive scheme for banking institutions in India.
As part of the scheme, the Indian Government will be offering a financial incentive to banks for promoting point-of-sale and e-commerce transactions using RuPay debit cards and person-to-merchant UPI transactions for FY 2022-23. PayNXT360 expects the incentive scheme to address the concerns of many banks that have been questioning the financial viability of the UPI payment system.
The incentivization of RuPay debit cards and UPI transactions is projected to create more value for all stakeholders involved. While banks will receive a financial incentive for promoting the payment method, merchants will continue to benefit from zero MDR for higher transaction volume and the Indian Government will experience faster migration from cash to digital payments. In the 2022-23 budget, the Indian Government is expected to announce further support, including financial assistance for banks, targeted toward the growth of the digital payment ecosystem.
In India, the digital payment ecosystem has been on the continuous growth momentum. According to data from the Indian Government, UPI achieved a record of 7.829 billion digital payment transactions in December 2022. With more consumers, across India, projected to enter the digital payments market over the next five years, UPI transaction value and volume are projected to record significant growth from the short to medium-term perspective.
The NPCI is expected to extend the service for NRIs in more countries around the world from the short to medium-term perspective. This will further drive UPI transaction value and volume over the next five years. Furthermore, the Indian Government is also expanding the list of countries that accept UPI payment methods. All of these policy measures, along with the incentive scheme, will keep driving the growth of the digital payments market in India from the short to medium-term perspective.
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