Mumbai, Jun 2: Non-cash payments using modes like UPI will account for 65 per cent of all the transactions by 2026 against the 40 per cent level estimated at present, a report said on Thursday. The report — which comes amid a rapid rise in unified payments interface (UPI) since the onset of the COVID-19 pandemic over two years ago — also said that the digital payments industry will be USD 10 trillion opportunities by 2026 against USD 3 trillion at present.
Consultancy firm BCG and leading third-party UPI services provider Phonepe have come out with the report, which also projects that UPI adoption will surge to 75 per cent of the population in the next five years from the 35 per cent level at the end of FY21.
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The consultancy's managing director Prateek Roongta said merchant payments will drive the growth in adoption of non-cash or digital transactions to 65 per cent from the present 40 per cent levels. The report estimated a seven-fold growth in merchant payments to USD 2.5-2.7 trillion by 2026 against the present USD 0.3-0.4 trillion, which will drive the overall non-cash volumes growth.
"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," Roongta said. The next wave of growth is likely to come from Tier 3-6 locations, as evidenced in the past two years wherein Tier 3-6 cities have contributed to nearly 60-70 per cent of new mobile payment customers, the report said.
The report also advocated for a "sustainable merchant discount rate" to incentivise the players in the ecosystem and ensure that they are encouraged to drive merchant acquisition and push digital payments. "Introducing an MDR of 0.2-0.3 per cent of the transaction value for small tickets can allow banks, payment players and the overall ecosystem to run sustainable businesses," according to the report.
It said the exponential rise in digital transactions is increasing pressure on bank systems, and the inability of some banks to handle demand spikes is a key reason for UPI transaction failures. As a solution, it is recommended banks to evaluate options outside core banking, including the cloud, as banking platforms have limited scalability and room to improve on service quality.
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The report identified thin margins as a key challenge for players in the ecosystem, which leads them to transition to high-margin offerings like lending and investment facilitation. This will lead to the emergence of super app ecosystems, where players have built a large captive customer base with access to rich customer data and purchasing behaviour patterns.
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