Payment Change in India, Cash and Debit Still in the Game

A few days after celebrating its 90th anniversary, Reserve Bank of India (RBI) Governor Shakti Kant Das announced new payment initiatives - enabling India’s Unified Payment Interface (UPI) to handle cash deposits, a proposal to permit the use of third-party UPI apps for making UPI payments from Prepaid Payment Instrument (PPI) wallets, and making India’s retail Central Bank Digital Currency (CBDC) accessible to a broader segment of users by enabling non-bank payment system operators to offer CBDC wallets.

This article briefly overviews recent developments and payment systems in India in light of these developments.

Roll out cash deposit facility via UPI

After allowing users to withdraw cash from ATMs using UPI in January 2024, the RBI has now proposed allowing a cash deposit facility at Cash Deposit Machines (CDMs) through UPI. The initiative has been taken because of the popularity and acceptance of UPI and the benefits seen from its availability for card-less cash withdrawal at ATMs. Operational instructions will be issued shortly.

Governor Shakti Kant Das said that 'this move comes from the learnings derived from using the cardless cash withdrawal system at ATMs via UPI.' He added that most users use debit cards to deposit cash at CDMs by manually entering the savings bank account number.

Unlike ATMs, which only dispense cash, CDMs or Cash Recycler Machines (CRMs) can dispense and accept cash deposits. Using CDMs helps bank officials reduce the manual workload of handling cash for users. Easy access to automated facilities reduces long bank queues.

ATM ecosystem players are now considering adopting UPI for cash deposits and collaborating with the RBI and National Payments Corporation of India (NPCI) to explore the feasibility of UPI-based deposits.

Manjunath Rao, President, Managed Services at CMS Info Systems, welcomed these changes saying: ‘the initiative once again proves the importance of coexistence of physical and digital banking platforms. Consumers will welcome this digital option to interface with their ATM transactions.’ There are close to 50,000 cash recycling ATMs in India installed across multiple banks, which increase customer convenience by being available to deposit or withdraw cash 24/7. Customers also trust this channel as they immediately receive credit into their accounts for cash deposited, a step forward from earlier versions of cash deposit machines that enabled credit on T+1 day.

The cash recycler market in India is predicted to grow quickly because these self-service terminals support a self-service banking ecosystem making them attractive to banks.

ATMs link to UPI

Last year, in September 2023, Hitachi Payment Services, one of India’s leading payments and commerce solutions providers, launched the country’s first-ever UPI-ATM as a White Label ATM (WLA) in association with NPCI, offering secure card-less cash withdrawals that eliminate the need for physical cards.

The central bank looks keen on replacing debit cards with UPI slowly but steadily. It plans to allow the linking of PPIs through third-party UPI applications, thus allowing PPI wallet holders more flexibility to make UPI payments. With this, the RBI aims to reach a larger section of non-urban towns and rural areas, where many small banks do not provide UPI facilities. Customers in these locations depend on third-party PPIs.

UPI has been the country's fastest-growing payment mode, accounting for more than 50% of digital transaction volumes.

Access to CBDCs through non-bank operators

The RBI is running an extensive retail CBDC pilot programme. In an effort to give the CBDC the best chance of success it needs to make it accessible to as many segments of society possible. It is proposing to enable non-bank payment system operators to offer CBDC wallets. This will also allow it to test the resilience of the CBDC platform to handle multi-channel transactions.

Although not part of the published announcement, this also increases the opportunity both for innovation and competition to the established banking system (often a key aim for CBDC programmes).

Shifting landscape driven by convenience

The growth of UPI is one of the main reasons debit card transactions have fallen, as people now prefer to use their phones to pay rather than swipe a debit card. In FY23, 14 billion digital payments were recorded across India. Out of this, 52% of households used the UPI platform. On the other hand, only around 38% of households use debit or credit cards when shopping online. Security concerns, shifting consumer preferences, and fintech innovations have also played pivotal roles. The convenience and ease of UPI for microtransactions have notably contributed to the declining relevance of debit cards.

However, along with increased usage, scams have also been rising. In FY23, 95,402 cases of UPI fraud were reported in India, up 13.2% from FY22.

Debit cards used for large payments and UPI for smaller ones

Recent reports suggest that while UPI usage grows exponentially, people continue using debit cards, especially for large payments. According to data by Worldline Report, the average ticket size (ATS) of debit cards grew by 24% year-on-year to ₹2,642 in the second half of 2023.

The growth in debit card ATS suggests that while debit card transaction volume fell, a significant population still used debit cards for their purchases, ensuring that transaction value did not fall in line with volumes.

Credit cards tell another story

By contrast, credit card usage is growing, possibly attributed to the lure of rewards, cashback, and discounts. Credit card issuances rose a substantial 21%, and credit card transaction value rose 11% to ₹9.30 trillion between June-Dec 2023. The number of credit card transactions also grew by 30.5% — indicating the rising popularity of online and offline buy-now-pay-later trends.

On the other hand, cash is still king despite soaring digital payments. During FY23, currency in circulation rose in value and volume in India. With the current year's data, it would be interesting to see the trend. RBI will tentatively release the Annual Report at the end of May 2024.