Cash is no longer king: 65% transactions must be digital by 2026, says BCG-PhonePe report


The habit of carrying your wallet with you while making purchases may soon be replaced by carrying your phone with you, as consumers continue to pay in cash, the findings of a recent study suggest. According to a joint report by Boston Consulting Group (BCG) and PhonePe, 65 percent of all transactions, or two in three transactions, in terms of value, are expected to be digital by 2026.

India’s digital payments market is at an “inflection point” and is expected to more than triple to $10 trillion by 2026 from its current $3 trillion level, the report said. This growth would be driven by an increase in merchant payments, it added, as more and more merchants adopt QR (quick response) payments in offline sales. The report’s findings exclude B2B (business-to-business) and G2B (government-to-business) transactions.

The digital payments landscape in India has changed dramatically over the past five years due to the rapid expansion of digital infrastructure, UPI-led migration to digital, pandemic-led acceleration of shift in customer preferences, growing merchant adoption network and disruptive innovations by fintechs, the report said.

UPI to lead non-cash payments

So far, UPI has “accelerated” India’s transition to non-cash payments, particularly in personal (P2P) remittances and low value (P2M) payments, the report said. UPI is expected to drive three-quarters of total non-cash transactions in five years, according to the report’s findings. Over the past three years, transaction volume through UPI has increased nine-fold to 46 billion transactions in FY22.

However, beyond the potential of digital transactions, there is also a need to address fraud management, simplify digital onboarding and KYC, reduce pressure on banks’ technical infrastructure, enable a better economy for payment players and strengthen the country’s digital infrastructure, the report said.

‘Underpenetrated’ Tier 3-6 cities to fuel growth

Currently, the cities at Level 3 and beyond and India’s vast rural core areas are still under-penetrated, the report said, adding that there is significant growth potential in those regions.

“While Tier 1-2 cities have witnessed high adoption of digital payments, the penetration in Tier 3-6 cities shows that there is room for growth. The next wave of growth will now come from Tier 3-6 locations, as evidenced by the past two years in which Tier 3-6 cities have contributed to nearly 60-70% of new customers for PhonePe,” Karthik Raghupathy, Head of Strategy , and Investor Relations at PhonePe said.

There are currently about 30 million B2C (business-to-consumer) merchants accepting QR code payments on POS, and this number is expected to grow to about 40 million merchants, the report said.

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