The value of digital payments in India will triple from $300 billion in FY21 to $0.9-1 trillion in FY26, driven by increased adoption and rapid growth in Unified Payments Interface (UPI) transactions, according to foreign brokerage CLSA.

Retail trade digital payments contributed 10.7% to India’s GDP in FY21, and according to CLSA, this will rise to 20.3% in the next five years.

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“With rising UPI use, digital payments have risen from $61 billion in FY16 (6% of consumption GDP) to $300 billion (18% of consumption) in FY21. UPI currently contributes 60% to the total payments by volume,” said the report.

Since the Covid outbreak, UPI payments have grown rapidly, owing to a surge in online transactions and a preference for digital payments over cash.

It took four years for the value of monthly UPI transactions to exceed Rs 3 lakh crore in September 2020, from its launch in 2016. It had more than risen to Rs 7 lakh crore a year later.

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UPI transactions nearly equaled debit and credit card transactions in terms of the overall value of payments made to retailers. According to CLSA forecasts based on transactions in the first half of FY22, UPI transactions at $187 billion are on track to outnumber debit card transactions at $83 billion and credit card transactions at $102 billion.

While UPI continues to be the driving force behind digital payments in India, it provides no income for ecosystem participants such as banks and fintech companies like PhonePe, Google Pay, and Paytm Payments Bank. This is due to the government’s Zero Merchant Discount Rate (MDR) policy, which states that merchants should not be charged for taking payments from customers using UPI (and RuPay debit cards).

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CLSA said on the lack of a viable business model in the payments market, “Payment platforms have built a huge scale on the issuing and acquiring side; what’s key for them is the ability to diversify and monetize their customer and merchant base.”

In FY22, UPI is expected to account for around 47% of all consumer payments, with mobile wallets accounting for only 6%.

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CLSA anticipates that in FY26, about 44% of payments will be through payment gateways and aggregators, 34% using QR codes, and 22% through the point of sale (PoS) devices.

Payment gateways and aggregators are predicted to develop rapidly, with the total payment value (TPV) increasing thrice over the next five years, from $170 billion to $550 billion.