India’s digital payment market is expected to more than triple to $10 trillion by 2026, according to the latest study by digital payments firm PhonePe and Boston Consulting Group (BCG).

At present, the study said, 40% of all transactions in India are digital, and payments worth $3 trillion were processed by digital instruments in 2021. This does not include payments made for financial services, corporate business payments, and government payments.

India's Unified Payments Interface (UPI) continues to grow, clocking 5.95 billion transactions worth Rs 10.41 lakh crore last month.

According to the PhonePe-BCG study, UPI has supercharged India’s transition to non-cash payments, especially in person-to-person (P2P) fund transfers and low-value merchant (P2M) payments.

“UPI saw about a nine-fold transaction volume increase in the past three years, from five billion transactions in FY19 to about 46 billion in FY22, accounting for more than 60% of non-cash transaction volumes in FY22,” said the report.

The study said UPI still has headroom to grow and will account for 73% of all digital payment volumes by FY26.

In terms of acceptance, quick response (QR) codes have played a big part in expaning digital payment services in India, the report said. At present, QR-code payments are accepted by more than 30 million merchants in the country, a substantial increase from 2.5 million merchants five years ago.

As QR-code adoption grows, total P2M transaction volumes on UPI have grown from 12% in 2018 to 45% in 2021, with further growth expected, it added.

“The major contribution for the digital payments’ growth would be from merchant payments, that are expected to significantly digitise in the next five years, increasing from 20% digital penetration by value today to about 65% by 2026, a seven-fold growth from $0.3-0.4 trillion digital merchant payments today to $2.5- 2.7 trillion by 2026,” the report said.

Offline payments are expected to account for 75% of all digital payment transactions in the coming years, as more stores adopt QR codes, the report said.

On challenges, the report highlighted know-your-customer (KYC) norms, frauds and UPI outages as possible bottlenecks in the growing acceptance digital payments.

“Currently, KYC is one of the key bottlenecks discouraging merchants and customers from signing up for digital platforms and e-wallets. While digital KYC means [such as] OKYC (offline KYC), VKYC (video KYC) are enabled for many players, they still come with friction when it comes to end-to-end digital KYC. Full KYC requires either a video or a physical touch point with a biometric device,” the report added.

It also said that due to scalability issues with bank infrastructure, technical declines continue to plague the high-growth UPI ecosystem.

“On average, banks and NPCI (National Payments Corporation of India, which runs UPI) face about 1.4% of technical declines in UPI transaction volumes due to unavailability of systems and network issues given the unprecedented UPI growth. Banking platforms have limited scalability and room to improve on service quality. Banks need to solve this by evaluating options outside core banking, including cloud,” said the report.