Evolution Of Payment Methods in India

Abstract

India is often described as the country that leapt from cash to digital in a single decade. That story is true, but only if you count transactions. This paper argues something more precise and more uncomfortable: India's cash-to-digital shift is real and world-leading by volume, yet structurally incomplete, because cash still carries a large share of transaction value and the digital system that replaced it runs on a zero-revenue model that the state has to keep subsidising. In 2024, the Unified Payments Interface (UPI) accounted for about 83% of the number of digital payments in India (RBI, 2024). In the same years, the currency in people's hands more than doubled after demonetisation (RBI data, 2016 to 2025). Both facts are true at once. Resolving that paradox is the key to seeing what is genuinely unfinished, and to proposing fixes that go beyond adding features. The paper closes with two concrete recommendations: a tiered Merchant Discount Rate that makes digital acceptance financially self-sustaining, and a redesigned rural digital-literacy programme keyed to account activation rather than certificates.

Introduction

Over roughly two decades, India moved from paper-based transactions to electronic transfers and then to real-time digital payments. Smartphones, cheap mobile data, a national biometric ID (Aadhaar), and a public payments rail (UPI) compressed into ten years a transition that took richer countries much longer. The convenience is real: a vegetable vendor and a multinational can now be paid the same way, in seconds, for free.

But "how many payments are digital?" and "how much money moves as cash?" are different questions, and India answers them very differently. Holding both answers at once is the argument of this paper. Before making it, a short note on where payments in India came from.

A brief history (kept deliberately short)

India has one of the world's longest documented payment histories, punch-marked silver coins from the mid-first millennium BCE, Indo-Greek and Kushan dynastic coinage, and Roman coin hoards that mark early maritime trade. It is a fascinating record, but for a policy argument it establishes only one thing: the physical token of value in India has changed many times, cowrie, coin, note, and each change was driven by trust and convenience, not by technology for its own sake. The current shift, from paper note to database entry, is the newest instance of that same pattern, and it should be judged by the same test: does it actually serve the people meant to use it? The rest of this paper takes up that test.

The paradox: digital wins the count, cash still carries the value

The single most-repeated claim about Indian payments is that UPI has "taken over." By one measure, it has. According to the Reserve Bank of India, UPI's share of digital payments rose from 34% in 2019 to about 83% in 2024, and to roughly 84% of all retail payment volume in FY 2024-25 (RBI, 2024; RBI Annual Report, 2025). In absolute terms UPI processed about 131 billion transactions worth ₹199.89 trillion in FY 2023-24, up 56% in volume and 43% in value year-on-year (NPCI, 2024), and about 185.9 billion transactions worth ₹260.6 lakh crore in FY 2024-25 (RBI, 2025). No other country runs a real-time retail system at this scale.

Now the other measure. If digital had truly replaced cash, the cash in circulation should have shrunk. It did the opposite. Currency in circulation rose from ₹17.97 lakh crore just before demonetisation (November 2016) to ₹37.29 lakh crore by October 2025, more than doubling, even as the currency-to-GDP ratio eased only modestly, from about 12.1% to about 11% (RBI data, 2016 to 2025). India is holding more cash than ever, not less.

These two facts are not contradictory once you separate volume from value. UPI dominates the count of transactions because it is used for tiny, everyday payments. The average UPI transaction had fallen to about ₹1,396 by the second half of 2024, and for person-to-merchant payments the average was roughly ₹643, with about 85% of them ₹500 or under (Worldline, 2024). Cash, meanwhile, still does a disproportionate amount of the heavy lifting by value, rent, wages in the informal economy, high-value and unrecorded purchases, which is why the note printing keeps rising.

So the honest statement is not "cash is finished" and not "cash is still dominant." It is: India has digitised the number of its payments far faster than it has digitised the value of its payments. That gap is the structural incompleteness this paper is about. It has two roots, one economic, one human.

Structural gap 1, the economics: a free system nobody pays for

India made its flagship rails free to use. Since January 2020 there has been zero Merchant Discount Rate (MDR) on UPI and RuPay debit-card payments, merchants pay nothing to accept them (Forbes India, 2025). That decision is the main reason acceptance exploded: a street vendor can display a QR code at no cost. It is also the reason the system is financially fragile.

Someone still bears the cost of running the rails, the banks and payment-service providers that maintain uptime, settlement, and fraud controls. With MDR set to zero, that revenue line is simply missing. The government fills part of the hole with an annual incentive, but the hole is bigger than the patch and the patch is shrinking. The FY 2024-25 incentive scheme was ₹1,500 crore, paying acquiring banks just 0.15% on low-value merchant UPI transactions up to ₹2,000 (PIB, 2025), and even that support is being cut, from about ₹2,484.97 crore in FY 2023-24 toward a projected ₹437 crore in FY 2025-26, an ~82% reduction in two years (Entrepreneur India, 2025). A payments network that carries 84% of the country's retail volume cannot rest indefinitely on a subsidy that is being withdrawn.

The visible symptom is what happened to debit cards. As free UPI substituted for them, debit-card transaction volume fell about 33% in FY 2023-24 (PwC, 2024). The rails didn't fail; the business model behind them quietly eroded. This is the first thing "incomplete" means: the transition is not yet paying for itself.

Structural gap 2, the people: accounts opened, not used

The second gap is human. India solved account access with remarkable speed, bank-account ownership among adults rose from 35% in 2011 to about 80% by 2017, driven by the Jan Dhan financial-inclusion drive (World Bank Findex, 2021). But an account is not the same as usage. In the same 2021 survey, ownership had stalled at 78%, and, more revealingly, about 35% of Indian account holders had an account that was inactive, seven times the 5% average across developing economies (World Bank Findex, 2021).

Read alongside the volume/value paradox, this is the real frontier. The people still transacting mainly in cash are disproportionately the rural, older, and lower-literacy users for whom an account exists on paper but not in daily life. Their reluctance is not irrational: switching from a tangible note to an abstract balance is a genuine change in how you track and control money, and trust and fear of fraud are legitimate barriers. Policy has recognised this, India ran a large rural digital-literacy programme, PMGDISHA, which trained 6.39 crore people and certified 4.78 crore with a 20-hour course covering digital payments (PIB, 2024). But its design, one person per household, certified by passing a test, optimised for coverage, not for turning a dormant account into a used one. Training a member of a household is not the same as getting that household to transact.

This is the second thing "incomplete" means: the last cohort has been reached but not activated.

The current trajectory (where the system is already heading)

The market is innovating hard, mostly on the volume side:

• Credit on UPI. Linking credit cards and credit lines to UPI has become a fast-growing use case, letting UPI carry borrowing, not just spending, and giving banks a way to earn on rails that otherwise generate no fee. Credit cards in force crossed ~101 million by FY 2024-25 and are projected to reach ~200 million by FY 2028-29 (a 15% CAGR) (PwC, 2024).
• Biometric authentication. NPCI has been exploring face- and fingerprint-based verification (via Aadhaar) to replace PINs, aiming to cut phishing and social-engineering fraud. The security gain is real, but centralising biometric data concentrates privacy risk, so strong data-protection safeguards are a precondition, not an afterthought.
• Net-banking interoperability. The RBI's move to make internet-banking payments interoperable would let merchants settle without each bank integrating separately with every payment aggregator, faster settlement, lower cost, less settlement risk.
• Merchant acquisition, ONDC and white-label gateways continue to pull small businesses onto formal digital rails.

Each of these deepens digital volume. None of them, on its own, closes either structural gap, the missing revenue model or the un-activated user. That is what the recommendations address.

Recommendations

1. A tiered Merchant Discount Rate, free for small merchants, capped and priced for large ones. Keep the political and financial-inclusion win, zero MDR for small merchants, but stop treating "free for everyone" as permanent. Introduce a small, capped MDR (industry proposals suggest around 0.3%) on UPI and RuPay-debit payments only for large merchants above a defined annual-turnover threshold (Forbes India, 2025). Because roughly 90% of India's ~6 crore digital-accepting merchants are small, the vast majority would still pay nothing, while large, well-capitalised merchants, who can absorb a fraction of a percent, would fund the rails they rely on. Crucially, ring-fence that MDR revenue into a dedicated pool for payment-infrastructure resilience and rural acceptance, so it replaces the shrinking, unpredictable ₹1,500-crore-and-falling subsidy (PIB, 2025; Entrepreneur India, 2025) with a self-sustaining cross-subsidy. This is a specific, tested lever: a turnover threshold, a capped rate, and an earmarked fund, not "make the system sustainable" in the abstract.

2. Re-engineer PMGDISHA around activation, not certificates. Redesign the existing rural digital-literacy machinery, the Common Service Centre network already reaches every district, so it targets the measured failure point: the 35% of accounts that sit inactive (World Bank Findex, 2021). Three concrete changes: (a) shift from one-person-per-household to per-adult enrolment, since the cash-reliant member is often not the one trained; (b) certify a learner only after a completed live transaction, a real UPI payment made and received, rather than a written test, so success is measured in usage, not attendance; and (c) fund it from the ring-fenced MDR pool in Recommendation 1, tying the money large merchants contribute to bringing their future customers onto the rails. This turns a coverage programme into an activation programme, which is exactly what the volume/value gap requires.

Together the two recommendations attack both roots at once: Recommendation 1 makes digital acceptance pay for itself, and Recommendation 2 spends part of that revenue turning dormant accounts into daily ones.

Conclusion

The evolution of payments in India, cowrie to coin to note to database entry, has always been a search for trust and convenience. UPI is the most dramatic chapter yet, and by the measure most often quoted, transaction volume, India leads the world. But a payment system is not finished when most payments are digital; it is finished when most value moves digitally, the rails that carry it are financially self-sustaining, and the last user actually uses her account. India has achieved the first of those and not yet the other two. That is not a failure, it is an unfinished success, and naming what is unfinished is the point. Fixing the economics of acceptance and the human capital of usage, rather than only adding features, is what will finally close the gap between the country that leads in transaction counts and the country where cash still quietly carries the value. This journey is far from over; the next chapter should be measured not in billions of transactions, but in dormant accounts brought to life.

Sources

1. RBI: UPI's share of India's digital payments rose from 34% (2019) to 83% (2024).
2. RBI Annual Report 2024-25: UPI = 84% of retail payment volume; UPI FY25 = 185.9 bn transactions, ₹260.6 lakh crore.
3. NPCI: UPI FY24 = ~131 bn transactions, ₹199.89 trillion value; +56% volume, +43% value YoY.
4. RBI data: currency in circulation ₹17.97 lakh crore (Nov 2016) → ₹37.29 lakh crore (Oct 2025); currency-to-GDP ~12.1% (2016) → ~11% (2025).
5. Worldline H2 2024: average UPI ticket ₹1,396 (−7.8% YoY); P2M average ~₹643; ~85% of P2M transactions ≤ ₹500.
6. World Bank Global Findex 2021: account ownership 78%; account ownership had risen 35%→80% (2011 to 2017) via PMJDY.
7. World Bank Findex 2021: 35% of Indian account holders had an inactive account, seven times the 5% developing-economy average.
8. Zero MDR on UPI and RuPay debit since Jan 2020; industry proposal for ~0.3% MDR on UPI for large merchants only; ~6 crore merchants accept digital, ~90% "small".
9. PIB / Cabinet: ₹1,500 crore incentive scheme (FY 2024-25) for low-value P2M BHIM-UPI; 0.15% incentive on transactions ≤ ₹2,000; zero MDR retained.
10. Digital-payment incentive outlay fell from ₹2,484.97 crore (FY23-24) toward ₹437 crore (projected FY25-26), an ~82% cut in two years.
11. PIB: PMGDISHA (approved 2017) targeted 6 crore rural households (one person each); 7.35 crore enrolled, 6.39 crore trained, 4.78 crore certified; 20-hour course including digital payments, delivered through Common Service Centres.
12. PwC, Indian Payments Handbook 2023-24: credit cards in force crossed ~101 million (FY24-25), projected to ~200 million by FY28-29 (15% CAGR); debit-card transaction volume down ~33% in FY23-24 as UPI substituted.