India has traditionally been a market where people prefer to use cash for all kinds of transactions, be it small or big. That has also been due to the slow spread of the banking network. Today, there are just 13 bank branches for every 1 lakh population.
However, as smartphone penetration rises among the youth, digital payments are also on the rise. According to Digital Payments 2020—a report brought out by Google and BCG—the contribution of cash for transactions has been steadily declining—from 92% in 2005, to 89% in 2010 and to 78% in 2015. It is expected to fall to 41% by 2025. However, it is still higher than the 20-25% which cash accounts for consumer payments in developed markets such as the UK and the US. The fall of cash over the past five years in India has been driven by the emergence of non-cash instruments such as credit/debit cards, mobile wallets and electronic payments.
Thanks to this, the share of non-cash transactions is estimated to increase from 22% currently to 40% by 2020 and 59% by 2025. Within the non-cash pool, digital payments are expected to contribute 26% by 2020 and 37% by 2025. Cards would account for 12% of transactions in 2020 and 21% by 2025. As more digital transactions happen, the instruments can store information on the credentials of an existing payments instrument, making the payment process at the point of purchase simpler.
The push for digital has been driven by stored value instruments such as mobile wallets, prepaid cards, gift cards and store credits which can be electronically recharged using credit and debit cards. BCG estimates that around 30 billion payment transactions happen every month in India, of which more than half are person-to-merchant transactions. Interestingly, it believes that small transactions of R100 will account for half of total transactions by 2020.