AUTHORS: Ananya Arora, Shivya Narula & Unnati Bhardwaj
INTRODUCTION
Until 2016, it was common for brides in Chandni Chowk, New Delhi, to leave shops like Arora Enterprises with stunning lehengas, while shop owners like Vishal worried about the bundles of cash stored in their homes. Sleepless nights were a routine for him. Today, however, digital payments have transformed this reality, replaced cash, and brought convenience, security, and peace of mind.
“I have seen this country change,” says Agarwal, a shop veteran with 65 years of experience. “We very rarely get cash payments anymore.”
A turning point in India’s financial journey came on November 8, 2016, when the Honorable Prime Minister announced the demonetization of all INR 500 and INR 1,000 banknotes. These high-denomination notes made up a significant volume of the cash transactions circulating in the economy. A substantial effect was caused in the market due to the withdrawal of these banned notes urging citizens to use alternative payment modes. This is when digital banking forms entered. Consumers started using credit cards, mobile wallets, and began investing in digital instruments.
A dramatic surge was witnessed in the fintech industry of India in the following months. Digital payments became the everyday option for people giving a significant share of transactions to mobile wallets (Prepaid Payment Instruments or PPI’s) as shown in the chart below.
This transformation was just the beginning of an unprecedented evolution. Over the past five years, India’s digital payments landscape has experienced phenomenal growth. A report by the National Payments Corporation of India (NPCI), Boston Consulting Group (BCG), and PhonePe highlights how India’s digital payments market is now at a critical inflection point. It is projected to grow more than threefold, from the current US$3 trillion to an estimated US$10 trillion by 2026. This remarkable growth underscores a significant shift, with digital payments expected to account for 2 out of every 3 payment transactions by 2026.
So, what has fueled this incredible transformation? We consider that the boom in the evolution of the digital payments has been fueled by these 5 key factors:
- A Sturdy Digital Backbone: The stage for a cashless economy has been set by the expeditious expansion of the digital landscape including the fast speed internet penetration and the widespread smartphone adoption.
- The UPI Phenomenon: The birth of Unified Payments Interface (UPI) has become a card of spade, the biggest game-changer making instant and seamless digital transactions the new normal for millions.
- A Pandemic-Driven Shift: A big major event that accelerated the direction of fintech towards digitalized payments was the COVID-19 during which safety and convenience became top priorities for consumers.
- A Merchant-Led Transformation: Increased acceptance as well as usage of digital payments by businesses, from local kirana stores to large retailers, has made cashless transactions omni-present indicating that CASH IS NO MORE THE KING.
- Powerhouses of Tech and Finance: Disruptive innovations and pioneering solutions by tech giants and fintech startups have redefined how we interact and make with money.
The Force behind India’s Payments Revolution
Unified Payments Interface (UPI) has significantly transformed the digital payments landscape in India with unbeatable ease, security, and versatility. Its ability to integrate multiple banking services into one app makes it a pathbreaker in financial technology. A big win for UPI has been a tremendous adoption and usage of online payments in rural India. Here are a few reasons why UPI stands out:
- Enables immediate money transfers 24/7, 365 days a year through a mobile device.
- It allows users to access multiple bank accounts using a single mobile application.
- Offers Single Click 2-Factor Authentication, ensuring regulatory compliance.
- Facilitates easy payments through QR code scanning, making the transactions quick and safe.
- Supports payments for merchants via a single application or directly within apps.
- Allows users to raise complaints directly from the mobile application.
Apart from the high volume of usage in the home country, India’s digital payments revolution is also gaining international momentum, with both UPI and RuPay expanding rapidly across borders.
UPI Challenges
“We still can’t figure out whether it’s a boon or a bane” says Agarwal.
UPI has transformed digital payments in India, but to maintain its success and scalability, several issues must be resolved.
- It is essential to have strong security measures in place to safeguard user information and stop fraud since he likelihood of fraud and hacks is positively connected with UPI transactions.
- Due to the increasing number of users and transactions UPI must make sure its infrastructure can manage high payment volumes without lag or outages.
- The primary UPI system still needs a steady Internet connection, even if UPI Lite was created to make offline transactions easier.
Case Study – Swiggy & Zomato: Integrating Credit into Payments
Swiggy and Zomato, the ready to go food delivery apps, are now reshaping digital payments by integrating micro-loans into their platforms. Swiggy’s Financial Push: According to the swiggy press release reports, over ₹102 crore in loans have been disbursed to delivery partners, enabling them to cover daily expenses. Zomato’s Merchant Credit Model: Zomato has started providing short term credit to restaurants, helping them accept more digital payments by seamlessly managing their working capital as well. By partnering up with NBFCs zomato has started embedding financial services into its platform in turn strengthening and developing India’s digital payments ecosystem.
GreenTech Finance in Digital Transactions
Fintech companies are also using green financing solutions in payments as sustainability becomes a global issue. Eco-friendly incentive schemes, sustainable investing platforms, and payment methods related to carbon credits are all receiving a lot of attention.
The Function of Blockchain in Next-Generation Payments –
Blockchain technology is being utilized for safe and open payment processing in addition to cryptocurrency. Smart contracts, blockchain-based remittances, and decentralized payment networks are all lowering transaction costs and increasing efficiency. Blockchain technology allows one to:
Why Payment processing times may be shortened from days to a few hours using blockchain payment systems.
- Cut down on middlemen in the payment process since blockchain guarantees high levels of transparency and payment legitimacy.
- Because all transaction data on the blockchain is unchangeable, make sure that payments and information are secure.
India’s fintech sector has undergone significant changes due to technological innovations, including enhanced compliance, increased financial inclusion, fraud prevention, and the promotion of sustainable finance. Moreover, emerging trends such as RegTech, embedded finance, AI-driven fraud detection, and green fintech have shaped the overall landscape, enhancing efficiency and security.
The revolutionizing compliance, Regulatory Technology (RegTech) , automates regulatory processes with the help of AI (artificial intelligence) called Regulatory Technology (RegTech). The traditional framework was slower, manual, and resource-intensive, leading to higher costs and inefficiencies. These problems are solved by RegTech by:
- Automated KYC & AML Compliance: AI-powered systems verify customer identities and detect fraudulent transactions in real time, improving onboarding efficiency.
- Regulatory Reporting & Risk Management: Machine learning models analyze transaction patterns, identify risks, and predict regulatory breaches before they occur.
- Enhanced Data Security & Privacy: AI ensures compliance with India’s evolving data protection laws by automating encryption and risk assessment.
The regtech market size has grown rapidly in recent years. It will grow from $16.18 billion in 2024 to $18.92 billion in 2025 at a compound annual growth rate (CAGR) of 17%, driven by regulatory sandboxes and increasing fintech adoption. Though there will be a lot of hurdles such as legacy system integration, data biases, and lack of standardization which will hinder mass adoption. The following graph illustrates the projected growth of the RegTech market in India, emphasizing its rapid expansion and adoption across financial institutions.
A crucial revolution in India’s digital transactions culture, driven by embedded finance solutions, is reshaping micropayments. Financial services have been integrated directly into non-financial platforms, enabling seamless payments, lending, and insurance through everyday apps in embedded finance.
- Growth of UPI & Digital Wallets: Unified Payments Interface (UPI) transactions in India crossed 12 billion per month in 2023, reflecting the increasing shift toward instant micropayments.
- Buy Now, Pay Later (BNPL) Services: AI-driven BNPL models have expanded financial access by allowing consumers to make purchases with deferred payments.
- API-Driven Banking: Open banking initiatives have enabled third-party platforms to offer financial services, eliminating friction in transactions.
India saw a 46% rise in digital fraud cases in 2023, underscoring the need for AI-driven security frameworks. Despite advancements, challenges such as false positives in AI models and increasing sophistication of cybercriminals demand ongoing innovation. The increase in digital transactions is accompanied by rising cyber threats and fraud risks. Hence AI- powered fraud detection systems are essential for preventing financial crimes in real time.
- Machine Learning for Anomaly Detection: AI continuously learns from transactional data to identify suspicious behavior patterns, preventing unauthorized access and fraud.
- Biometric Authentication & Behavioral Analytics: Facial recognition, fingerprint scanning, and user behaviour tracking enhance security in digital banking.
- Blockchain & Tokenization: Decentralized ledger technology (DLT) secures transactions, making fraud detection more transparent and efficient.
The need for AI-driven security frameworks is underscored by a 46% rise in digital fraud cases in India in 2023. Despite advancements, challenges such as false positives in AI models and the increasing sophistication of cybercriminals necessitate ongoing innovation.
Technological innovations in India’s fintech sector are fostering regulatory compliance, enhancing financial accessibility, mitigating fraud risks, and promoting sustainability. AI-driven RegTech is streamlining compliance, embedded finance is driving micropayments, machine learning is preventing fraud, and green fintech is enabling sustainable investments.
Cybersecurity Challenges in India’s Digital Payment Ecosystem
A report by the Reserve Bank of India (RBI) indicated the number of digital fraud cases has increased significantly showcasing reported financial losses amounting to ₹276 crore in 2022-23. A study by Gateway House identifies key vulnerabilities, channels of attack, and perpetrators involved (see Table 1).
Table 1: Vulnerabilities, Channels, and Perpetrators in Digital Payments
|
Mode |
Vulnerability |
Attack Channel |
Perpetrators |
| Customer’s Bank | Lack of patch updates, insider threats | Malware injection, phishing | Hackers, rogue employees |
| Payment Gateway | Insufficient encryption | Man-in-the-middle attack | Organized crime groups |
| Mobile Wallets | Lack of two-factor authentication | SIM swap fraud, fake apps | Individual hackers |
| Point-of-Sale (PoS) | Skimming devices | Card cloning, keyloggers | Cybercriminal syndicates |
Social Engineering Scams
One of the most significant cyber risks in India’s digital payments is social engineering. In this, attackers pose as banks or government officials and manipulate individuals into revealing sensitive data. One of the most infamous case is the Union Bank of India Phishing Attack (2016). A hacker gained access to the bank’s foreign exchange systems through a phishing email, leading to an attempted fraudulent transaction worth $171 million. Swift intervention and global cooperation prevented the loss.
Table 2: Common Social Engineering Attack Methods
|
Attack Type |
Methodology |
Impact |
| Phishing | Fake emails trick users into revealing credentials | Unauthorized transactions |
| Vishing | Fraudulent phone calls impersonating officials | Loss of financial data |
| SIM Swap Fraud | Criminals duplicate SIM cards for OTP access | Identity theft, account breaches |
| Fake Payment Apps | Fraudulent apps mimicking real payment apps | Data leaks, unauthorized withdrawals |
Systemic Risks and Digital Payment Failures
One of the most notorious cases was the Hitachi Payment Services Breach (2016), where malware injected into the company’s network led to the compromise of over 3.2 million debit cards. This breach resulted in financial losses exceeding ₹1.3 crore.
Table 3: Major Cybersecurity Incidents in Indian Digital Payments
|
Year |
Incident |
Impact |
| 2016 | Union Bank of India Phishing Attack | $171 million attempted fraud |
| 2016 | Hitachi Payment Services Breach | 3.2 million cards compromised |
| 2018 | Cosmos Bank Cyber Heist | ₹94 crore siphoned via SWIFT |
Solutions and Regulatory Measures
To mitigate risks in digital payments there have been implementations of several cybersecurity measures. The RBI’s cybersecurity framework mandates Security Operations Centers (SOCs) and periodic audits for banks. The IT Act, 2000, along with the Digital Personal Data Protection Act (DPDP), strengthens legal protection against cyber fraud.
Table 4: Regulatory Measures and Their Impact
|
Regulation |
Description |
Impact |
| RBI Cybersecurity Framework | Mandates security audits for banks | Improved compliance, early threat detection |
| IT Act, 2000 | Legal framework for cybersecurity offenses | Criminalization of cyber fraud |
| DPDP Act, 2023 | Strengthens data privacy and security | Protection against unauthorized access |
| CERT-IN Guidelines | Rapid incident reporting and response mandates | Faster containment of cyber incidents |
Key recommendations to enhance cybersecurity include:
- Strengthening two-factor authentication (2FA) across all digital payment channels.
- Enhancing public awareness about phishing and social engineering scams.
- Implementing AI-driven fraud detection mechanisms.
- Enforcing stricter compliance measures for digital wallets and payment gateways.
India’s digital payment ecosystem is evolving rapidly, but cybersecurity threats pose significant risks. Systemic vulnerabilities, social engineering scams, and payment infrastructure weaknesses necessitate robust security frameworks.
The Rise of Embedded Finance: Making Transactions Invisible Yet Impactful
The Indian Economy in recent years has experienced a rapid boom in the digital payments landscape. The economy which has been dominantly characterised as one who focuses on deposits as a medium of savings is projected to experience growth in the share of equity and mutual funds in savings and which is expected to account for 25% of it by 2025. This transformation and growth is propelled by ease of transaction facilitated by automated UPI, attractive Buy-Now-Pay-later (BNPL) options, next generation assessment of credit worthiness through transaction history and well equipment of FinTech’s to meet the unmet demand. UPI has made digital payments a seamless process. The “JAM trinity” as termed in the BCG report, holds the trio of Jan Dhan Yojana, Adhaar Card and Mobile phones for the growing awareness and acceptance of digital payments. This acceptance of digital payments coupled by the ease of transactions has made Systematic Investment Plans (SIPs) through UPI an attractive proposition.
The total number of investment warrants carried out through UPI reached 32 million transactions by March 2022. The availability of the option to tailor-make investment plans and reduced risk of late payment due to automation make for a compelling case for users to increase adoption. Another thrust in this sector has been UPI IPO mandates. The estimates of IPO transaction value through UPI indicate that it reached a peak of about ₹6,000 crore in October of 2024. Recent reports indicate a rising trend of default in credit card bills and slowdown in their issuance. The percentage of credit cards in the market marked by late payment rose to 2.3% in 2024. The issuance percentage also experienced a slowdown with a growth drop from 18.7% in 2023 to 13.5% in 2024. This makes online Buy-Now-Pay-later (BNPL) a compelling bet for GenZ and Millenniums especially with the emergence of online spending. Many companies such as OLA are introducing inbuild post-paid options on their app to create a captive market. Despite offline BNPL in the form of EMIs stills accounts for most of the share, according to reports the share of online BNPL is expected to grow to 40% of the market share by FY26. This adoption would also be facilitated and promoted by merchants from different industrial categories as availability of short-term credit for them amounts to higher average order value and increased consumerism.
The availability of funds and lending options play a very crucial role in assisting a nation in actualising their ambitious goal for economic growth and prosperity. Despite this, MSMEs that contribute a significant share in the GDP, received only 12-14% of formal credit and a significant proportion of their lending demand goes unmet. With the rise in the number of P2M transaction, the weight given to transaction history has increased from ~10% to ~50% due to its insights into purchase and cash flows. This method will facilitate a granular analytics-based assessment of the credit worthiness of the person, inculcating an seamless assessment process through reduced documentation requirement. 
Regardless of the immense growth potential of embedded finance sector in India, it calls for effective digital infrastructure and organisational capabilities for successful embedded financial services offering. Technological requirements include effective API integration to facilitate sharing of sensitive data and communication between various systems. Security and regulatory compliance are also of at most importance, implementation of measure such as encryption, security audits at regular intervals and two-factor authentication should be put into effect. In order to provide a frictionless user experience, omnichannel experience should be taken into focus to access facilities among various devices. The platforms should also be equipped with data analytics and processing techniques to provide personalised financial offerings and useful data packed insights. Along algorithms for detection of risk management and customer support is also of importance.
Conclusion
The boom of digital payments in India has been truly remarkable, advancements in technology, regulatory measures introduced by the RBI and better cybersecurity guidelines had thrusted the sector forwards and has led to greater penetration into various sectors. This sector is transforming through AI-driven Regulatory Technology, embedded finance, and green fintech, enhancing compliance, financial inclusion, and security. However, rising cyber threats, social engineering scams, and systemic risks demand robust AI-powered fraud detection and regulatory measures. Regulatory frameworks like RBI’s cybersecurity guidelines and the Digital Personal Data Protection Act are strengthening protections, but challenges like digital literacy gaps and regulatory uncertainty remain. With future growth hinging on balanced regulations, AI innovation, and enhanced financial awareness, the next phase of this sector offers an immense growth potential and a ready market in the form of tier 2 and tier 3 cities that to an extent are unpenetrated.
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