Explained: How digital payments are fuelling India's economic growth

Govt plans to introduce biometric authentication for UPI payments, but what exactly is a digital payment system and why is it important for the Indian economy?

In today’s India, if one does not carry cash, they will do fine because digital payment systems have seeped into the nerves of the Indian economy. One can pay digitally even in remote areas of the country by simply opening an app on their phone and entering a PIN.

 

Soon, there will not even be a need to enter a PIN — biometric authentication will enable payments. According to media reports, the government is planning to introduce a biometric authentication interface for making payments through the Unified Payments Interface (UPI) using data stored by the unique identification system, Aadhaar. The method is likely to be revealed at the Global Fintech Festival 2025 in Mumbai. The addition of this feature will further boost the ongoing digital payments revolution.

 

In August, UPI transactions crossed the 20-billion mark for the first time. The digital payments system is slowly becoming the backbone of the country’s financial infrastructure. But have you ever wondered what a digital payments system is, how it works, and why it is important for the Indian economy? Let’s explore.

 

What is a digital payments system?

 

The transaction of money through technologies such as debit cards and smartphones, without involving physical currency, constitutes digital payments. Digital payments are fast, secure, and make transactions more transparent.

 

The digital payments system makes it easier for businesses and customers to track transactions.

 

For example, if a customer uses their credit card to make a payment at a restaurant or a person uses UPI to send money to their family or friends, it qualifies as a digital payment. 

 

How many types of digital payments are there in India?

  The digital payment infrastructure has been evolving rapidly in India, especially since internet access has become widespread. There are various methods of digital payment; some of the prevalent ones in India are:

 

• UPI (Unified Payments Interface): UPI is a real-time payment system developed by an RBI-regulated entity, the National Payments Corporation of India (NPCI). It is built over the IMPS infrastructure and allows people to transfer money promptly between any two bank accounts.

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Credit card/debit card: These are unique cards provided by banks to enable payments without visiting a branch. A debit card uses funds deposited in the payer’s bank account, while a credit card uses the credit limit granted by the bank.  These cards can be used for various purposes such as paying for groceries or food through a mobile application. Some popular card issuers include Visa, Mastercard, and Amex.

 

Internet banking: One of the earliest digital payment methods, it is facilitated through a bank’s website and allows users to make payments and manage other banking activities digitally. The bank provides a unique ID for customers to access their accounts.