The Rise Of Digital Wallets And How They Affect Credit Card Usage? All You Need To Know

The Reserve Bank of India (RBI) has stated that UPI payments accounted for nearly 80% of all digital payments in 2023

In India, clients can transfer funds from bank accounts instantly via a system known as UPI. ( Image Source :Getty )

By Lucie Fonseca

The convenience and accessible character of digital wallets have considerably added to their popularity among consumers in India. QR code acceptance and the removal of fees have enabled rapid adoption, even among small merchants. According to a press release from the Ministry of Finance, the number of UPI transactions has risen from 92 crore in FY2017-18 to 8,375 crore in FY2022-23, demonstrating a compound annual growth rate (CAGR) of 147%. Likewise, the worth of these transactions has ascended from Rs 1 lakh crore in FY2017-18 to Rs 139 lakh crore in FY 2022-23, exhibiting a CAGR of 168%.

The Reserve Bank of India (RBI) has stated that UPI payments accounted for nearly 80% of all digital payments in 2023. This data highlights the important role that UPI-enabled digital wallets play in the new economy.

What is a Digital Wallet?

Living in India, you would be familiar with digital wallets such as Google Pay, PhonePe, and Paytm. These innovative applications have transformed the way payments are processed , giving users a convenient and efficient means of transferring money to each other.

A digital wallet functions as a platform that simplifies financial transactions, with its main functions revolving around Person-to-Person (P2P) and Person-to-Merchant (P2M) payments. Other use cases may include disbursement of government aid, Business-to-Business transactions, loan processing and repayment.

While mobile wallets are mainly connected to smartphones, digital wallet applications can be used on a variety of connected devices, consisting of computers, tablets, fitness trackers, and even feature phones. This flexibility contribute to the extensive adoption of digital wallets in today's digital age.

The Growth of Digital Wallets

In recent years, digital wallets underwent exponential growth. Forecasts report that by 2026, the global consumer base will surpass 5.2 billion individuals. This surge can be credited to numerous key factors, such as the widespread use of smartphones, the thriving e-commerce industry, and the rising demand for contactless payment solutions - a trend that has been further fast-tracked by the COVID-19 pandemic. Customers are gradually choosing touchless shopping experiences, with the rise of super apps further driving the shift towards digital payment methods.

How Digital Wallets Work Globally?

In India, digital wallets operate distinctively in contrast to other countries. Instead of connecting a debit or credit card with the wallet, clients can transfer funds between bank accounts instantly via a system known as UPI. The ease of use and absence of transaction fees have made this approach hugely popular amongst consumers and merchants.

On the other hand, in Europe and the United States, conventional digital wallet consumers typically link a debit or credit card to platforms such as Apple Pay or Google Pay. These wallets facilitate e-commerce transactions and contactless payments at point-of-sale terminals. In both scenarios, the wallet initiates a traditional card payment transaction.

The Impact on Debit and Credit Cards

The consumption of debit cards in India has been on the decline due to the growing popularity of digital wallets. According to the PWC Indian Payment Handbook 2023-2038, debit card transactions witnessed a reduction of 13% in transaction volume and 1% in transaction value year-on-year in FY2022-23.

In contrast, credit cards have seen significant growth, with a 30% increase in transaction volume and a 47% increase in transaction value year-on-year in FY2022-23. In spite of this growth, credit cards remain a premium product in India, with a comparatively low penetration rate of 5.5%.

As India's economy continues to prosper, the number of credit card users is expected to rise due to the unique benefits they offer. Credit cards are not only a status symbol but also provide aspirational consumers with convenient access to credit for various expenses such as vacations, travel, entertainment, and household appliances. Additionally, credit cards entice consumers with cashback offers, loyalty programs, and rewards, making them an attractive choice for many.

Advantages and Disadvantages of Using Credit Cards through UPI

The recent integration of credit cards with UPI is poised to bolster the growth of credit card usage by expanding its acceptance network. By linking their credit card to their UPI digital wallet, cardholders can initiate payments through QR codes without the need for a physical card POS. This will also enhance security by allowing users to keep their physical cards securely stored in their wallet as they make the payment using their phone, mitigating the risk of card data theft and fraud.

However, there are certain limitations to using credit cards through UPI. Currently, this functionality is only available for Rupay credit cards and is not applicable for P2P transactions or transactions with small-scale merchants. Despite these restrictions, the potential for this integration to extend to other commercial networks holds promise for credit card issuers and consumers alike.

To sum up, as digital payments continue to gain traction and the government pushes for a cashless economy, the seamless integration of credit cards with UPI stands to offer consumers greater convenience, efficiency and security. This development signifies a step towards a more streamlined and secure payment ecosystem, ultimately benefiting all parties involved.

The author is the global head, R&D, Giesecke+Devrient. 

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