Digital payments

Also called: Digital transactions, cashless transactions, electronic payment methods · Topic: Payment Systems and Digital Finance · NCERT: Class 7, Ch 8 "Banks and the Magic of Finance"; Class 10, Ch 3 "Money and Credit"

Meaning

Digital payments are payments where money moves electronically from one account to another through a payment system, instead of by cash or paper instruments such as cheques. Examples are internet or mobile banking transfers, debit or credit cards at POS (point-of-sale) machines, wallets and UPI QR codes.

They matter because they are the "pipes" of India's financial infrastructure. The government promoted them "to reduce the requirement of cash for transactions and also control corruption" (Class 10). They also help bring poor and rural people into the formal banking system.

Formula (to measure their spread, using the RBI Digital Payments Index): Growth since base (%) = (Current index ÷ Base index − 1) × 100

Explanation

How a digital payment works

• Every digital payment runs on a payment system. A payment system is a way to clear and settle payments between a payer (the person who pays) and a beneficiary (the person who receives).
• Clearing means exchanging and checking payment instructions to find out who owes whom, and how much.

• Settlement means the final transfer of funds between accounts. After settlement, the payment cannot be reversed.

• Settlement finality: under the PSS Act, a settlement becomes final and irrevocable (it cannot be taken back) as soon as the amount payable is determined. This is true for both gross and net settlement [2].

• Why it matters:

  • A bank fails in the middle of the day.
  • Payments that are already settled cannot be undone.
  • So one bank's failure does not spread to other banks.

• Final settlement happens in the banks' accounts with the RBI. The RBI "maintains accounts of other banks and facilitates exchange of funds between them" (Class 7). This is why settlement in RBI money is the safest kind.

• Positive confirmation: RTGS, NEFT, IMPS and UPI send the sender a message once the money reaches the receiver's account [3]. Cash and cheques do not do this.

Types of digital payment systems

Basis	Type A	Type B
Size and user	Retail: many small payments (UPI, IMPS)	Large-value: a few big payments (RTGS)
Settlement method	Gross: each payment settled on its own	Deferred net: payments are pooled and only the net difference is settled
Timing	Real-time (RTGS, UPI, IMPS)	Batch (NEFT)

• Gross settlement: each payment is settled one by one, "without bunching or netting with any other transaction" [3].
• Real-time settlement: there is no waiting period [3].
• RTGS (Real Time Gross Settlement) is both real-time and gross. It has run 24x7 since December 2020, which makes India one of the few countries that runs RTGS round the clock [3].
• NEFT (National Electronic Funds Transfer) settles payments in batches using deferred net settlement.
• Payment modes by use:
• P2P (person-to-person): sending money to a friend

• P2M (person-to-merchant): paying a shopkeeper, often by scanning a UPI QR code

• Worked example: gross vs net settlement

• Bank A must pay Bank B ₹100 crore. Bank B must pay Bank A ₹70 crore.
• Gross: two separate transfers are made, so ₹170 crore moves in total.
• Net: ₹100 − ₹70 = ₹30 crore. Only A pays B.
• Trade-off: netting needs much less money, but banks carry risk until the batch settles. Gross settlement is safer, but banks must hold more money (liquidity) during the day.

What makes digital payments rise or fall

• Push factors:
• Demonetisation (November 2016) cut the cash in people's hands and pushed them towards digital modes (Class 12).
• UPI (2016) allowed instant, 24x7 mobile payments.
• Zero-MDR: there is no merchant discount rate (MDR, the fee a merchant pays on each digital payment) on UPI, so it is free to use.

• Government incentives, such as the ₹1,500 crore scheme for low-value BHIM-UPI P2M payments (2024-25) [10].

• Enablers measured by the RBI: payment enablers, payment infrastructure (demand side and supply side), payment performance and consumer centricity [5].

• Drags:
• Outages. Because one rail carries most of the traffic, a single failure hurts many users.
• Weak internet in rural areas and low digital literacy (textbook-level constraints).

Measuring spread: RBI Digital Payments Index (RBI-DPI)

• It is a composite index (one number built from several parameters). It measures how far digital payments have spread and deepened across India [5].
• Base: March 2018 = 100. It is computed every half year [5].
• Worked example
• March 2025 index = 493.22. September 2024 index = 465.33 [5].
• Growth since base = (493.22 ÷ 100 − 1) × 100 = 393.22%. So digital payment depth in March 2025 was about 4.9 times the March 2018 level.
• Half-year growth = (493.22 − 465.33) ÷ 465.33 × 100 ≈ 6.0%.

In India

• Law: the Payment and Settlement Systems (PSS) Act 2007 received presidential assent on 20 December 2007 and came into force on 12 August 2008 [2].
• Under Section 5, no one except the RBI may run a payment system without RBI authorisation. This applies to domestic and foreign operators [2].
• Running a system without authorisation, ignoring RBI orders or giving false information can lead to fines and imprisonment [2].

• The Act's definition of a payment system includes card operations and money transfers, but excludes stock exchanges [2].

• Regulator: the RBI.

• The Payments Regulatory Board (PRB) Regulations, 2025 have been in force since 20 May 2025 [2]. Earlier, the BPSS (Board for Regulation and Supervision of Payment and Settlement Systems) did this job [3]. In answers, write "PRB (earlier BPSS)".

• The Department of Payment and Settlement Systems (DPSS) oversees all systems by monitoring them, assessing them and pushing for changes where needed [4].

• Operators:

• RBI runs RTGS and NEFT.

• NPCI (2008) is a not-for-profit company promoted by banks at the initiative of the RBI and the Indian Banks' Association (IBA). It runs UPI, BHIM, IMPS, RuPay, NFS, NACH, AePS and NETC FASTag. It runs Bharat BillPay through NBBL and takes UPI and RuPay abroad through NIPL.

• Latest figures:

• Total digital payment transactions crossed 18,000 crore in 2024-25 [6].
• UPI handled 16.99 billion transactions worth over ₹23.48 lakh crore in January 2025 [7].
• UPI makes up about 85% of India's digital transactions [8].
• The IMF (June 2025) found that UPI had about 49% of global real-time payment volume in 2024. This makes it the world's largest real-time payment system [9].
• P2M payments were 62.35% and P2P payments were 37.65% of UPI volume in FY 2024-25 (till January 2025). About 86% of P2M payments were worth ₹500 or less [10].

• RBI-DPI stood at 493.22 in March 2025 [5].

• Policy markers:

• Payment-data localisation (April 2018): payment data of Indian users must be stored only in India.
• Payments Vision 2025 (released 2022): the RBI's roadmap with five themes: integrity, inclusion, innovation, institutionalisation and internationalisation.

Don't confuse with

• Payment system vs digital payment: a payment system is the mechanism for clearing and settlement, and it can be paper-based (cheque clearing). A digital payment is one that moves only through electronic rails.
• RTGS vs NEFT: RTGS is real-time and gross, for large values. NEFT uses batch, deferred net settlement. Both are run by the RBI, not NPCI [3].
• RBI-DPI (Digital Payments Index) vs DPI (Digital Public Infrastructure): the first is an RBI index number (base March 2018 = 100). The second is a model of shared public rails with private apps on top, such as UPI.
• UPI vs NPCI: UPI is a payment rail. NPCI is the not-for-profit company that operates it. The RBI regulates both.

Prelims Hooks

• The PSS Act 2007 (in force from 12 August 2008) says no one except the RBI may run a payment system without authorisation under Section 5 [2].
• Trap: the PSS Act's definition of a payment system includes card operations but excludes stock exchanges [2].
• RTGS is real-time and gross, has run 24x7 since December 2020, and is operated by the RBI [3]. NEFT uses batch / deferred net settlement.
• RBI-DPI: base March 2018 = 100, computed every half year. It was 493.22 in March 2025 [5].
• UPI: about 85% of India's digital transactions [8]. The IMF (June 2025) found it had about 49% of global real-time payment volume in 2024 [9].
• NPCI (2008): a not-for-profit company promoted by banks at the initiative of the RBI and IBA. It runs UPI, IMPS, RuPay, NFS, NACH, AePS and NETC FASTag.

Mains Points

• Inclusion vs viability
• Zero-MDR keeps UPI free for users and small shopkeepers, which helps financial inclusion.
• But banks earn no fee, so the government must pay subsidies such as the ₹1,500 crore P2M incentive (2024-25) [10].

• This leaves an open question: who will pay for the infrastructure over the long run?

• Public rail brings scale but also concentration risk

• The UPI model (a public rail with private apps on top) cut entry barriers for small merchants and fintech firms. It became the world's largest real-time payment system [9], and India now promotes it abroad through NIPL.

• But UPI's roughly 85% share means one outage hurts the whole economy [8]. The RBI's double role as regulator and operator (RTGS, NEFT) can also create a conflict of interest.

• Sovereignty vs openness

• Data localisation (2018) and RuPay give India control over its payment data and card network.
• But they raise compliance costs for foreign firms and cause friction in trade talks. Payments Vision 2025's theme of internationalisation tries to balance these two aims.

Related concepts

• Payment system

Read more

• Payment systems as financial infrastructure