The Hidden Challenges of Digital Payments

India’s transition to a digital economy is evident, especially when you look at how digital payments have grown. Last recorded, Indian banks transferred a massive $2.5 trillion (about 80% of the country’s GDP) through smartphones, in 2023 alone, underscoring the massive shift towards digital transactions. It’s easy to assume that such a monumental amount of money being transferred digitally means a large portion of the population is using digital banking platforms. However, the reality is more nuanced.?

Despite the boom in digital payments, only around 50% of India’s 820 million active internet users have engaged in digital banking. The active internet user base grew to 886 million in 2024, with rural India playing a leading role in this expansion, contributing to 55% of the country’s total internet population. This disparity raises an important question: why do so many users use digital payment platforms without fully embracing the core functions of digital banking?

The Problem

A key factor in the rise in digital payments can be attributed to the ease and convenience they bring to everyday transactions—whether it’s buying groceries or paying bills. However, the challenge lies in the fact that digital payments don’t encompass the complete banking experience. When it comes to tasks like opening a bank account or initiating mobile banking, users are far less autonomous.

Banking Activities that Are Non-Autonomous

While the majority of users can manage routine payments independently, they often struggle with more complex banking activities such as:

These banking activities typically require interaction with bank representatives or assistance from customer support or a more tech-savvy family member. While the digital payment systems allow customers to transfer money or pay for services with ease, many essential banking services remain either unavailable or difficult to complete digitally.

The Surge in Digital Payment Frauds

One of the most pressing challenges with digital payments in India is the alarming rise in fraud.?

The National Cyber Crime Reporting Portal (NCRP) has logged 25,924 UPI-related complaints, along with thousands of complaints related to internet banking and vishing (fraudulent phone calls). Despite the rise in digital payment usage, cybercrime continues to evolve, with fraudsters using sophisticated techniques such as phishing, identity theft, and fraudulent merchants to bypass safeguards.?

Payment providers have implemented various measures to curb fraud, including encryption, tokenization, and biometric authentication. Yet, fraudsters continue to discover new methods to exploit vulnerabilities, indicating that there is much work to be done to ensure the safety and security of digital payment systems.

Lack of Interoperability

Another major issue in digital payments is the lack of interoperability between various payment systems. In a fragmented ecosystem, users are often forced to rely on different platforms to complete transactions. This reliance on multiple payment systems can lead to delays and added costs. For example, banks must integrate separately with each payment aggregator (PA) that a merchant uses, making the process cumbersome.

As a result, transactions between banks and merchants often face delays, and merchants may not receive payments promptly. This lack of a unified payment system hampers the overall user experience and creates additional risks, including settlement risks and technical glitches.

Comparing Digital Payment Fraud to ATM Fraud

Interestingly, when comparing digital payment fraud with more traditional forms of banking fraud, such as ATM fraud, the picture is stark. In 2022, India saw just 1,600 cases related to ATM fraud, compared to nearly 800 digital payment fraud cases daily. Over the years, ATM frauds have seen a year-on-year decline, with amounts involved falling from Rs. 116 crore in FY 2019-20 to Rs. 68 crore in FY 2021-22. In contrast, digital payment fraud is on a rapid upward trajectory.

This highlights a key issue: While ATM fraud has seen a reduction, digital payment fraud has risen sharply, suggesting that more robust safeguards are needed to protect users.

Conclusion

While digital payments in India are undeniably a solution for day-to-day convenience, they present a series of challenges. From fraud and security risks to the lack of interoperability between systems, the landscape of digital payments is far from seamless. To fully realize the potential of digital banking, there needs to be a greater focus on enhancing the security of digital payments, making banking activities more autonomous, and ensuring smoother integration across various payment systems.

The future of digital payments is bright, but it requires continued innovation and collaboration to address these challenges. Until these issues are resolved, the convenience of digital payments will remain a double-edged sword, offering benefits while exposing users to new risks.