Evolution of digital payment systems globally: challenges faced and future opportunities

Abstract

The global payments industry has evolved over the years from the barter system to traditional banks to digital wallets. In some countries, the growth has been faster than the others, leading the transition from cash to the cashless economy to varying with time. Sweden observes only 15% cash transactions while others like China, Canada and Australia are also moving towards being cashless. In India, the penetration of digital payments was boosted due to demonetization in 2016 and more recently due to lockdown (COVID-19). The mode of research used in the report includes both primary and secondary research. A survey was conducted to understand the reasons for consumers preferring digital payments and the challenges faced by them. The report also covers the user journey, evolution of banking and payments system in India. There has been development in the payments system from the electronic money in 1918 to the UPI system in 2016. Analyzing the industry, we find that there are three dominant forces. These include the threat of substitutes, competitive rivalry and buyer power. It reveals that there is a concentration of power in the industry and using the Herfindahl- Hirshman index; we find that it is an oligopoly market. The report further analyses the popular business models across the world. Observing the trends in the payments industry, we find that there is a significant increase in the value of transactions, with a CAGR of 28.92%. The report further looks at the differences in the growth of digital transactions in developed and developing countries. Mobile wallet usage also seems to be increasing continuously over the years. There are various risks and challenges faced by both the regulators and the customers. Some of the regulatory challenges include lack of uniformity between RBI and TRAI, two-factor authentication using OTP, country-specific data flow barriers and data localization rules, ensuring payment safety and reliability and lack of infrastructure. In addition to a lack of privacy, customers also relate bad past experiences for not using e-wallets. Despite this, the future opportunity in this sector is tremendous. The regulators can create competition among players, encourage innovation and cybersecurity to improve the experience and performance of digital payments. Being updated about the potential and existing disruptions in the fintech industry will help them be relevant.