refer to the use of technology to facilitate financial transactions without the need for physical cash or traditional paper-based methods, such as cheques
These processes involve the electronic transfer of funds and the initiation of payment instructions through digital means.
Regulation and Infrastructure
Digital payments in India are regulated under the Payment and Settlement Systems Act, 2007
The infrastructure supporting these transactions includes:
- Core Banking Solution (CBS): A banking software with a web platform for centralized data management; E-kuber is the specific core banking solution used by the Reserve Bank of India (RBI)
- National Payments Corporation of India (NPCI): An umbrella organization and “Not for Profit” company created by the RBI and the Indian Banks’ Association (IBA) to operate retail payments and settlement systems
Classification of Digital Payments
The sources classify digital payment systems into several key categories based on their functionality and speed:
- Immediate Payment Service (IMPS): A real-time, 24/7/365 interbank electronic fund transfer system managed by the NPCI
- Real-Time Gross Settlement (RTGS): Used primarily for high-value interbank transactions that require instant and full clearing. It is maintained by the RBI and is available 24/7/36
- National Electronic Funds Transfer (NEFT): An online funds transfer system introduced by the RBI that operates 24/7/365 to quickly move money between bank branches across India
Key Products and Recent Innovations
The NPCI has launched several products to catalyze the shift toward a cashless economy:
- Unified Payments Interface (UPI): A mobile platform for instant fund transfers between bank accounts, including “Peer to Peer” requests.
- BHIM (Bharat Interface for Money): A secure mobile app that uses the UPI platform for digital payments.
- UPI123Pay: Launched in 2022, this allows feature phone users to make digital payments via missed calls, interactive voice response (IVR), or sound-based technology without an internet connection.
- UPI Lite: An “on-device wallet” for offline transactions of small values (under ₹200)
- Central Bank Digital Currency (CBDC): Also known as the e-rupee, this is a digital version of fiat currency issued by the RBI that serves as legal tender and a safe store of value.
Security: Card Tokenization
To enhance the security of digital transactions, the RBI introduced Card Tokenization in October 2022
This process replaces actual card details with an alternate unique code called a “token”
Under this facility, merchants and payment aggregators can no longer store customer card credentials, which protects users against data breaches and phishing
Context of the Cashless Economy
The promotion of digital payments is part of the Digital India programme, which aims for a “Faceless, Paperless, Cashless” society.
While digital transactions offer transparency, lower costs for banks, and reduced risk compared to carrying cash, the sources note that challenges remain, such as a high dependency on cash in rural areas, limited digital literacy, and cybersecurity threats.
Digital payment is like an e-mail for your money; instead of physically hand-delivering a paper letter (cash), you send a digital instruction that instantly updates the recipient’s balance from anywhere.