Digital Payments And UPI: Transformation In Banking Habits

Abhay Trivedi

Introduction

For a long time, India’s financial system was dominated by traders, middlemen, and brokers who relied on old-school methods to track transactions. But that’s changed. Spreadsheets, software, and digital tools have taken overmainly because digitization has swept through the financial sector. Digital transformation here means using tech not just to speed things up, but to make banking more customer-friendly, efficient, and secure. Think mobile banking apps, AI-powered customer service, and blockchain-backed transactions.

This shift really began in the early 2000s with private banks bringing in online banking, ATMs, and card payments, stuff that was new to most Indian customers at the time. It started slow, but as internet access improved and digital tools became more affordable, adoption picked up. Even people in remote areas began using digital financial services. A big turning point came in 2016 with demonetization, when the government pushed hard for a cashless economy.

Initiatives like Digital India helped spread awareness and made digital payments more mainstream. India’s financial sector has gone through a major digital shift, driven by government support, tech innovation, and changing user habits. UPI has played a key role in this, offering simple, low-cost, and secure transactions that boost financial inclusion. The pandemic sped up this digital adoption even more.

Digital payments are financial transactions that don’t involve any physical exchange of cash. Instead of handing over coins or notes, money is transferred electronically from one bank account to another using digital tools and platforms. These transactions rely on technologies like mobile apps, internet banking, UPI (Unified Payments Interface), debit or credit cards, digital wallets, and even QR codes.

In India, digital payments have become a key part of how people and businesses operate. From large companies conducting online transactions to small shopkeepers accepting UPI payments, digital methods are being used across all levels of trade and commerce. Whether it’s buying groceries, paying utility bills, shopping online, or sending money to a friend, digital payment systems have made it faster, easier, and more convenient to manage money without relying on cash.

This shift also supports transparency, reduces the risks of theft or loss associated with 5^th Year B.A.LL.B. (Hons.) Student at MNLU, Nagpur carrying cash, and helps in tracking spending better. The rise of digital payments is an essential step toward building a more inclusive and digitally empowered economy. But challenges remain like poor internet access, cyber fraud, low digital literacy, and language barriers which risk leaving some people behind. Fixing these gaps will take a joint effort from the government, banks, tech companies, and users

Recent Developments in the Expansion of UPI Network

Between 2023 and 2025, UPI has seen major innovations that mark a shift from being a domestic payments tool to a global financial infrastructure. India has already enabled UPI acceptance in countries such as Singapore, UAE, Mauritius, Sri Lanka, Bhutan, and even France, where the Eiffel Tower became one of the first foreign sites to pilot UPI QR payments. Cross-border transactions are growing rapidly, with over six lakh international UPI payments recorded in the first few months of FY26 alone. NPCI International is actively working to expand UPI to more countries with large Indian diaspora and tourist flows.

On the domestic front, UPI Lite has been introduced to make small-value payments faster and more reliable, even in areas with weak connectivity, with transaction limits recently raised from ₹200 to ₹500 and wallet limits to ₹5,000. Another significant step is the linking of RuPay credit cards to UPI, allowing users to scan QR codes and pay merchants on credit rather than directly from bank accounts, expanding consumer choice though limited for now to merchant payments (P2M).

To make India friendlier for visitors, UPI was also opened to foreign tourists in 2023, enabling them to link international cards for use with UPI apps during their stay. Meanwhile, the Reserve Bank of India’s Digital Rupee (CBDC) pilot has gained momentum: transaction value jumped from just ₹5.7 crore in 2023 to over ₹1,000 crore by 2025, with interoperability allowing users to pay merchants via UPI QR codes using the digital rupee.

Challenges in Implementation

While the Unified Payments Interface (UPI) has revolutionized digital transactions in India, making them faster and more accessible, it also faces significant challenges that need urgent attention. UPI’s simplicity and speed have unfortunately made it a prime target for cybercriminals. Users often fall victim to phishing attacks, where they are tricked into revealing their credentials through fake links or messages. Additionally, fraudulent QR codes and scam apps have been reported, leading to unauthorized transactions. For instance, in September 2025, a software update in the Mobikwik UPI app disabled security checks, allowing fraudsters to transfer ₹40 crore from user accounts.

UPI operates on a centralized infrastructure managed by the National Payments Corporation of India (NPCI). While this centralization ensures uniformity, it also poses risks. In 2023 and 2024, UPI experienced outages due to technical issues, causing millions of transactions to freeze. UPI generates a vast amount of transaction data, raising concerns about user privacy. While the system is designed to be secure, the sheer volume of data collected can be susceptible to breaches. Privacy experts argue that the UPI ecosystem’s reliance on data collection and sharing could compromise user privacy if not managed properly.

Policy Suggestions for Re-thinking India’s Approach Towards Technological Advancements

It is clear that India has ambitions of leading the field of digital payments and this is evidenced by programmes like Digital India and the push for a cashless economy, however the materialisation of these ambitions is difficult if India does not make sweeping policy changes when it comes to inclusion of blockchain, cryptocurrencies, non-fungible tokens (NFTs) and other virtual digital assets (VDAs). India’s current stance on Virtual Digital Assets (VDAs), including cryptocurrencies, reflects a cautious and somewhat restrictive approach.

While the government’s concerns about financial stability and investor protection are valid, the existing policies may inadvertently stifle innovation and growth in a sector that is rapidly gaining global traction. In 2022, India introduced a 30% flat tax on profits from VDAs, along with a 1% Tax Deducted at Source (TDS) on each transaction. This tax regime has been criticized for its lack of nuance and has had unintended consequences. For instance, major Indian crypto exchanges reported a 70-90% decline in trading volumes post the implementation of the 1% TDS in July 2022.

The high tax burden, coupled with the inability to offset losses, has led to liquidity constraints and a decline in trading volumes. This approach may deter retail investors and traders, potentially pushing them towards unregulated platforms.

The 2020 Supreme Court judgment in the Internet and Mobile Association of India (IAMAI) v. Reserve Bank of India (RBI) case struck down the RBI’s banking ban on crypto transactions. While this was a significant victory for the crypto community, it highlighted the lack of a comprehensive regulatory framework for VDAs in India. The absence of clear regulations has led to a fragmented approach, with different authorities issuing conflicting statements. For instance, while the Supreme Court ruled against the RBI’s ban, the central bank has continued to express concerns about the risks posed by cryptocurrencies.

Many of the problems faced by UPI can be solved by implementing a blockchain framework which will help in decentralisation of servers. However, effective policy is required so that this can be properly implemented without harm.

Conclusion

For India to become a global leader when it comes to digital transactions it is important for India to keep up with the technological developments taking place in the digital sphere. Fintech, reg-tech, insure-tech and other asset management companies are looking to switch to blockchain models of governance which is mostly unsupported and running without supervision and a proper framework.

India should develop a comprehensive regulatory framework for VDAs that balances innovation with investor protection. This framework should define the legal status of cryptocurrencies, set clear guidelines for their use, and establish mechanisms for monitoring and enforcement. The government should invest in research and development to explore the potential applications of blockchain and other distributed ledger technologies in various sectors, including finance, supply chain, and governance.

Collaboration between the government, industry stakeholders, and academic institutions can lead to the development of innovative solutions and the creation of a conducive environment for the growth of such technology. Educating the public about the benefits and risks associated with VDAs can lead to more informed decision-making and reduce the likelihood of fraud and scams. By adopting a more open and balanced policy, the country can harness the potential of this emerging sector, fostering innovation and economic growth while ensuring the protection of investors and the stability of the financial system.

Abhay Trivedi, 5th year B.A.LL.B. (Hons.) student at MNLU Nagpur and a fellow at the Public Policy Qualitative Participatory Action Research Fieldwork Fellowship Cohort 6.

Disclaimer: All views expressed in the article belong to the author and not necessarily to the organisation.

Acknowledgement: This article was posted by Aashvee Prisha, a research intern at IMPRI.