Introduction
Technology breakthroughs and shifting customer tastes have caused a significant shift in the payments landscape in recent years. The future of financial transactions and commerce is being shaped by the rapid transition from cash-based to digital wallets and contactless payments. At the front of this change are digital wallets and contactless payments, which offer consumers quick, easy, and safe substitutes for cash and credit cards. Digital wallets and contactless payments are undoubtedly influencing the direction of commerce as more individuals choose cashless purchases.
Contactless Payments
Rise of Contactless Payments:
Digital payment ecosystem in India in its early days, was primarily focused on traditional card-based payments. The COVID-19 pandemic accelerated adoption, prompting higher transaction limits and digital investments. Today there exists a diverse and dynamic system offering a wide range of digital payment offering a bouquet of digital payment options catering to every need of the Indian consumer – instant payment systems (UPI, IMPS), small value payment systems (PPI, UPI Lite), large value payment (RTGS), bill payment (BBPS), bulk payment (NACH), offline payment (UPI Lite X), government payments (NACH, APBS), toll payments (NETC) and many more. In 2020, India recorded 100 million digital transactions per day, marking a five-fold increase from 2016. RBI anticipates this number will rise to 1.5 billion transactions daily in the future. Let’s have delve deeper in some key statistics of contactless payments:
- Retail Digital Payments:
- 162 crore transactions in FY 2012-13
- 16,416 crore transactions in FY 2023-24.
- Digital Transactions:
- 222 crore digital transactions valued at Rs. 772 lakh crore- in CY-2013
- 20,787 crore transactions valued at Rs. 2758 lakh crore in CY-2024.
- Number of credit cards:
- 5.53 crore cards in December, 2019
- 10.80 crore cards in December, 2024,
- Over 91 crore card-on-file tokens created as on 31st Decmeber, 2024.
- Share of UPI Transactions in Volume:
- 375 core in 2019
- 17221 crore in 2024
- Share of UPI Transactions in Value:
- 5.86 lakh crore in CY 2018 246.83 lakh crore in CY 2024.
Contactless payments are transactions that are completed by tapping a card or phone on a payment terminal instead of swiping or dipping it. This method is made possible by Near Field Communication (NFC) technology. Few key contributors which lead to a surge in the adoption of contactless payments are:
- Policy intervention such as waiving off the need for 2FA for payments below Rs. 5000
- Entry of small businesses into digital payments
- Development of passive and risk-based authentication, modern cryptography, privacy by design practices etc.
Some of the key contactless payment instruments and corresponding players are:
- Bank Credit Cards- Rupay, Mastercard, VISA, American Express
- Mobile NFC- Samsung, Apple
- Payment Acceptance- Verifone, Pine Labs, PayTM, G Pay, PhonePe
Key Entities Involved in Contactless Payments in a Digital Payment Ecosystem
Traditionally, financial institutions have played a vital role in digital payments, and they will continue to do so. Over time, credit card providers became key players in the payment ecosystem, followed by innovations such as ATMs, wallets, and prepaid payment instruments. Recently, the RBI has authorized account aggregators to offer their services, mainly as providers of financial information.
- Financial Institutions i.e., banks, NBFCs, Exchanges, Mutual Funds, etc.
- Payment Processing i.e., credit card providers, Wallet, PPIs, Gateways, etc.
- Account Aggregators such as financial information providers i.e., banks, NBFCs, Funds, etc.
- Devices & Platforms i.e., device manufacturers, Internet & SM Platforms, Utility apps, etc.
- Fintech providers
Contactless Payment Transaction Process
- Generation of Unique cyrptographic Code for initiation of transaction, when contactless card is tapped or brought near to merchant’s POS terminal
- Transmission of data from card reader to card processing network, which checks for probable fraud & after verification request is forwarded to card issuer
- Available balance checked before authenticating transaction or flagging of stolen card, purchase from unusual location or large transactional amount by card issuer
- Card issuer approves the transaction & approval message is sent to merchant’s POS machine
Digital Wallets
What are Digital Wallets?
A digital wallet is a virtual payment tool that securely stores financial information, enabling users to make transactions without the need for physical cards. Digital wallets can store credit and debit card details, bank account information, loyalty cards, and even tickets or boarding passes.
How Do Digital Wallets Work?
Digital wallets operate using tokenization and encryption to protect sensitive payment data. Every transaction generates a unique token representing the card information, minimizing fraud risks and ensuring data security. Steps involved in Digital Wallet Transactions are:
Loading Funds
Users link their bank accounts or credit/debit cards or deposit money directly into the wallet
Making Payment
Transactions can be completed using NFC technology, QR codes, or online payment gateways
Security & Authentication
Encryption, biometric authentication (e.g fingerprint or facial recognition), and PIN verification used for securing transactions
Transaction Processing
Payments are processed in real-time, deducting funds from the wallet or linked account
Record-Keeping
Digital wallets maintain transaction histories, allowing users to track their expenses easily.
Comparison of Top 4 Digital Wallets in India
PayTM
- Launched in 2010 as a mobile recharge platform
- Owned by One97 Communication
- Boasts over 337 million registered users
- Offers a range of services, including mobile recharges, bill payments, online shopping, and more
- Key feature of the app is its ability to book train tickets and flights
- Paytm wallet is convenient for everyday small transactions, but may not be ideal for larger purchases or those requiring additional documentation or verification
- Refunds can take up to 7 days to process.
PhonePe
- Launched in 2016 as a UPI-based digital wallet
- Initially owned by Flipkart, its majority stakes are now held by Walmart
- Grown to over 250 million registered users in India
- Offers a wide range of services, including mobile recharges, insurance, bill payments, money transfers, and travel bookings via 3rd party apps like MakeMyTrip
- A notable feature is its bill-splitting option, allowing users to share expenses with friends and family
- Delays in payments and refunds processed through the platform, has been reported although.
Google Pay
- Launched in 2015, originally as Android Pay
- Owned by Google
- Gained over 70 million registered users in India
- Offers various features, including utility bill payments, recharges, and money transfers
- One of its most popular aspects is the chance to earn scratch cards with each transaction
- Major drawback is the frequent occurrence of failed transactions. Additionally, only a limited number of banks support Google Pay for processing transactions.
Amazon Pay
- Launched in 2007 as a payment service for Amazon.com
- Grown into a leading digital wallet
- Over 50 million registered users in India
- Offers essential digital wallet features such as mobile recharges, bill payments, and online shopping
- A unique feature of Amazon Pay is that the users can utilize their Amazon Pay balance to shop on Amazon.in
- However, its acceptance is limited, as not all merchants or establishments support it.
Challenges and Considerations
- 52% – Duplicate Websites & Fake Apps
- 43% – Password/ credential information fraud
- 39% – Spyware/ Malware
- Excessive data collection, processing without consent, use for unitended purposes
- Opacity in data handling practices
- Performing analysis without identification
- Failure rate of over 3% recorded in September, 2020
- Allocation of Rs. 1500 crore in the Union Budget 2021-22 for strengthening digital payment
Common Myths About Contactless Payments
| Myth | Reality |
|---|---|
| Myth 1: Criminals can steal money from your contactless card just by standing near you. | Transactions require KYC-compliant POS terminals, and fraudulent activity is traceable. |
| Myth 2: Contactless cards can be easily cloned and misused. | Advanced encryption and security measures make cloning nearly impossible. |
| Myth 3: A stolen contactless card can be used for unlimited purchases. | Fraud detection systems and transaction limits prevent unlimited misuse. |
| Myth 4: Criminals can steal account details using card skimmers. | Dynamic encryption ensures intercepted data cannot be reused. |
Conclusion
Digital wallets and contactless payments are unquestionably the way of the future for payments. We may anticipate more developments in this area as technology develops and customer demands for convenience, speed, and security increase. To remain competitive and satisfy changing customer expectations, businesses and financial institutions need to adjust to this shifting environment. The future of payments will be more secure, accessible, and efficient than ever before with sustained investment and innovation.
References
- https://www.americanexpress.com/in/articles/life-with-amex/benefits/what-is-contactless-payment.html
- https://rbi.org.in/scripts/PublicationsView.aspx?Id=23127#7
- https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=1202
- https://rbi.org.in/scripts/PublicationsView.aspx?Id=20315#CH7
- https://www.dsci.in/files/content/knowledge-centre/2023/Contactless-Payments-A-DSCI-Mastercard-Study-Report.pdf
Disclaimer
The information provided in this article is intended for general informational purposes only and should not be construed as legal advice. The content of this article is not intended to create and receipt of it does not constitute any relationship. Readers should not act upon this information without seeking professional legal counsel.
