India’s payments landscape has reached a pivotal stage, with digital transactions now accounting for 99.8% of all retail payments, according to a new report by CareEdge Advisory. Despite this near-total digitisation, cash continues to hold a 50% share in private consumption expenditure (PFCE) as of the first quarter of FY26, reflecting the coexistence of traditional and digital modes in the economy.

The study traces how the country’s payment ecosystem has been reshaped by policy reforms, technology adoption, and the rapid expansion of internet and smartphone use. It concludes that India has built a “hybrid payments economy” - digital for convenience, but cash for certainty.

UPI remains the growth engine

The Unified Payments Interface (UPI) continues to drive the country’s digital transformation. UPI transactions rose to 54.9bn in Q1FY26 and 185.9bn in FY25, growing at a compound annual rate of 49% between FY23 and FY25. Digital payments accounted for 92.6% of total retail payment value in Q1FY26, up from 89.1% in FY23, with UPI alone contributing over 90% of total transaction volume.

The average UPI transaction value declined from INR1,662 ($18.72) in FY23 to INR1,330 in Q1FY26, showing that consumers increasingly use the platform for small-value, everyday purchases such as groceries, transit fares, and utilities. CareEdge said this trend indicates growing trust and adoption in smaller towns and semi-urban areas, where digital payment usage has accelerated significantly.

The RBI’s Digital Payments Index (DPI) rose from 445.5 in March 2024 to 493.2 in March 2025, reinforcing the rapid pace of digitisation across all demographic segments.

Financial inclusion and infrastructure expansion

The growth of digital payments is closely tied to rising internet access and financial inclusion. Internet penetration in India increased from 60.7% in March 2021 to 70.9% in June 2025, while the Financial Inclusion Index improved from 53.9 to 67 during the same period. Wider smartphone ownership and affordable data have brought millions of users into the formal digital economy.

Government programmes such as the Payments Infrastructure Development Fund (PIDF) have supported the rollout of acceptance infrastructure in smaller towns and rural areas. New tools like UPI Lite for offline payments and UPI123Pay for feature phones have made digital transactions more inclusive by enabling users without smartphones or stable internet connections to participate in the system.

According to CareEdge, UPI now serves 491mn users and 65mn merchants, and powers nearly half of all global real-time digital payments. The system’s recent expansion into France signals India’s growing influence in the international fintech ecosystem.

Cards and NEFT retain relevance as PPIs decline

While UPI dominates in both volume and value, traditional systems such as NEFT and IMPS remain critical for higher-value transfers. NEFT, with an average transaction size of about INR48,000 in Q1FY26, continues to handle large business and interbank payments. IMPS remains significant for instant transfers, though some activity has shifted to UPI.

Credit card usage continues to expand, driven by e-commerce growth and flexible EMI options, but debit card transactions have declined sharply as users migrate to UPI for smaller purchases. Prepaid payment instruments (PPIs), once popular for mobile recharges and transit payments, have fallen out of favour due to tighter regulations and wallet integration with UPI.

Systems such as NACH and AePS remain relevant for recurring payments, government transfers, and financial inclusion. NETC continues to drive contactless toll and transit transactions. CareEdge’s analysis indicates that India’s payment architecture is now a multi-layered ecosystem — with each instrument serving a specific need, while UPI anchors overall growth.

Digital expansion, cash resilience

Despite the dominance of digital payments, cash remains a vital component of India’s payment ecosystem. Its share in private consumption has fallen from 70% in FY23 to 50% in Q1FY26, but it continues to play a stabilising role, particularly in rural and informal sectors.

The report attributes cash’s continued importance to its reliability, ease of use, and universal acceptance. It remains a preferred mode for small merchants and unbanked populations, and acts as a dependable fallback during network outages or system failures. The current 50:50 split between cash and digital payments marks what CareEdge calls a “tipping point”, suggesting that while digital modes will continue to expand, cash will remain entrenched in cultural and economic practices.

India’s payment evolution, the report observes, is no longer about replacing cash but integrating it into a hybrid, resilient model where both channels complement each other.

Challenges and sustainability of growth

CareEdge notes that UPI’s zero-merchant discount rate (MDR) framework has accelerated adoption but poses questions about the long-term sustainability of payment systems. The next phase of growth is expected to come from value-added services such as micro-credit, merchant analytics, insurance integration, and fintech collaborations that can ensure financial viability for service providers.

The surge in digital transactions has also heightened the importance of security, fraud prevention, and consumer protection. With billions of payments occurring in real time, regulators and payment companies face growing challenges in maintaining robust safeguards against cyber threats and misuse.

The next few years are expected to consolidate India’s position as one of the world’s leading digital payment markets. Internet penetration is projected to reach 85% by 2028, which will further widen the user base. Meanwhile, ongoing financial literacy initiatives and government-led digital inclusion schemes are likely to accelerate adoption across smaller cities and rural regions.

The report adds that affordable smartphones, low-cost data plans, and interoperable payment systems will remain the strongest growth enablers. As connectivity deepens, the diversity and frequency of digital payments are expected to rise, extending beyond peer-to-peer transfers to encompass retail, services, and investments.

To this end, CareEdge expects UPI transaction volumes to exceed 250bn by FY27, maintaining double-digit growth over the next three years. Digital payments are projected to expand further as regulatory innovations enhance accessibility and interoperability.

However, the report argues that cash will remain part of India’s consumption pattern, particularly in regions where digital penetration remains low. This coexistence of cash and digital modes provides flexibility and resilience, making the system less vulnerable to shocks.