India’s Financial Digitalisation Has Scaled; Regulation Must Keep Pace

India’s shift from a cash-centric economy to a digital payments powerhouse is supported by an architecture that combines modern technology, strong institutions and a regulatory framework that balances innovation with trust and security. It is actually a network of systems operated by banks, regulators and technology providers.

The Reserve Bank of India (RBI) regulates the core settlement and clearing mechanisms for financial transactions. Systems such as Immediate Payment Service (IMPS) and Real Time Gross Settlement (RTGS) act as the basic rails for interbank fund transfers. The Unified Payments Interface operates on top of the IMPS infrastructure, enabling billions of instant peer-to-peer and person-to-merchant payments using a common interface 24×7, including on weekends and holidays, with a virtual payment address or QR code. This has reshaped how payments are made in daily life while transforming consumer behavior, business operations and financial inclusion. Small merchants, gig workers and first-time bank account holders are more comfortable today than before in using digital tools. Low onboarding costs and ease of use have made participation accessible.

Today, India is at the forefront of the digital revolution. Financial technology (FinTech) is speeding up digital payments. The India Stack is expanding financial inclusion, galvanising banking infrastructure and public finance management systems covering both direct benefit transfers and tax collections. Vibrant e-markets are springing up and expanding their reach. It is estimated that the digital economy currently accounts for a tenth of India’s GDP. Going by growth rates observed over the past decade, it is poised to constitute a fifth of GDP by the end of 2026 by leveraging on its digital public infrastructure (DPI), the vibrant information technology (IT) sector and a burgeoning youth population, including one of the largest AI talent bases. 

This vibrant ecosystem is also promoting startups that are increasingly driving social innovation by leveraging technology and fostering inclusion for underserved communities in areas like agriculture, healthcare, education, and sustainable energy. In fact, this environment is accelerating the fertilisation and implementation of new products, services, models, and processes that ultimately enhance community welfare and foster systemic change. Solutions often stem from collaborations across government, business, non-profits and focus on areas such as agriculture, microfinance, housing, and community-led renewable energy.

Digital Technologies in the Financial Sector
Micro-level evidence from surveys of Indian banks shows that while all of them have implemented mobile and internet banking, 75% offer online account opening, digital KYC, and digitally-enabled doorstep banking. Additionally, 60% provide digital lending, 50% offer payment aggregator services, 41% use chatbots, 24% have adopted open banking, and 10% have integrated Internet of Things (IoT) technology. 

An AI-assisted review of the latest annual reports of Indian banks reveals various instances of productivity gains from digitalisation. Examples include monthly savings of 14,500 person-days, 25-30% decline in customer acquisition costs, reduction of the use of 84 tons of paper, saving of 400,000 litres of fuel in commutes to banks by customers, 40% reduction in customer wait times at branches, 50% reduction in the compliance monitoring time and shortening account opening time to less than a day. Aadhaar – India’s unique identification number – has halved the cost of conducting the Know Your Customer process in India.

The rapid metamorphosis of the digital financial architecture in India is complemented by the need for better compliance (RegTech), more efficient supervision (SupTech), and enhanced security. With regard to RegTech, key applications include automating KYC (Know Your Customer) and AML (Anti-Money Laundering), regulatory reporting, and real-time transaction monitoring. Meanwhile SupTech is improving supervision, moving from static reporting to real-time analysis of data to identify risks and ensure market stability.

The digitisation of financial services increases vulnerability to cyber-attacks, making advanced, AI-driven cybersecurity tools essential for protecting the integrity of the financial system. While the integration of these technologies allows for a safer, more transparent financial ecosystem, it also presents new risks such as data quality issues and the need for new skills within regulatory bodies.

Innovations in the digital credit landscape such as Account Aggregators, Open Credit Enablement Network (OCEN), and financial services on the Open Network for Digital Commerce (ONDC) have also contributed to productivity gains. The Trade Receivables Discounting System (TReDS) addresses the credit gap of MSMEs by connecting them with banks, and clients, with a reduction in funding costs by up to 2.5 percentage points. 

Around 40% of the rural population and 78% in the 20-30 years age group in the overall population use internet in India, with approximately one-third of households engaging in online purchases of consumables and services, one-fourth in buying of consumer durables, and nearly one-tenth in food purchases. The rising importance of embedded financing is reflected in the quadrupling of its share in FinTech funding.

Conclusion
Modern technologies are currently powering innovations in the financial sector worldwide and making it more inclusive than before. Technological advances are redefining policy making, re-engineering work processes and procedures, building new capacities and, more generally, rethinking approaches to various policy functions. We must adapt to Industrial Revolution 4.0 as we face new demands of citizens for greater speed, convenience, and affordability. The demand for digital finance for inclusion, building climate resilience and a supporting ecosystem must be seen in this context.

New products and new providers, including those such as fintech and bigtech, are making life smarter but they also confront us with the associated risks. While managing the risks, we must pay heed to the fact that regulations can stifle or foster innovation. Cooperation and dialogue among all stakeholders, both domestic and international, are imperatives if we are to navigate the ceaseless tides of innovation. We must open our minds to the power of innovation and the cross-fertilisation of ideas and experiences, while being mindful of the inherent challenges.

This is the concluding part of a two-part series on financial digitalisation by Dr Michael Debabrata Patra.

Part I examined the global adoption of digitalisation, its success with financial inclusion and climate resilience.