UPI and Digital Wallets: A Year Of Growth Or Decline?

Digital transactions in India are surging at a rapid pace. Since the launch of the Unified Payments Interface (UPI) in 2016, this payment system has experienced exponential growth, surpassing other modes of payment, especially in retail transactions. In recent years, UPI has acted as a catalyst for digital financial growth, emerging as the primary choice for small-value transactions.

The data speaks volumes: according to reserve Bank of India (RBI) data, in September 2024, UPI transaction volume stood at 15,041.75 million (Rs 20,63,995 crore in value), compared to 10,555.68 million transactions (Rs 15,79,133 crore in value) in September 2023.

In contrast, digital wallet transactions declined during the same period, with transaction volume dropping from 489.96 million (Rs 19,926 crore in value) in September 2023 to 405.49 million (Rs 11,889 crore in value) in September 2024, according to RBI data.

While digital payment modes continue to gain popularity due to their convenience, not all are growing at the same rate. The data indicates that digital wallets are lagging compared to UPI, which has gained immense acceptance, particularly post-pandemic.

How Do UPI and Digital Wallets Differ?

UPI facilitates direct money transfers between bank accounts and can be linked to multiple accounts, while digital wallets function as virtual wallets, storing money separately from bank accounts for transactions.

Vamsi Krishna, CEO of StoxBox, explains, “Digital wallets can function without being linked to a bank account, making them useful for individuals without banking facilities. UPI apps, on the other hand, require an active bank account and support direct fund transfers with minimal setup.”

Notably, UPI allows users to manage multiple bank accounts through a single app and useful for all transactions. One the other hand, wallets are more suited for small transactions, keeping bank accounts uncluttered from routine payments.

Regarding costs, Krishna adds, “Many wallets charge fees for services like transferring wallet balances to bank accounts, though maintaining a wallet is usually free. Transactions via UPI apps are typically free for users, whether through bank apps or third-party platforms. However, UPI payment processors may charge merchants a nominal fee.” 

Although UPI and digital wallets currently impose nominal or no charges, regulatory actions, such as the curbs on Paytm Wallet by the RBI in January 2024, may have shifted customer preferences toward UPI to some extent and for some time, for its direct and seamless transfer capabilities.

Are Digital Wallets Losing Relevance? 

Mohan K., Founder of TechFini, comments, “In January 2024, UPI transactions reached a record Rs 18.41 trillion, marking a 52 per cent increase in volume and a 42 per cent increase in value compared to the same month in the previous fiscal year. This surge underscores UPI's widespread adoption across various transaction types.” 

He adds, “Digital wallets, which gained popularity for storing funds and facilitating payments, are facing challenges due to UPI's rise. Unlike wallets, UPI enables direct bank-to-bank transfers without requiring a separate wallet balance, enhancing user convenience. Consequently, some users and merchants are shifting away from traditional digital wallets in favour of UPI-based transactions.” 

Despite these challenges, digital wallets still hold value for specific use cases, such as keeping bank statements uncluttered from small transactions or for users who prefer quick payments without entering a PIN, as enabled by features like UPI Lite. To stay relevant, wallet providers are increasingly integrating UPI into their platforms for added convenience. 

How Are Digital Wallets Competing With UPI? 

According to Krishna, digital wallets offer distinct advantages such as one-click payments, loyalty rewards, and bundled services like investments and insurance. They also cater to individuals without bank accounts. 

He notes, “Digital wallets are ideal for those who don’t want minor transactions like Rs 10 or Rs 15 to clutter their bank statements or for users like teenagers who need digital money but don’t require full access to a bank account.” 

Mohan adds, “While UPI facilitates seamless bank-to-bank transfers, digital wallets offer additional services like storing multiple payment methods, providing rewards, and enabling quick merchant payments. This coexistence has expanded the digital payments landscape, offering consumers varied options to suit their needs.” 

Consumers continue to use both digital wallets and UPI, making choices based on convenience, security, and personal preferences. 

While UPI dominates in terms of transaction volume and value, digital wallets retain their utility and relevance for niche use cases. Despite slower growth, wallets remain a useful tool for specific demographics and transaction types, ensuring their place in India’s evolving digital payment ecosystem.