India’s payment landscape defies conventional economic logic. Whilst the Unified Payments Interface (UPI) processes transactions at breathtaking velocity and digital adoption soars across demographics, physical currency in circulation has simultaneously surged to a staggering ₹37.2 trillion—equivalent to 420 billion US dollars—marking a 19 per cent year-on-year increase in value and a 5 per cent rise in volume during 2025. This apparent contradiction confounds analysts expecting cash to fade as digital alternatives proliferate. Yet India isn’t experiencing a straightforward transition from physical to digital money; instead, it’s cultivating a unique dual ecosystem where both payment forms thrive in parallel, each serving distinct needs across the nation’s extraordinarily diverse economic landscape. UPI now accounts for 85 per cent of all digital payments whilst serving nearly 700 banks, 491 million individuals, and 65 million merchants. A payment industry expert captures this complexity perfectly: India’s payment ecosystem is no longer a binary choice between cash and digital—it’s a dynamic coexistence, with each serving unique requirements that simple substitution cannot address.
The Stubborn Resilience of Physical Currency
Despite digital payments’ spectacular ascent, cash remains profoundly embedded in India’s financial culture across multiple demographics and sectors. Micro merchants operating from roadside stalls, rural consumers in areas with spotty connectivity, and older generations comfortable with tangible money continue preferring physical currency for daily transactions. States like Uttar Pradesh, Delhi, and Bihar lead cash usage, reflecting both cultural preferences and infrastructural limitations that digital systems struggle to overcome completely.
Merchants display particular fondness for cash because it helps them avoid merchant discount rates typically ranging from 1 to 3 per cent of transaction values, alongside device rental fees that erode already thin margins. For small businesses operating on razor-thin profitability, these percentage-point differences translate to meaningful income reductions that cash transactions circumvent entirely. Even within India’s formal economy, cash commands trust and widespread acceptance, particularly in sectors like jewelry where over 60 per cent of transactions occur in physical currency despite high values that theoretically favor digital alternatives. This persistence reflects not merely technological barriers but deliberate economic calculation and deeply rooted trust patterns that policy interventions cannot easily dislodge.
The cash surge also stems from precautionary hoarding behaviour, with households maintaining currency reserves for emergencies, informal transactions, and situations where digital systems might fail. India’s experience with demonetisation and periodic digital infrastructure outages has reinforced these tendencies, creating demand for physical currency that persists despite growing digital capabilities.
UPI’s Relentless Expansion and Innovation Wave
The digital wave sweeping India proves equally undeniable despite cash’s resilience. UPI transactions have surged by 42 per cent in volume and 30 per cent in value over the past year, with projections suggesting one billion transactions daily by 2028 and annual values reaching ₹342.6 trillion (3.9 trillion US dollars). These figures position UPI among the world’s largest real-time payment systems, rivalling and often surpassing established networks in developed economies despite India’s lower per capita income.
Innovation continues accelerating UPI’s reach and utility. Biometric authentication eliminates the need for passwords whilst enhancing security. Internet of Things-enabled payments allow devices to initiate transactions autonomously. Cross-border remittance capabilities extend UPI‘s functionality beyond domestic boundaries, enabling international transfers through partnerships with foreign payment systems. These expanding use cases transform UPI from a simple payment rail into a comprehensive financial infrastructure supporting diverse economic activities.
The next transformation wave incorporates artificial intelligence, embedded finance, and sophisticated credit services. PwC‘s survey of over 170 industry stakeholders reveals that 73 per cent anticipate generative AI and agentic AI will significantly impact payment landscapes, whilst 65 per cent identify credit cards as the top growth mode. UPI is evolving to accommodate cross-border transactions, micro-credit disbursement, and buy now, pay later arrangements that blur traditional boundaries between payments and lending.
Embedded finance represents particularly disruptive potential as telecommunications companies, e-commerce platforms, and social applications integrate payment capabilities directly into non-financial services. These entities leverage vast user bases to drive financial inclusion and digital adoption, accelerating innovation whilst improving accessibility. However, this cross-industry participation pressures pure-play payment providers to differentiate through innovative products and strategic partnerships lest they become commoditised infrastructure providers captured between merchants and consumers.
Fraud’s Shadow Over Digital Growth
Digital payment expansion inevitably attracts criminal attention. Fraudulent transactions reached 2.4 million in 2025, representing a 20 per cent increase from 2 million in 2024. This escalation threatens consumer confidence that underpins digital adoption, making fraud prevention critical for sustained growth. The Reserve Bank of India (RBI) has responded by mandating beneficiary account name verification for real-time gross settlement and national electronic funds transfer services, reducing misdirected and fraudulent transfers.
The central bank is preparing to launch the Digital Payments Intelligence Platform, which deploys artificial intelligence to flag risky transactions and enhance real-time fraud risk management across the ecosystem. RBI’s MuleHunter.ai tool uses machine learning to identify mule accounts and suspicious activities in real time, disrupting fraud networks that exploit digital payment systems’ speed and scale. These technological countermeasures represent an escalating arms race between increasingly sophisticated fraudsters and regulatory authorities deploying advanced detection capabilities.
India’s payment revolution demonstrates how emerging economies can simultaneously embrace innovation whilst respecting entrenched traditions and practical constraints. The coexistence of surging cash circulation and explosive digital growth reveals a sophisticated ecosystem accommodating diverse needs rather than forcing artificial uniformity. As artificial intelligence, embedded finance, and enhanced security reshape capabilities, whilst regulatory frameworks evolve to balance innovation and protection, India’s dual payment ecosystem will continue influencing global financial services. The future belongs not to cash or digital exclusively, but to intelligent integration serving 1.4 billion people across the world’s most complex and dynamic economic landscape.