Digital payments system needs to adapt to rural India’s realities

Merging traditional and digital methods is crucial for enhancing financial inclusion.

By Ajeet Kumar Singh

India has experienced a remarkable evolution in its digital payment landscape. This shift has changed how transactions happen nationwide. Innovations such as UPI (Unified Payments Interface), Bharat Bill Payment System (BBPS), and QR codes are at the forefront of this change. There is no doubt that urban area residents have welcomed digital payments with open arms. Nonetheless, as more and more people gain access to financial services, an important question arises, and that question is: how can these digital repayment tools meet the credit needs of rural and semi-urban borrowers? Solving this issue is essential for spreading the advantages of digital finance throughout the country.

Digital payment solutions offer unmatched ease, security, and scalability, positioning them as a game-changer for expanding access to financial services. Take the Bharat Bill Payment System (BBPS), for example, launched in 2016 to unify multiple platforms and enable real-time settlements, streamlining the bill payment experience. With millions of transactions annually covering utility bills, loan repayments, and credit card payments, BBPS has seen remarkable growth. However, despite this progress, challenges related to last-mile connectivity in rural areas limit the system’s full potential.

Cash continues to dominate rural credit systems

Cash payments remain the main method in rural credit systems. For both non-banking financial companies (NBFCs) and rural borrowers, cash is a reliable option. Its ease of use, quick access, and common acceptance make it very trustworthy. With about 65 percent of India's population living in rural regions, there is a clear need for a hybrid approach. Merging traditional and digital methods is crucial for enhancing financial inclusion.

The widespread adoption of WhatsApp across rural India presents an opportunity to simplify digital repayments further. By utilising WhatsApp APIs, borrowers can conveniently apply for loans, verify KYC details, and make EMI payments directly within the app, which helps improve financial literacy. Complementing this, SMS payment links offer an effective alternative in regions with poor internet access by redirecting borrowers to secure payment gateways via text messages. This approach works particularly well in rural areas with high mobile penetration but low smartphone usage, demonstrating the adaptability of digital solutions to overcome rural constraints.

UPI needs modifications to allow rural users to take a bigger advantage

With a current base of 350 million active users, extending UPI’s reach to developing regions offers vast potential for growth. Nevertheless, its success in semi-urban and rural areas depends on tackling issues like digital literacy gaps and network infrastructure limitations.

For simple loan repayments, static QR codes provide a cost-effective and straightforward method, allowing users to scan and pay fixed amounts. These codes are particularly beneficial for small transactions or in areas with limited technical support. However, their lack of scalability for variable transactions poses challenges, as static codes cannot be updated dynamically.

On the other hand, dynamic QR codes address these limitations by generating unique transaction-specific codes, enhancing tracking, and reducing fraud risks. Despite their technical superiority, the higher costs of implementing dynamic QR codes often deter smaller lenders in rural areas from adopting them.

Customer Service Points (CSPs) have become a cornerstone for improving financial inclusion in rural areas. Acting as small banking hubs, they provide essential services such as cash and digital payments, loan disbursements, and EMI collections. Their accessibility even in remote locations builds trust in digital systems, bridging the gap created by the lack of formal banking infrastructure in villages.

Realities of the rural landscape

While digital repayment techniques hold great promise, the reality of rural life presents complex challenges. Limited digital literacy, inconsistent internet connectivity, and high transaction costs make it difficult for these tools to gain traction. Even as smartphone adoption rises, many rural residents still struggle to understand and use digital financial systems effectively. Moreover, unstable internet connections further hinder the use of platforms like UPI in many areas. For NBFCs, already operating on tight margins, investing in digital infrastructure is often too costly, while borrowers are discouraged by transaction fees, which together impede the adoption of digital systems.

A collaborative approach works best

Adapting digital payment systems for rural borrowers requires collaboration. Government agencies, financial institutions, and fintech innovators must work together. Enhancing digital infrastructure can improve connectivity and lower device costs. These efforts can help them embrace digital repayment systems with greater confidence. Additionally, subsidising transaction fees or creating shared digital infrastructures can help reduce costs for NBFCs and borrowers. Crucially, a hybrid model that incorporates both digital tools and cash payments provides a practical solution that accommodates varying levels of literacy and connectivity.

In conclusion, while digital payment mechanisms offer significant potential to empower rural and semi-urban borrowers, their success depends on addressing underlying infrastructural and educational challenges. All in all, it can be said that achieving financial inclusion in India’s heartland will require a balanced and adaptable approach that blends the innovation of digital systems with the reliability of traditional cash methods.

(Ajeet Kumar Singh is MD and Co-Founder, SAVE Solutions Private Limited)

Views are personal and do not represent the stand of this publication.