India`s payments system undergoing a structural shift towards a hybrid model: CareEdge Advisory
According to CareEdge Advisory, the share of digital transactions in Private final consumption expenditure (PFCE) has increased from 30% in FY23 to 50% in Q1 FY26, driven by UPI adoption, policy changes, and evolving consumer behaviour. Despite this growth, cash remains resilient, maintaining a 50% share in PFCE.
It notes that India's payments system is undergoing a structural shift towards a hybrid model, where digital and cash channels coexist, serving distinct yet complementary roles. Supported by a conducive regulatory environment and innovations that enhance interoperability, UPI is well-positioned to consolidate its role as the backbone of India’s payments landscape, driving both transactional efficiency and broader economic participation.
“From 70% share of cash usage in Private Final Consumption Expenditure (PFCE) in FY23 to 50% in Q1FY26, India has been witnessing a payments system revolution, where cash and digital transactions will co-exist to drive financial inclusion and power a truly inclusive economy,” said Kalpesh Mantri, Assistant Director at CareEdge Research.
According to CareEdge Advisory report, retail payments are now 99.8% digital, with paper-based instruments (Cheques) nearly obsolete, owing to policy push, infrastructure support, and deep fintech penetration. Digital payments, led by UPI, AePS, IMPS, and others, dominate retail transactions, accounting for 92.6% of payment value and 99.8% of transaction volume as of Q1 FY26. It highlights that rising internet penetration (from 60.7% in Mar’21 to 70.9% in June 2025) and smartphone usage have accelerated this shift, enabling financial inclusion by bringing previously unbanked populations into the formal digital economy.
CareEdge Advisory report highlights that UPI is the driving force behind the behavioural shift of growing digital transactions, with 54.9 billion transactions in Q1FY26 and 185.9 billion transactions in FY25. UPI transactions grew at a CAGR of 49% between FY23 and FY25, underscoring rapid adoption and deepening penetration in tier 2 and tier 3 cities.
UPI is expected to continue its rapid growth, further solidifying its dominance in India’s digital payments landscape. Widespread smartphone and internet access (approx. 85% in 2028), combined with supportive policies and wider usage, will expand both merchant and consumer adoption.
“UPI transactions have registered phenomenal 49% CAGR between FY23 and FY25, underscoring rapid adoption with rising internet penetration as well as deepening penetration in tier 2 and tier 3 cities. However, its zero-MDR framework challenges long-term sustainability. The next growth phase will hinge on smart monetization through value-added services like micro-credit, merchant analytics, insurance, and fintech partnerships, ensuring UPI remains both accessible and economically self-sufficient,” said Tanvi Shah, Senior Director at CareEdge Research.
The report also notes that NEFT remains crucial for mid-to-high-value transactions, with an average ticket size of approximately Rs 48,000 as of Q1FY26, which is significantly higher than that of UPI. IMPS continues to experience steady growth but is being cannibalised by UPI, which offers a similar instant payment experience with broader merchant acceptance. While, NACH transactions remain important for bulk disbursements, such as salaries, subsidies, and dividends.
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