A significant portion of our growth has come from Tier III, beyond: PhonePe’s Ankit Gaur on digital payments boom

With UPI transactions crossing record volumes, payment gateway providers are increasingly focusing on how small businesses can use this digital payments boom to streamline operations and expand their customer base. 

A large share of this growth for the fintech firm is driven beyond India’s metros, with digital payments opening up new markets, said Ankit Gaur, Head of Payment Gateway and Online Merchants at PhonePe, during a fireside chat at MSME Sparks 2025, a week-long event hosted by YourStory to celebrate Indian MSMEs.

“Not just Tier I, a significant portion of our growth over the last three-four years, and especially post-COVID, has come from Tier III, IV, and beyond [towns],” he said. 

Gaur added, “Imagine a carpet maker in Uttar Pradesh… Their market was constrained by where they could sell. What digital payments have done is they’ve allowed them to sell anywhere and collect the money digitally. So, suddenly, an artisan in any Tier III market, or a goods and services provider, has found that their market has opened up. They are no more geographically constrained.” 

According to Gaur, digital payments have addressed one of the most fundamental hurdles for MSMEs, which is access to formal credit. Traditionally, smaller businesses in these markets operated primarily on cash, making it nearly impossible to establish creditworthiness with banks or financial institutions.

“It has allowed the MSMEs to use those collections today, especially UPI, which has democratised payment. It's allowed them to have a trail, because you're now collecting money through payment apps and doing so digitally. You have a trail of what your cash flows are, and that allows you to be able to prove to a bank or NBFC as to what your credit worthiness is,” he explained. 

However, the journey to widespread digital adoption hasn't been without challenges. Gaur said PhonePe has put a lot of effort into educating consumers about digital payments.

“There is a big generation today that is growing up digital first. But for anyone who is [over] 35 [years], we've not grown up in the true digital era… To understand the concept of money not being in a physical form itself has been very difficult," Gaur noted.

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He continued, “The second part has been a lot about combating the challenges of fraud. One unfortunate side effect of digital payments has been the fact that there are newer ways in which scams are happening, and fraudsters are taking charge.” 

Looking ahead, Gaur sees opportunities for MSMEs to expand internationally through digital payments. “The markets opening up is one big opportunity. The government is promoting cross-border transactions. For SMEs and MSMEs who are looking to grow, what digital payments do is just open up your different models of selling, not just locally, not just nationally, but internationally as well.” 

He also identified embedded payments as the next major trend, which he sees scaling massively over the coming years. According to Gaur, this will manifest in two key ways: device embedding and platform integration.

On the device front, payments will become accessible across multiple touchpoints, such as traditional smartphones to taps, swipes, and even facial recognition systems.

Gaur believes that UPI is evolving from a single payment method into a comprehensive platform, including the growing adoption of UPI credit and extension of UPI to feature phones in Tier II and III markets. 

With AI spreading across industries, Gaur's vision in the finance sector lies primarily in improving user experience rather than changing how transactions are processed by making payments more intuitive through conversational interfaces.

However, even with these technological advances and widespread adoption, he said India's digital payments story is far from complete.

“We have barely scratched the surface when it comes to digital payments in India. We are talking about close to 500-600 million users already using digital payments..There's a very large chunk, which is already out of the digital payments ecosystem, and getting them into it has to be important.”