UPI (Unified Payments Interface) has profoundly reshaped Indian banking since
its 2016 launch. It is now the dominant retail payment system, processing the
vast majority of digital transactions and fundamentally altering revenues, costs,
deposits, competition, and business models.
Scale of UPI (FY 2025-26 data)
- Volume :
~24,162 crore transactions (up ~30% YoY).
- Value :
₹314 lakh crore.
- Users :
~55.5 crore onboarded.
- Banks live :
703.
- Share of
retail digital payments : ~80–86% by volume.
UPI accounts for
nearly half of the world’s real-time payment transactions.
Positive impacts on banks
- Deposit stickiness and CASA support : Transactions link directly to
bank accounts, keeping funds inside the banking system and reducing cash
usage. This supports low-cost Current Account Savings Account (CASA)
balances for some banks, especially those capturing merchant float via
their own QR codes.
- Lower cash-handling costs : Fewer ATM withdrawals and cash
logistics expenses free up resources.
- Digital trail for credit : Transaction data improves underwriting,
enabling pre-sanctioned credit lines on UPI, merchant loans, and instant
lending. Banks (and fintechs) have expanded credit, particularly to prime
and some new-to-credit segments.
- Customer acquisition and engagement : Massive onboarding of users
(including Jan Dhan accounts) creates opportunities for cross-selling
loans, insurance, and other products. Banks that innovate on UPI rails see
higher mobile activity and product updates.
- Operational efficiency : Accelerating digital volumes have
helped reduce cost-to-income ratios for many lenders over time.
- Merchant relationships : Banks deploying their own QR
infrastructure gain direct access to transaction flows, current-account
deposits, and lending opportunities with small businesses.
Negative / challenging impacts
- Zero or near-zero MDR (Merchant Discount Rate) : Most UPI
transactions generate little or no direct fee income for banks (unlike
cards, which had 0.4–2%+ MDR/interchange). Banks bear infrastructure, compliance,
fraud prevention, and settlement costs with minimal direct revenue.
Government subsidies have sharply declined.
- Volume-revenue paradox : Explosive growth in transactions has
not translated into proportional fee income. Banks effectively cross-subsidize
UPI via other charges or accept it as public infrastructure rather than a
profit centre.
- Pressure on traditional payment revenues : Cards and
older systems have lost relative share; some fee pools have been
disrupted.
- Deposit dynamics :
High-velocity UPI transfers accelerate money circulation. Loan proceeds
move quickly across accounts instead of staying as stable deposits,
weakening the traditional credit–deposit multiplier. Some analyses view
this as a structural drag on deposit growth, potentially increasing
reliance on wholesale funding.
- Competition and disintermediation : Third-party apps (PhonePe, Google Pay,
etc.) dominate user interfaces. Payments banks have been particularly
hurt, as UPI made their wallet-based model largely redundant. Smaller or
less digitally agile banks face higher relative costs.
- Rising operational burden : Fraud risks, security upgrades, and
high transaction volumes increase costs. Some banks are building their own
UPI apps to reduce fees paid to third-party platforms.
Differential impact : Domestic vs foreign banks
Domestic banks
(especially large private and public-sector ones with scale) have adapted
better by leveraging UPI for customer acquisition, merchant float, and credit
products. Foreign banks, already constrained by limited branch networks and
higher regulatory costs in retail, found the zero-fee, high-volume UPI
environment even harder to monetize profitably—this was one factor in their
broader retreat from mass retail banking.
Evolving monetization strategies
Banks are
shifting from pure transaction fees toward ecosystem value :
- Credit-on-UPI
and RuPay credit cards for interchange + interest income.
- Merchant
solutions and float balances.
- Cross-selling.
- Own UPI apps
to cut intermediary costs.
- Some
selective fees on third-party aggregators or high-volume users (with
regulatory caution).
Overall : UPI is treated
more as critical public digital infrastructure than a direct profit engine. It
has driven inclusion, formalization, and efficiency, but forced banks to absorb
costs while seeking indirect returns through deposits, lending, and
relationships. The model rewards scale, digital capability, and ecosystem
thinking—advantages that large domestic banks currently hold more strongly than
most foreign lenders. 👈