Banks fund India's digital payments while fintechs reap the revenue

UPI cost burden reaches Rs 8,500 crore annually as third-party apps dominate customer engagement

Indian banks are bearing an annual ₹8,500 crore cost burden to operate the country’s digital payments infrastructure while fintech competitors leverage this network to generate revenue from lending and financial services, according to a report by fintech firm Zeta.

 

“A central irony in the UPI model is that banks shoulder much of the cost while the rest of the ecosystem captures its value and visibility with users. With zero MDR (merchant discount rate) in place, nearly all operating costs, transaction processing, infrastructure maintenance, fraud mitigation, and compliance, fall on issuing banks. Industry estimates peg annual UPI operating costs at ₹10,000 crore and government subsidy covers only ₹ 1,500 crore,” Zeta said in the e-book titled ‘Reimagining UPI for Banks'.

 

UPI has emerged as the backbone of India’s digital economy, with transaction volumes growing 14-fold over five years and merchant payments comprising more than 60 per cent of activity. Yet the cost structure has left banks funding infrastructure that third-party payment providers use to acquire customers and cross-sell financial products.

 

“UPI now powers nearly 85 per cent of India’s retail digital payments. Yet, the customer mindshare has shifted decisively from banks to third-party apps. A typical customer opens PhonePe or Google Pay 25-30 times a month, but rarely their own bank’s app,” Mehul Mistry, senior vice president, customer success, strategy and growth, Zeta, told Business Standard.

 

“This shift has eroded banks’ ability to cross-sell, upsell, and build deeper engagement. If banks can reimagine UPI as a product and anchor usage back into their apps with differentiated offerings, they will reclaim both customer mindshare and long-term value,” he added.

 

The report said that payment aggregators like PayU, Paytm, BharatPe, PhonePe, and Google Pay offer merchant loans and advances, underwritten using UPI transaction data and repaid via daily QR-linked deductions. They on-board merchants, manage interfaces, and offer credit, even though banks are the legal acquirers, it said.

 

The report refers to the PwC data which projects that UPI could process a billion transactions per day by FY27-28, unlocking nearly ₹47,400 crore in annual revenue potential.

 

Mistry said that banks are uniquely placed to transform UPI from a payment rail into a full-fledged product stack. He highlighted that credit lines on UPI, family banking, add-on UPI IDs, instant rewards, and merchant loans based on UPI cash flows are possibilities.

 

“The future will belong to banks that see UPI not merely as infrastructure, but as their most powerful distribution channel,” said Mistry.

 

Mistry said the real opportunity lies in the digital trail created by UPI transactions. This data can fuel sharper underwriting, contextual lending, and precision cross-sell at scale.

 

For merchants, UPI cashflows can power instant settlement advances. For consumers, every UPI transaction can trigger personalised credit or rewards.

 

“It requires banks to reimagine UPI as a growth engine, not just a cost line,” said Mistry.

 

Banks can enable innovations including smart multi-account linking under a single UPI ID, add-on UPI IDs for multiple users per account, and family banking hubs for shared financial management. These also include embedding real-time credit options during payments and providing merchant loans based on UPI cash flow data.

 

As the UPI ecosystem in India develops further, the report said that banks are at a strategic inflection point. They must quickly innovate and turn UPI from a simple payment tool into a strong platform for merchant solutions, credit, and individualised financial services if they want to remain relevant.

 

By adopting a customer-centric, UPI-native strategy and emphasising rewards, privacy, and seamless experiences, the report said that banks may regain their position as industry leaders. This would spur fresh growth in India's thriving digital economy.

 

In the coming years, the banks that successfully transform payments from a cost centre into a strategic business driver will define an evolution that promises richer, more secure, and more rewarding digital financial journeys for both its consumers and merchants.

 

“It is not too late for banks. Even if banks win back 25-30 per cent of customer traffic from today's dominant payment apps, that shift would be transformative. Banks already own the customers, the accounts, the credit rails, the trust,” said Mistry.

 

“By upgrading their UPI infrastructure, banks can move from being silent rail providers to experience owners.”