UPI: India’s Banking Revolution or a Silent Threat to Traditional Banks?

What is UPI and Why is It Booming?​

Launched by NPCI (National Payments Corporation of India) in 2016, UPI allows real-time, 24/7 fund transfers using just a mobile number or UPI ID — no bank details, no IFSC, no hassle.
By 2024, UPI clocked over 120 billion transactions valued at ₹180+ lakh crore. From street vendors to government services, UPI has become the go-to method for payments.

Benefits to Users and the Economy​

• No transaction fees (for most users)
• Instant payments, 24/7 — even on holidays
• Highly accessible, even for rural users
• Boost to digital India, reducing reliance on cash

For the economy, UPI has increased transparency, improved digital inclusion, and driven financial literacy among the unbanked population.

The Flip Side: A Challenge for Traditional Banks?​

Banks are required to support UPI infrastructure, but here’s the catch — they don’t earn from it. Unlike card payments or IMPS, UPI transactions are largely free, offering no revenue to the banks that process them.
This is leading to:

• Loss of interchange fee revenue
• Decreased footfall in branches
• Reduced cross-selling opportunities
• Banks becoming backend service providers, while apps like Google Pay and PhonePe build customer loyalty

Ask yourself: when you use UPI, do you remember your bank or just the app?

Changing Power Dynamics: Fintech vs Banks​

UPI has also empowered fintech giants. Apps now own the user interface, while banks do the “dirty work” of processing.
This shift weakens banks’ branding and customer relationships, potentially reducing their role in the long run unless they adapt.

The Policy Dilemma​

While UPI promotes inclusion and transparency, is it sustainable if banks don’t earn from it?
Some suggest:

• Charging nominal fees for high-value/business transactions
• Offering premium UPI services
• Government support or subsidies to banks

What Lies Ahead?​

UPI is here to stay, no doubt. But banks must evolve or risk irrelevance. Collaboration with fintech, smarter digital strategies, and customer-focused innovation are the only way forward.

Discussion Prompt:​

Do you think UPI should remain 100% free, or should banks be allowed to earn from it to stay sustainable?
Let us know your opinion below — your voice matters in shaping the future of Indian banking.

 

[kanishkajha]

UPI has undoubtedly transformed India’s payment landscape — not just technologically, but culturally. Its frictionless design, zero-cost model, and scalability have made digital payments feel as natural as handing over cash. But from a systemic perspective, the sustainability question is real.

While financial inclusion and accessibility must remain top priorities, it’s also important to recognize that banks shoulder infrastructure costs without direct returns. If we don’t address this imbalance, we risk weakening the very institutions that hold up the digital economy.

Perhaps the way forward lies in tiered monetization — keeping UPI free for individuals and small-value transactions, but introducing nominal charges for high-frequency, high-value, or commercial use cases. At the same time, banks should rethink their positioning: from being just processors to becoming platforms of value-added services, leveraging UPI data to offer smarter credit, insurance, and advisory products.

UPI shouldn’t just be free — it should also be sustainable, both technologically and economically. And that means building a model where efficiency and equity can co-exist.