UPI growth pushes banks to look beyond payments for revenue: McKinsey

The report, titled - "How instant payments are transforming the financial landscape", said India has emerged as one of the world's leading instant-payment markets, with UPI processing more than 19 billion transactions every month, accounting for nearly a third of the country's total transaction volume.

As instant payments gain scale, however, the economics of the payments business are also changing. McKinsey said, "As demand for instant payments grows, banks, acquirers, and payment schemes may see revenue from traditional sources pressured and will need to adapt their services, products, and business models to remain competitive."

The pressure stems partly from the way instant-payment systems such as UPI are structured. McKinsey noted that UPI's expansion was supported by zero fees for merchants and customers, government support and subsidies to financial institutions for low-value transactions. Its growth was also aided by participation from major banks and third-party application providers and India's broader digital public infrastructure.

Unlike card payments, which generate transaction-linked revenues for financial institutions, instant payments can be harder to monetise directly.

"While card payments generate revenue for many financial institutions, the benefits of instant payments come from lower costs, better customer relationships, and new service offerings rather than transaction fees," the report said.

This is changing how banks compete in India's payments market. "In India, banks have embraced UPI for everyday payments while differentiating themselves through lending, merchant solutions, and premium card offerings," McKinsey said.

Fintech companies are also trying to convert their large payments customer bases into businesses beyond payments. The report said, "Fintechs have similarly used their large payment user bases to expand into adjacent businesses, including lending and insurance distribution, merchant advertising, and other value-added services."

McKinsey said transaction data generated through the payments ecosystem has also created revenue opportunities in lending, insurance, merchant marketing and customer analytics. It pointed to the Reserve Bank of India's decision to allow RuPay credit cards on UPI as an example of established payment players adapting their products to the rise of instant payments rather than treating the two systems purely as substitutes.

The report places India, along with Brazil, among markets where instant payments have become a primary payment rail. It said that in such markets, instant payments expanded beyond person-to-person transfers into merchant, government and business payments, while displacing cash, reducing debit-card usage and beginning to compete with credit cards in some use cases.

McKinsey said India's experience also showed that payment infrastructure alone was not enough to drive adoption. "Markets that have scaled instant payments combine three factors," it said, pointing to broad participation across the payment ecosystem, a strong value proposition for consumers and merchants, and continued introduction of new features.

The findings come as Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, which creates an enabling framework for Merchant Discount Rate (MDR) charges on UPI transactions. The government has clarified that the amendment does not itself impose a charge and that UPI will remain free for consumers and small merchants. It has said that if MDR is introduced, it would apply only to a limited set of merchant transactions above a specified threshold at a nominal rate. (ANI)