In just a few years, India’s banking and payments landscape has been transformed. At the heart of this transformation lies UPI (Unified Payments Interface), which is a real-time payment system launched in 2016 by NPCI (National Payments Corporation of India). What began as a digital payments innovation has steadily become the backbone of India’s banking system, altering how banks operate, how customers transact, and how financial inclusion is redefined.

What makes the UPI phenomenon especially remarkable is how it has reoriented entire banking workflows—from customer acquisition and transaction infrastructure to credit delivery and cross-bank interoperability. In this blog, we walk through the evolution of UPI, explore how it is changing banks’ roles and strategies, examine measurable impacts, and look at challenges and future possibilities.

What Is UPI and How Did It Evolve?

UPI is an instant inter-bank payment system that allows users to transfer money between bank accounts via their mobile device, using a UPI ID or Virtual Payment Address (VPA). It operates 24/7, across banks, with minimal friction and real-time settlement.

Key milestones and scale:

• As of June 2025, UPI processed over Rs 24.03 lakh crore in value, across 18.39 billion transactions.
• In August 2025, UPI volume crossed 20,008 million (20.008 billion) transactions, valued at Rs 24.85 lakh crore.
• UPI connects 684 live banks (as of July 2025) in India.
• UPI now accounts for roughly 85% of India’s digital transactions by volume.
• On a global level, India’s UPI is now recognised as one of the largest real-time payment networks by volume.

The rapid scaling of UPI has gone from a nascent protocol to a dominant infrastructure that has laid the foundation for its deep impact on banking.

How UPI Reshapes the Banking System

a) Banks Become Payment Layer Providers, Not Gatekeepers

Traditionally, banks handled both custodial accounts and their own transaction rails (NEFT, RTGS, IMPS). UPI decouples the payments layer from any single bank. Now:

• Banks must integrate with UPI, exposing APIs to NPCI and third-party apps.
• Customers seamlessly transact via apps like PhonePe, Google Pay, Paytm, etc., even if their accounts are at a different bank.
• Banks shift from being monolithic controllers of their own systems to enabling nodes in a shared rail.

This forces banks to rethink their value proposition: they need to compete on user experience, trust, and value-added features rather than just account access.

b) Cost and Operational Efficiency

UPI’s digital architecture reduces costs for banks:

• Lower overheads for branch-based cash handling.
• Fewer intermediaries in payment settlement.
• Reduced friction and errors in reconciliations.
• Scalable infrastructure that handles peaks (festivals, salary days) without proportional cost increases.

Banks can repurpose infrastructure saved from traditional operations to better customer services and digital innovation.

c) Customer Acquisition & Relationships

Because UPI is so convenient and accessible:

• Many users open accounts just to use UPI, or switch banks, competing to be the “bank behind the UPI.”
• Banks focus more on digital onboarding, KYC, frictionless signup, and embedding value-added services (lending, savings, wealth products) around UPI touchpoints.

Thus, UPI becomes a customer funnel tool.

d) Credit & Lending via UPI

The next frontier is embedded credit and lending via UPI:

• NPCI and banks are working to link credit lines / RuPay cards / lines of credit to UPI apps, enabling users to draw credit and repay via UPI.
• This opens paths for instant micro-loans, overdraft, BNPL (buy-now-pay-later) directly within UPI flows.
• Because transaction history is rich, banks can better assess creditworthiness.

Thus, UPI may evolve into not just a payments platform, but a financial services platform.

e) Interoperability and Banking Innovation Pressure

UPI’s open, interoperable model compels banks to modernise:

• They must restructure legacy systems to support real-time APIs, microservices, and high availability.
• Banks need to focus on UX, data analytics, loyalty, and value-added services instead of just deposit and lending spreads.
• Smaller banks can innovate and plug in, creating a more distributed ecosystem rather than a few large banks dominating.

Measurable Impacts & Economic Value

a) Inclusion & Formalisation

One of UPI’s strongest achievements is bringing many cash-only users into the formal financial network:

• Rural, semi-urban, and underbanked regions embraced UPI via QR payments and feature phone USSD options.
• UPI has helped formalise informal commerce, as more small vendors accept digital payments.
• The BIS estimates that UPI has driven strides in financial inclusion while preserving consumer protections.

b) Cost Savings for the Economy

• An estimate by the World Economic Forum suggests UPI has saved India ~USD 67 billion (Rs 5.5 lakh crore) since inception, when compared to cash and card costs (handling, cash logistics, fraud, delays).
• The removal of friction, intermediaries, and inefficiencies translates into productivity gains for commerce and banking.

c) Contribution to GDP / Growth

• Some research indicates that 1% increase in UPI transaction volumes correlates with a 0.03% increase in GDP growth.
• UPI helps accelerate the circulation velocity of money, lowers cash drag, and encourages digital commerce expansion.

d) Dominance in Digital Payments

• India’s share of digital payments is dominated by UPI. By mid-2025, average daily UPI transaction value had crossed Rs 90,000 crore (USD ~10.3 billion).
• The growth in banks joining UPI (675 in June 2025, up from 602 the previous year) and the increase in merchant QR codes confirm the deepening reach of UPI.

Challenges & Risks

The power of UPI comes with responsibilities and friction points. Some notable challenges:

Technical and Scalability Risks

• Outages happen. In April 2025, a major UPI outage lasted ~5 hours due to API flooding.
• Peak transaction loads strain systems, especially during large festivals or sales.

Fraud, Security & User Trust

• As usage surges, fraud attempts (phishing, fake UPI IDs) also increase.
• Banks and NPCI must continuously upgrade security, monitoring, anomaly detection, and user education.

Overuse / Overspending Behaviour

• A behavioural study found that ~75% respondents reported increased spending attributable to UPI’s frictionless nature, as “intangible” payments reduce the psychological “pain of paying.”
• This may lead to weaker saving habits if not checked.

Digital Literacy & Accessibility Gaps

• Some populations—elderly, rural users, or those without smartphones—remain excluded or vulnerable.
• Reliance on digital channels places a premium on digital user experience, which needs constant refinement.

Regulatory & Privacy Concerns

• Data privacy, KYC compliance, cross-border interoperability, and oversight over third-party payment apps are complex issues.
• Ensuring consumer protection while scaling is a balancing act.

Future Directions: What’s Next for UPI & Banking

Cross-Border & Global UPI Integration

• NPCI is extending UPI internationally by tying up with other nations’ payment networks.
• For example, Indian travellers can now use UPI payments in Qatar at merchant terminals via partnerships.
• PayPal plans to integrate UPI in its cross-border “PayPal World” platform to enable global payments via UPI.

Credit / Instalment Features

• NPCI is working on converting UPI transactions into EMIs (Equated Monthly Instalments), letting users immediately split a UPI purchase into credit repayments.
• This will embed credit functionality deeper into everyday payments.

UPI Lite, Offline Payments & Offline Modes

• UPI Lite allows low-value offline payments without network connectivity—helpful in low signal zones.
• Further expansion of *USSD-based UPI ensures payment access on feature phones.

Banking Strategy Transformation

• Banks will increasingly offer value-added services around UPI: mini-loans, cross-sell, and payments-linked wealth products.
• Strategic collaboration with fintechs will become vital as banks must evolve from transaction providers to financial platforms.

Conclusion

UPI’s rise is not just a fintech success story, but it is redefining banking in India at a structural level. From displacing cash, reworking bank roles, enabling credit, and formalising commerce, UPI is the rails on which India’s digital economy runs.

Banks, regulators, and fintechs must continue to innovate, secure, and scale the UPI infrastructure. Balancing inclusion and risk, scaling responsibly into credit and cross-border realms, and managing user behaviour will be key. As UPI evolves, so too will the banking system to be more open, flexible, digital, and user-centric. The era of “bank in your pocket” is already here and UPI is steering the helm.

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