India’s UPI faces sustainability challenge as growth outpaces funding models

A decade after its launch, India’s Unified Payments Interface has become the backbone of the country’s digital economy, but its future growth hinges on developing sustainable revenue models amid mounting costs and market consolidation.

India’s Unified Payments Interface has moved from an experiment to the backbone of the country’s digital economy, but its 10th year has brought a harder question: how does a system built on zero-fee transfers pay for its own next phase?

The Reserve Bank of India was still describing India as a deeply cash-dependent country in its Payment Systems Vision Document 2012-15, noting the low number of non-cash transactions per person and pushing for a less-cash economy built on safer, faster electronic payments. That ambition now looks almost understated. In 2025-26, India recorded 28,174 crore digital transactions, and 86% of them ran through UPI, which did not even exist a decade ago. More than 55 crore people now use it, with 703 institutions involved in processing transactions.

UPI itself emerged from work that began years before its public launch. The RBI and the National Payments Corporation of India developed it against a backdrop in which cash-on-delivery still dominated a large slice of e-commerce and immediate payment systems were just beginning to scale. A 2013 RBI committee had already anticipated the possibility of a rapid spread of mobile-based money services, and that forecast proved accurate once UPI went live in 2016, first as a pilot in April before full rollout in August. Demonetisation later gave digital payments a boost, but monthly UPI transaction value remained below Rs 10,000 crore until December 2017 and only crossed Rs 1 lakh crore a year later, showing how gradual the take-up still was.

What changed the economics of the system was the question of merchant fees. The High-Level Committee on Deepening of Digital Payments, led by Nandan Nilekani, argued in 2019 that consumers and small merchants should not be charged and that the government should subsidise low-value transactions. The Centre later introduced incentives for low-value UPI and RuPay debit card payments to small merchants, but the subsidy was only ever a partial answer. According to a December 2024 Bank for International Settlements paper, investment in Indian fintech surged in 2019 and again in 2021, with payment firms drawing a large share of the capital as UPI adoption accelerated and the pandemic pushed more consumers towards digital payments.

That influx of money helped create a market dominated by a few large players. State Bank of India chairman C S Setty said last week that banks had “missed the payments bus”, and the numbers support his point: Walmart-backed PhonePe and Google Pay handled about 80% of UPI transactions by volume in July and 83% by value. Even rules intended to limit any one player to 30% market share have repeatedly been delayed, most recently until December 2026. SBI, despite its size, accounted for only a tiny fraction of UPI activity, while Kotak Mahindra Bank was the leading bank by volume and value among lenders.

The system’s scale has also created a cost problem. UPI transactions have risen far faster than card payments, with debit and credit card volumes excluding ATM withdrawals only modestly higher than they were in November 2019. Industry executives say the real issue is not adoption but funding: every transaction carries technology, banking and compliance costs that are difficult to recover when the merchant fee is zero. PayU chief executive Anirban Mukherjee has argued that UPI’s success should now be used to build credit products for merchants and consumers, while the payments industry is pushing for a merchant discount rate on higher-value transactions to large merchants.

The government, too, appears to be signalling that subsidies alone cannot sustain the system indefinitely. The finance ministry said at the weekend that public support cannot finance the next stage of growth. That next stage may lie in rural and semi-urban India, where usage still has room to deepen, and abroad, where NPCI chief executive Dilip Asbe has pointed to cross-border expansion as a strategic priority. UPI is already live in nine countries, including the UAE, Singapore and France, and the partnership with Singapore’s PayNow has become a model for how instant retail payments might work across borders. For the payments industry, the conclusion is clear: if UPI is to keep growing, it will need a revenue model that can fund the infrastructure behind it.