UPI Growth Pressures Traditional Payment Revenues, Pushing Banks and Fintechs Toward Lending: McKinsey

The rapid expansion of India's Unified Payments Interface (UPI) is putting pressure on traditional payment revenue streams, according to an August 2026 McKinsey Financial Services Practice report titled "How instant payments are transforming the financial landscape."

The report notes that India has emerged as one of the world's leading instant-payment markets. UPI currently processes more than 19 billion transactions every month, accounting for nearly a third of the country's total transaction volume. However, as these instant payments scale, the fundamental economics of the payments business are shifting.

McKinsey stated that banks, acquirers, and payment schemes face pressure on traditional revenue sources and must adapt their services, products, and business models to remain competitive. This pressure stems largely from the structure of instant-payment systems like UPI, which has grown with zero fees for merchants and customers, supported by government backing and subsidies for low-value transactions, along with participation from major banks, third-party application providers, and India's digital public infrastructure.

Unlike card payments that generate direct transaction-linked revenues for financial institutions, instant payments are more difficult to monetise directly. The report points out that the benefits of instant payments come primarily from lower costs, better customer relationships, and new service offerings rather than transaction fees. To counter this, banks in India are embracing UPI for everyday payments while differentiating themselves through lending, merchant solutions, and premium card offerings.

Fintech companies are similarly working to convert their large payment user bases into businesses beyond payments. The report highlights that fintechs have expanded into adjacent sectors, including lending, insurance distribution, merchant advertising, and other value-added services. Transaction data generated through the ecosystem has further created revenue opportunities in customer analytics and merchant marketing.

The Reserve Bank of India's decision to allow RuPay credit cards on UPI serves as an example of established payment players adapting their products to the rise of instant payments. In markets like India and Brazil, instant payments have become primary payment rails, expanding beyond person-to-person transfers into merchant, government, and business payments while displacing cash and reducing debit-card usage.

According to McKinsey, India's experience demonstrates that payment infrastructure alone is not enough to drive adoption. Successful markets combine broad ecosystem participation, a strong value proposition for consumers and merchants, and the continuous introduction of new features.

These findings arrive as Parliament has passed the Taxation and Other Laws (Amendment) Bill, 2026, creating an enabling framework for Merchant Discount Rate (MDR) charges on UPI transactions. The government has clarified that the amendment does not automatically impose a charge and that UPI will remain free for consumers and small merchants, with any future MDR application limited to a set of merchant transactions above a specified threshold at a nominal rate.

"The transition of UPI from a high-volume payment rail to a catalyst for lending and value-added services marks a critical evolution for India's financial sector. Because instant payments offer limited direct transaction fee revenues, financial institutions and fintechs must innovate around merchant solutions and credit to build sustainable business models. As the regulatory framework around merchant charges continues to evolve, the ability to leverage transaction data securely for auxiliary financial services will determine long-term success in the digital ecosystem." — Dr. Shishir Gupta, Founder & CEO, StartupLanes