Unified Payment Interface (UPI) is synonymous with words like Paytm, Phonepe, GooglePay etc but it is also the reason that these companies could never have the success which Alipay and Wechat tasted in China. Alipay and Wechat are standalone wallet apps that do not have inter-operability. This means that one can transfer money from one Alipay account to another Alipay account but it is not possible that a person holding account in ICBC bank can use Alipay app to transfer money to another person using Wechat app with the account linked to Chinese construction bank. UPI on the other hand, has made this scenario possible in India. In India, it is perfectly possible for person using Paytm app linked to SBI account to transfer money to a person showing his QR -Code generated on google pay app linked to HDFC bank account. This is the power of UPI which has brought immense ease of digital transactions to Indian users and is now rated as one of the gold standards of digital public infrastructure in the world.

Reserve Bank of India deserves credit for envisioning UPI as highly interoperable platform which allows bank to bank transfer using any application platform. The creation of interoperable platform has ensured that no particular app can claim monopoly on QR based transactions. In fact, companies like Paytm which had a thriving digital transaction volume after demonetization and had an aspiration to become Alipay of India found themselves in a tight spot after UPI was introduced. The introduction of UPI completely removed the need of users to have a wallet which was an important strategy for fintech companies to mobilize low cost funds. With UPI, that opportunity simply fell flat on the ground.

Banking system in India has got technological leg-up because of UPI. Further, UPI has ensured that deposits remain within the banking system and do not migrate to non-banking companies. If that would have happened, it would have put huge pressure on banks to mobilize low cost deposits and that in turn, would have hit their lending ability and profit margins. The UPI has ensured that transactions alone cannot become a monopoly point of a business and the business needs to adopt banking structure to raise public funds and deploy them in productive assets. The use of low-cost deposits to further the credit growth in an economy is a very diligent function and it is important that this function should remain largely confined to banks who are more regulated and equipped to handle such activity. Erosion of low-cost deposits by wallets could have led to a disruption that Indian system was not prepared for.

While UPI has given a chance to Banking system to ward off threat to its low-cost deposit base, banks should ensure that this should not lead them into complacency. It should be wake up call for banks to device innovative models that not only lower the costs of the such transactions but also become a gateway of customer acquisition. Government has till now pumped over 10,000 crore rupees to keep UPI free of cost but it is not sustainable to do so given the rising size of UPI transactions. UPI transactions have reached a staggering figure of 728 million transactions daily, which is likely to grow further. While UPI has given a digital push to economy, it is true that it is yet to achieve its key objective of cashless Indian economy. It may also be worthwhile that UPI’s mandate must be limited to access, speed and financial inclusion as cashless economy requires many other regulatory reforms which UPI alone cannot achieve.

The banking system must build on the lessons learned from UPI’s success by integrating AI to offer cutting-edge services. Given the sector’s critical role in financial intermediation and capital allocation, banks should evolve into “thinking” financial advisors. This shift will help customers reach their financial goals while ensuring capital is channelized into highly productive assets—a transition that necessitates significant investment in AI-driven lending automation. India requires a banking system that deeply understands capital market dynamics to effectively mobilize national savings. Rather than simply reacting to economic cycles, banks must adopt a long-term vision focused on the financial well-being of all Indians. Just as UPI revolutionized transaction speed and simplicity, the next frontier for banks is to use technology to make the entire banking experience more intuitive and meaningful.