While UPI's meteoric rise has been a boon for financial inclusion and cashless transactions, it has also led to a significant shift in market dynamics. Leading Third- Party App Providers (TPAPs) like PhonePe and Google Pay have carved out dominant positions, often serving as the primary interface for merchants accepting UPI payments. Now, traditional banks are keen to reclaim their direct merchant relationships, recognizing the strategic imperative of owning this crucial customer segment.

The Rise of TPAPs and the Merchant Disconnect of Banks

The success of UPI-enabled apps like PhonePe and Google Pay can be attributed to several factors: intuitive user interfaces, aggressive marketing, widespread QR code deployment, and often, zero merchant discount rates (MDR) for UPI transactions (though this is beginning to change for some segments). These apps have become the de facto payment acceptance solution for a vast number of merchants, from small kirana stores to large enterprises.

While banks are the backbone of UPI, sponsoring these TPAPs and handling the underlying financial infrastructure, they often find themselves in the background of the merchant relationship. The direct interaction, data insights, and potential for cross- selling value-added services often reside with the TPAPs. This disconnect has spurred banks to strategize on how they can forge stronger, direct ties with merchants.

Also Read: Retirement Planning in 2025: The Benefits of Using SIPs and SWPs Together

Why Banks Want Direct Merchant Relationships

For banks, a direct merchant relationship offers several compelling advantages:

• Customer Ownership and Loyalty: Direct relationships allow banks to understand merchant needs deeply, build loyalty, and prevent customer churn. Merchants using a bank's own UPI solution are more likely to engage with other banking products.
• Data-Driven Insights: Direct relationships provide rich data on merchant transactions, sales patterns, and business performance. This data is invaluable for developing tailored financial products, offering personalized credit, and providing advisory services.
• Cross-Selling Opportunities: Once a bank is the primary UPI acquiring partner, it opens doors to cross-sell a suite of financial services, including current accounts, working capital loans, point-of-sale (POS) solutions, business insurance, and wealth management. This is crucial for diversifying revenue streams beyond core banking.

• Reduced Dependence on TPAPs: Limiting reliance on TPAPs for merchant acquisition reduces associated costs (even if currently low or zero MDR) and gives banks greater control over their digital payments strategy and customer
  experience.
• Compliance and Risk Management: Directly managing merchant relationships allows banks to maintain tighter control over KYC (Know Your Customer) and AML (Anti-Money Laundering) compliance, mitigating potential risks.
• Innovation and Customization: With direct access, banks can innovate faster and offer customized payment solutions that cater to specific merchant segments or industries, rather than relying on generic TPAP offerings.

Also Read: Kiwi, a Fintech Startup, Raises $23M to Grow UPI Credit Payments

Banks' Strategy: Reclaiming the Digital Frontier

To compete effectively with agile TPAPs, banks are adopting multi-pronged strategies:

• Developing Robust In-House UPI Solutions: Banks are partnering with companies who bring the technology of user-friendly interfaces, seamless onboarding processes, and efficient payment collection. This includes providing static and dynamic QR codes, sound notification devices, and integrated dashboards for transaction tracking and reconciliation. That is helping banks create a value proposition which used to be the forte of large TPAPs. Central Bank of India engaging with IserveU Technology for the same in a $10 million contract is a case in point.
• Leveraging Existing Relationships through Branch Network: Banks have a vast existing network of current account holders and business clients. They are leveraging these relationships to onboard merchants directly onto their UPI acquiring platforms, offering integrated banking and payment solutions. This includes streamlined access to business loans and lines of credit directly linked to their transaction history instead of implicit data points that the banks have now.
• Value-Added Services (VAS): Beyond just payment acceptance, banks are bundling value-added services like analytics, loyalty programs and inventory management making their offerings more attractive than pure-play payment apps.
• Regulatory Support: The Reserve Bank of India (RBI) and NPCI's initiatives, such as the proposed 30% volume cap on TPAPs' market share, provide an opening for banks to expand their presence and contribute to a more diversified UPI ecosystem.