How Urban Cooperative Banks Can Crack the Offline Merchant Acquiring Code
Urban Cooperative Banks (UCBs) have long been a trusted part of India’s financial landscape, serving local traders and small businesses. With the rise of digital transactions, UCBs now have an opportunity to expand their role by entering the merchant acquiring space. But how can they effectively navigate this new terrain?
The Digital Transformation of Payments
In recent years, the digital payment landscape in India has undergone a significant transformation. Unified Payments Interface (UPI) has revolutionized transactions, making QR codes a common sight at local markets and small shops. According to the Reserve Bank of India, UPI QR codes saw a 91.5% increase, reaching 65.8 crore by March 2025. This shift has left UCBs as spectators, but recent policy updates offer them a chance to participate directly in merchant acquiring.
The Scale Challenge for UCBs
UCBs are inherently regional, with operations confined to specific areas. While this allows them to build strong community ties, it limits their ability to scale—a crucial factor in merchant acquiring. The economics of deploying QR codes and managing logistics require a large base of merchants to be cost-effective. Private banks and fintech companies have leveraged their national presence to dominate this space.
The Scale Paradox
- Local depth vs. broader reach
- High unit costs without national scale
- Fragmented merchant onboarding
A New Strategy for Merchant Acquiring
To overcome these challenges, UCBs must adopt a different approach. Instead of trying to replicate the fintech model, they can leverage their strengths through strategic partnerships. Payment Platform-as-a-Service (PPaaS) solutions offer a way forward. These platforms provide ready-made infrastructure, including UPI enablement, QR code issuance, and fraud monitoring, without the need for heavy investment.
Benefits of PPaaS
- Reduces operational costs by up to 25%
- Maintains control over customer experience
- Enables focus on core strengths
A mid-sized bank in southern India successfully adopted this model, outsourcing merchant onboarding and backend infrastructure to service 25,000 merchants.
Beyond Payments: New Opportunities
While enabling UPI payments is a start, the real opportunity for UCBs lies beyond transactions. The QR soundbox can become a daily touchpoint, strengthening visibility and trust. This consistent presence opens doors to deeper engagement, such as offering tailored financial services based on real-time transaction data.
Opportunities Beyond Payments
- Tailored offerings like short-term credit
- Micro-insurance based on cash flow patterns
- Improved credit assessments using behavioral signals
By shifting from passive payment collection to active engagement, UCBs can unlock new revenue streams. Their combination of data insights and local relationships positions them to deliver relevant and trusted services.
Charting the Future
As India aims for one billion transactions per day, growth will likely come from Tier II cities and beyond. UCBs already have enduring relationships with merchants in these regions. To stay relevant, they must embrace agility and focus on delivering the right product to the right merchant at the right time.
Key Takeaways
- Embrace strategic partnerships
- Focus on core strengths and local relationships
- Leverage data for tailored financial services
UCBs have the potential to redefine their role in India’s digital economy. By combining their deep community ties with innovative solutions, they can become vital players in the merchant acquiring space.
By focusing on strategic partnerships and leveraging their existing strengths, UCBs can navigate the complexities of merchant acquiring and play a significant role in India’s digital future.
