India’s Fintech Paradox: If Everything Becomes Free And Interoperable, Why Inno ...
India’s fintech ecosystem is at an interesting crossroads.The RBI’s Payments Vision 2028 released in March 2026 contains several genuinely thoughtful proposals. Shared fraud liability between issuer and beneficiary institutions could improve accountability. A single window authorization system for cross border payments that combines the PSS Act and FEMA could reduce regulatory friction. And the proposed “Small Payment System Provider” category, with lighter compliance requirements for smaller fintechs, acknowledges a long standing structural issue in India’s licensing ecosystem, bringing it more on par with license structures that exist in Singapore and the UK today
But there is one question that remains conspicuously absent from the conversation, and something I was hoping to see in the vision document of 2028: where is the monetization? In a world where UPI is free (which means that providers of this service cannot charge their users), and it constitutes 80%+ volumes of the digital payment ecosystem, how is it sustainable for payment operators to operate, and more importantly continue to innovate?
Instead, the broader trend continues to move in a familiar direction: keep it free, and make everything interoperable.
That is what the 2028 payments vision document suggests. Double down on TReDS interoperability. Explore an interoperable cards ecosystem. We already have ULI as an interoperable lending stack, and ONDC as interoperable ecommerce infrastructure. Of course, the scale of the last two is a question mark, but it speaks to the mindset of the regulator.
And now, the latest news that NPCI is building an interoperable soundbox system, is what really got to me. Soundboxes were not merely another payment device. They represented genuine market innovation. Fintechsidentified a real merchant pain point: the anxiety of not knowing whether a payment had actually gone through. They built a solution that solved for trust and operational convenience in one stroke.
And, the soundbox was never just a INR 100 per month subscription device. It was also a distribution mechanism. A merchant who used the soundbox consistently for six months created transaction history and payment behavior data. That data then became the basis for underwriting loans and onboarding merchants deeper into the formal financial ecosystem.
I get the argument for it. Interoperability makes things easier and cheaper for merchants. Ease of doing business matters. But this debate requires more nuance.What about the ease of doing business for the companies that invested capital, time, and operational bandwidth into creating these innovations in the first place? What becomes of their moat once every successful product layer is eventually standardized? Payments is already a business where scale is essential simply to survive. Even leadership does not guarantee profitability. PhonePe, despite being the market leader in consumer UPI payments (~50% market share), still reported losses of INR 1444 crore in H1 FY26.
The broader pattern increasingly appears to work like this: Fintechs find a market gap → innovate and invest heavily to solve it → achieve scale → interoperability is introduced → margins collapse → consolidate or disappear.
And this creates a larger contradiction within India’s payments ecosystem. On one hand, the ecosystem is steadily pushing toward zero margin infrastructure where every layer becomes free, interoperable, and stripped of defensibility. On the other hand, NPCI’s proposed 30% market share cap on UPI volumes remains unmet. PhonePe continues to hold roughly 50% market share, while Google Pay controls approximately 33%. But why would newer players aggressively compete for volume in an ecosystem where the unit economics are fundamentally broken?The contradiction becomes difficult to ignore.
Either:
Everything becomes interoperable and free, moats disappear, margins collapse, and naturally the market consolidates around two to three dominant players.
OR
The ecosystem genuinely wants competition (as suggested by the 30% market cap), in which case newer entrants need viable ways to monetize and sustain themselves.
Right now, the industry appears to be trying to pursue both simultaneously. Meanwhile, NPCI itself reported INR 1,552 crore in PAT in FY25. The infrastructure layer is thriving. The regulator is thriving. But the question remains: what about the regulated entities building on top of that infrastructure?
India’s DPI stack is undeniably world class. It has transformed financial access and digital payments at unprecedented scale. But there is a difference between enabling competition and commoditizing every successful innovation the moment it achieves adoption.
At some point, the ecosystem must stop treating “free” as inherently synonymous with “good.” Because an ecosystem where innovation is systematically commoditized may eventually become an ecosystem that stops producing innovation altogether.
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