How urban cooperative banks can crack the offline merchant acquiring code

A few years ago, the only digital device at a local kirana in Jaipur or a fruit stall in Bhopal might have been a basic FM radio. Today, these same setups echo with the familiar chime of a payment soundbox, announcing the quiet arrival of India’s digital economy at the grassroots.

This transformation, led by UPI, has reshaped everyday transactions. QR codes are now embedded in our retail fabric. According to the RBI’s 2024–25 report, UPI Quick Response (QR) codes also saw a sharp 91.5% increase, reaching 65.8 crore as of March 31, 2025, reflecting their widespread adoption across merchant touchpoints.

Amidst this digital surge, one trusted player has largely remained a spectator: urban cooperative banks (UCBs). But the stage is now set for their re-entry.

A familiar face in a digital world

UCBs have long been pillars of India’s financial landscape. With more than 11,000 branches spread across the country, they are often the first port of call for local traders, small shopkeepers, and family-run businesses seeking loans or managing cash flow. Their edge is not in technology or marketing; it lies deep, personal trust built over decades.

Now, thanks to progressive policy updates from the RBI, UCBs can participate directly in merchant acquiring on UPI, a move that could redefine their relevance in India’s digitised future. But this opportunity comes with a fundamental challenge: scale.

The scale paradox

UCBs are inherently regional institutions. Their operations are restricted to specific geographical areas. This could be a city, a district, or a defined jurisdiction. While this enables them to maintain strong community bonds, it also limits their ability to scale out something essential in merchant acquiring.

Merchant acquiring is, by nature, a scale-intensive business. The economics of QR code deployment, soundbox logistics, compliance overhead, and customer support only work when costs are spread across a large base of merchants and transactions. This is where private banks and fintechs have held the advantage, leveraging national presence, centralised infrastructure, and technology-driven efficiencies.

In contrast, most UCBs operate in concentrated clusters. Without a national scale, they face the risk of high unit costs, fragmented merchant onboarding, and limited ability to invest in tools needed to manage the full lifecycle of merchant relationships.

This presents a scale paradox: while UCBs have local depth, built on familiarity and trust, merchant acquiring demands broader reach, enabled by technology and operational capacity. Reconciling this paradox requires UCBs to think differently, not by replicating the fintech playbook, but by amplifying their core strengths through smart partnerships.

The new playbook for merchant acquiring

The traditional model, where acquirers try to own every part of the acquiring journey, is not viable for UCBs in the current environment. Setting up device procurement, logistics, testing, and support operations is complex and cost-intensive.

Payment Platform-as-a-Service (PPaaS) technology enablers can remove these challenges by providing access to ready-made merchants' acquiring infrastructure without the burden of heavy upfront investment. This includes UPI enablement, QR code issuance, soundbox management, logistics, fraud monitoring, and reconciliation, all delivered through an integrated backend.

This model takes the complexity out of merchant acquiring, cuts operational costs by up to 25%, and lets UCBs stay in control of the customer experience. A mid-sized bank in southern India serves as a strong example. By adopting a PPaaS model, it outsourced merchant onboarding, device logistics, and backend infrastructure, enabling it to acquire and service a network of 25,000 merchants.

Beyond payments: The real opportunity

While enabling UPI at merchant outlets is a logical first step, collecting payments is only the beginning. The real opportunity for UCBs lies in what they do after the transaction.

The QR soundbox, for example, is more than a device for confirming payments. It becomes a daily, branded touchpoint that strengthens visibility and trust. More importantly, it allows the bank to become part of the merchant’s routine, opening the door to deeper CASA (current account and savings account) engagement and the delivery of more meaningful financial services.

This consistent presence creates opportunities for higher-value interactions. UCBs have long served the credit needs of small businesses. Now, with real-time visibility into UPI transaction data, they can tailor offerings such as short-term credit or micro-insurance based on actual cash flow patterns rather than assumptions.

Underwriting practices can also evolve. Instead of relying solely on traditional models, banks can leverage behavioural signals, such as transaction frequency, peak hours, and average ticket size, to improve credit assessments. This makes it possible to offer timely, need-based lending, whether it’s to cover a shortfall after a slow week or to prepare for an upcoming sales spike.

By shifting from passive payment collection to active engagement, UCBs can unlock new revenue streams. Their combination of data-led insights and deep local relationships positions them to deliver services that are not only relevant but also deeply trusted.

Charting the next chapter

As India aims for one billion transactions per day, the next phase of growth will likely come from Tier II cities and beyond. UCBs already have what many new-age players are still trying to build: enduring relationships with the merchants driving local economies in these regions.

To stay relevant in this evolving ecosystem, UCBs must embrace agility. The path forward will not depend on owning infrastructure. It will depend on using the right infrastructure to deliver the right product to the right merchant at the right time, without losing the personal trust that has always been their greatest strength.

(Deepak Chand Thakur is CEO and Co-founder of NPST, a banking and payments software products company.)