There was a period, roughly 2017 to 2020, when paying for groceries with your phone felt like winning a small lottery. Scratch cards, instant cashbacks, referral bonuses. Google Pay, PhonePe, and Paytm were burning investor capital to buy a habit. And it worked. The habit stuck. What nobody fully anticipated was how deeply that cashback economy would rewire both the consumer and the business sitting on the other side of the transaction.
The Subsidy That Built a Behavior
When UPI first launched in 2016, adoption was slow. The infrastructure was sound but the incentive to switch from cash was not obvious to most people. Cashback changed that equation. It gave consumers a concrete, immediate reason to try something new. A ten rupee reward on a hundred rupee transaction is a 10% return, which is better than almost any financial product. For a first time digital payment user, that felt real and tangible in a way that "convenience" never quite does.
The behavioral economics here is well documented. Variable rewards, the kind where you scratch a card and sometimes win and sometimes do not, are among the most powerful conditioning tools known. UPI apps essentially gamified payments. The result was not just adoption. It was emotional attachment to a payment method. People started feeling clever for paying digitally. That is a meaningful psychological shift.
By the time cashbacks started shrinking around 2020 and 2021, as MDR was eliminated and regulatory pressure mounted, the behavior had already calcified. Indians were not going back to cash. The subsidy had done its job and then exited, leaving behind a permanently altered consumer base.
What the Data Actually Showed About Spending Patterns
The cashback era produced some genuinely interesting distortions in consumer behavior. People began splitting transactions to maximize rewards. They would pay for petrol in two installments, or send money to a family member and have them pay the merchant, purely to stack cashback triggers. This was not rational in any deep sense but it was perfectly logical given the incentive structure that had been built.
More significantly, cashback drove digital payments into categories that had been stubbornly cash based. Vegetable vendors, autorickshaw drivers, small kiranas. The offers were the wedge. Once the habit of scanning a QR code was established in those contexts, it persisted even after the offers disappeared. The marginal transaction cost of using UPI dropped to near zero for consumers, and the cashback had covered the psychological switching cost upfront.
There was also a data dimension that often goes unmentioned. Every cashback transaction was a labeled data point. The fintech companies collecting this data knew not just that you paid, but where, when, how often, and in what category. That data became the foundation for credit underwriting, insurance cross-selling, and investment product targeting. The cashback was, in part, a data acquisition strategy dressed up as a consumer benefit.
The Business Model Problem That Followed
Here is where things get uncomfortable for the fintech sector. UPI, by design and by regulatory intent, is a zero MDR infrastructure. There is no interchange fee flowing to the payment app when you send money or pay a merchant. The Reserve Bank of India and the government made this explicit. UPI was to be a public good, not a toll road.
That left the apps that had spent hundreds of millions of dollars acquiring users through cashback with a fundamental question: what do you actually sell these people now?
The answer, across the board, has been financial services. Payments become the distribution layer and the real revenue comes from lending, insurance, mutual funds, and wealth products sold to the same user base. This pivot was always the plan for the more sophisticated players. But the cashback era accelerated the timeline and raised the stakes. You now had hundreds of millions of users who were conditioned to expect value from their payment app. Converting that expectation into product revenue is harder than it sounds.
Many users are happy to receive cashback but deeply skeptical of buying a financial product through the same app. The trust that cashback built was transactional, not advisory. Getting someone to trust an app with their loan application or their insurance premium is a different kind of trust entirely.
How the Smarter Players Adapted
The fintechs that have navigated this transition most effectively are the ones that understood early that cashback was a means, not an end. They used the payment data to build credit models that traditional lenders could not replicate. A user who pays their electricity bill on time every month, who buys groceries regularly, who has consistent transaction velocity, is a fundamentally legible credit risk even without a formal credit bureau footprint. That insight is genuinely valuable.
Some players moved toward merchant services, recognizing that the business side of UPI had more monetization surface than the consumer side. Offering merchants analytics, working capital loans, inventory financing, or even just better reconciliation tools created a revenue stream that did not depend on charging consumers anything.
Others leaned into the investment and savings angle. The logic is sound: if you know someone's income patterns and spending habits from their payment data, you can make a reasonably informed case for a systematic investment plan or a recurring deposit. Whether that translates into actual conversion at scale is still being tested across the industry.
The Longer Arc
What the cashback economy ultimately demonstrated is something that financial services companies have always known but rarely executed this cleanly. Distribution is everything. The company that owns the payment moment owns the relationship. UPI cashbacks were an extraordinarily expensive way to buy that moment, but for the players who survived the subsidy wars with large user bases intact, the asset they hold is real.
The consumer behavior shift is permanent. Indians, particularly in urban and semi-urban areas, now default to digital payments in a way that would have seemed implausible in 2015. The business model shift is still in progress. Figuring out how to build sustainable revenue on top of a zero-fee payment rail, with users who were trained to expect free or rewarded transactions, is one of the more interesting strategic problems in Indian fintech right now.
The cashback era is over. What it left behind is both a gift and a constraint for everyone building in this space.