Mid-sized private-sector banks and small finance banks are turning to fintechs to offer payment services to merchants, seeking to capture a relationship that has traditionally belonged to larger acquiring banks—and earn from the transaction flows that come with it.
Banks, including Ujjivan Small Finance Bank, Jana Small Finance Bank, CSB Bank and Karnataka Bank, have approached fintechs such as Pine Labs, Cashfree Payments and Phi Commerce to build such capabilities, according to three people aware of the discussions.
The collaboration is aimed at retaining merchants whose payment transactions and resulting deposits have traditionally been routed through payment gateways and their partner acquiring banks, many of which are larger lenders.
The opportunity is sizeable. Unified Payments Interface (UPI) processed 24,162 crore transactions worth ₹314.23 trillion in fiscal year 2026 (FY26), while India had 11.53 million point-of-sale terminals and 785.4 million Bharat QR and UPI (Unified Payments Interface) QR codes as of May 2026, according to Grant Thornton Bharat’s India Payments Trends Report 2026.
“Smaller and emerging banks have deep relationships with SME (small and medium enterprise) customers, but often lack the technology and processing infrastructure to offer payment services across both offline and online channels,” said Kush Mehra, president and chief business officer at Pine Labs. “By white-labelling a platform such as Pine Labs, they can offer these services under their own umbrella without having to build the technology and processing stack in-house.”
Under white-label arrangements, fintech companies provide the technology, onboard merchants and process their payments, while the bank offers the service under its own brand. The model lets banks retain the merchant’s current account and payment-linked balances while earning from the payment business.
Merchant relationship
Banks increasingly want to offer merchants a single platform for offline and online payments, giving them an integrated view of transactions and settlements. Owning that relationship also gives lenders greater visibility into a business and its cash flows.
Earlier, a bank could refer a current-account customer to a payment gateway for card, UPI or online payment services. The merchant’s collections would still be settled into its account with the bank, but the lender had limited visibility into transaction volumes, ticket sizes, payment modes, refunds and chargebacks.
Under a conventional referral arrangement, a smaller bank refers a merchant to a payment gateway or a larger acquiring bank for payment services. Collections may still be settled into the merchant’s current account with the smaller lender, allowing it to retain low-cost current and savings account, or Casa, balances. But it earns no direct income from payments because the gateway or acquiring partner sets merchant pricing and captures most of the transaction fee.
“The money remains with the bank, but the entire transaction flow is outside the bank’s control,” said Rajesh Londhe, co-founder of Phi Commerce.
The acquiring partner, meanwhile, has a closer view of the merchant’s transaction activity. This creates a risk that the smaller lender retains the current account but loses the wider relationship if another lender uses its payments role to offer loans, cards or cash-management products.
The economics change under a white-label arrangement with a payment aggregator. The fintech provides technology, merchant onboarding and payment-processing infrastructure, while the bank packages the service for its customers and sets the merchant-facing price. After network, acquiring and technology costs, the bank retains the payment margin.
“For large merchants, banks can earn a net take rate of around 5 basis points from white-label payment services, rising to about 7 basis points for SMEs and MSMEs (Micro, Small and Medium Enterprises),” said Rajesh Londhe, co-founder of Phi Commerce.
A bank serving 1,000 merchants processing ₹100 crore each annually would handle ₹1 trillion in payment volume. At a 5-basis-point net take rate, that would generate about ₹5 crore in payment revenue. Value-added services such as reconciliation, payouts and analytics could add another couple of basis points, or roughly ₹2 crore, Londhe said.
For banks, the bigger prize is low-cost Casa deposits, rather than payment fees alone, said a senior banking executive of a mid-sized private bank on condition of anonymity.
“If a merchant’s primary bank holds its current account, but the merchant uses a rival lender’s payment service, the rival bank has a stronger opportunity to win that current-account relationship and capture the daily settlement balances that flow into it,” the executive added.
Payment data can also help banks assess cash flows and identify opportunities for working-capital loans, overdrafts, corporate cards and other products, although access to granular merchant data depends on the partnership structure and merchant consent.
Mint's queries emailed to the banks mentioned above remained unanswered.
White-label route
Banks seeking to expand merchant acquiring have two choices. They can build the infrastructure and operate as a payment aggregator themselves, a route that requires investment in technology, compliance, operations and payment processing. Or they can use a white-labelled platform offered by a fintech.
“The question is whether a bank wants to be the payment aggregator on record itself, which is a heavy lift, or offer a white-labelled product with the bank’s own branding,” said Reeju Datta, co-founder of Cashfree Payments.
In the white-label model, the fintech generally remains the payment aggregator on record and provides the underlying technology, merchant onboarding, routing and processing infrastructure. The merchant-facing portal can carry the bank’s branding, while collections are settled into accounts held with the bank.
The arrangement does not eliminate the role of larger banks in the payment chain. Card transactions may still be processed using the acquiring capability of a sponsor or partner bank. But the smaller lender can retain the settlement account, offer the payment product to its own customers and receive relevant payment-flow information.
Pine Labs said bank-partnership distribution models account for about 30-35% of its annualized revenue. Some banks on their platforms add 3,000-5,000 merchant touchpoints a month, while Pine Labs’ direct SME-acquisition business adds about 12,000-15,000 merchant touchpoints each month, Mehra said.
Cashfree said it has relationships with about 22 banks through referral and white-label arrangements, but did not disclose the revenue contribution of this segment. Phi Commerce said it uses a revenue-sharing model rather than charging banks a large upfront technology fee and is targeting at least three bank launches in the current fiscal year.