How Instant UPI Refunds Can Improve Customer Retention in Fintech and Retail

The explosion of digital payments in India over the last few years has been phenomenal, driven largely by new-age instruments. In January 2025, UPI set a new benchmark by facilitating over 16.99 billion payments, collectively valued at ₹23.48 lakh crore, its most active month to date in both volume and value. This remarkable growth reflects a clear shift in behavior, as both merchants and consumers increasingly embrace the ease and efficiency of digital transactions. UPI, in particular, reinforces its role as a payment method and also as a foundational layer for broader financial inclusion. 

It has simplified merchant onboarding, enabled cash-flow-based lending innovations, and fostered interoperability between Fintechs and traditional financial institutions. Even in the retail sector, UPI drives close to 80% of all transactions nationwide, underscoring its dominance in daily consumer spending. This includes payments at grocery stores, for online shopping, utility services, and much more, contributing to 11,353.60 million P2M (peer-to-merchants) transactions in April 2025. These statistics clearly reflect how evidently UPI has woven itself into the daily financial routines of Indians.

The Fragility of Consumer Trust in Digital Payments

Despite UPI being a viable alternative to cash due to its real-time nature, consumer trust in digital payments remains highly fragile. It is deeply tied to the reliability of the infrastructure behind it. Even the smallest glitch can disrupt the experience and shake the trust users place in the entire system. The fact that the money reflects instantly in the receiver’s account gives both sides immediate clarity and confidence. That’s what makes it work so smoothly in everyday transactions. However, if UPI is truly replacing cash, refunds must follow the same logic. When a transaction fails or is reversed, the amount should return as quickly as it went. 

Otherwise, if the transaction ends in a pending state, disrupting the payment experience, it directly affects merchants and sellers. They become vulnerable to losing business, as customers hesitate to retry, fearing the double deduction. Even when refunds are eventually processed, the delay in UPI refund timelines adds to user frustration, as many expect instant reversals in a system built on real-time transactions. 

This fear ultimately discourages further attempts, weakening the trust that these transactions rely on. For example, in April 2025, several UPI users faced glitches during peak hours due to technical issues in bank servers, causing payments to fail across platforms. Consumers were then left waiting unreasonably long for refunds, further adding to their frustration. The situation intensified rapidly, prompting NPCI to address the issue publicly through its social media channels. This only highlights how non-negotiable instant refund mechanisms are when it comes to maintaining customer trust and retention. In the absence of a resilient and responsive digital payment infrastructure, even the most widely adopted systems risk losing their credibility.

Instant UPI Refunds offer Reassurance 

Small businesses and retailers often absorb the real cost of failed payments. Unlike large platforms that can offer store credits or loyalty points to cushion the impact, these businesses operate on thinner margins and tighter relationships. In such settings, a single payment failure, especially one followed by a delayed refund, can permanently push a customer away. Hence, businesses need to see instant UPI refunds not just as a value-add but as the baseline expectation.

If a fintech platform, payment app, or D2C is not investing in instant reversals, it's signalling that user trust is negotiable. That's a dangerous message in a market where switching costs are low and alternatives are plenty. Especially in retail, where purchases are personal and in-the-moment, a pending payment with no immediate clarity can create chaos. Here, instant UPI refunds offer two-fold benefits. First, the security of their deducted amount if a payment fails, and second, the confidence to retry, knowing their money will be refunded within minutes. 

Retention Doesn't Wait Two Days

UPI has grown rapidly in volume and innovation in the financial world. However, the refund system remains stuck in outdated banking processes, relying on SLAs (Service Level Agreement) and batch cycles that delay resolution. This makes it a matter of priority rather than a technical challenge. Though India is not short on ambition or infrastructure. For example, on April 26, 2025, NPCI announced system upgrades aimed at cutting UPI transaction times in half—from 30 seconds down to 15. They reflect a serious push to optimize status checks, reversals, and the overall speed of money movement. Status updates and refunds are expected to process up to 75% faster. However, the real question is not what the system can do—but whether fintechs and payment gateways are willing to align. Until they upgrade their infrastructure and reimagine refund logic, customer experience remains broken at the point where retention is most brittle.

This becomes even more critical as UPI expands its global footprint. Already active in seven countries, including the UAE, Singapore, and France, UPI is redefining cross-border payments and strengthening India at a global stage. With such global ambitions, the system can't afford to have a domestic pain point as basic as sluggish refunds. At the end, the consumer narrative supports the fact: when large payments can be done in two seconds, why should they wait two days to get it back when a transaction fails? Hence, the narrative needs to change. In 2025, instant refunds are not a "good-to-have" but a default. Anything less means putting convenience above trust, and that's a tradeoff India's digital economy can no longer afford to make.