The Cashback War That Made UPI a Habit



When India’s Unified Payments Interface (UPI) launched in 2016, it promised to make instant bank-to-bank payments as easy as sending a text. The challenge for payment apps was driving adoption at scale.

  • People were still used to cash or wallets like Paytm.

  • Trust in new UPI apps was limited.

  • No single app had a dominant market share.

By 2017–18, competition intensified. PhonePe (backed by Flipkart) and Google Pay (then called Tez) realized that user acquisition was everything. Whoever got people to link bank accounts first could build long-term loyalty.

Objective

  1. Onboard millions of first-time UPI users across India.

  2. Build strong transaction frequency by making payments habitual.

  3. Outcompete rivals (Paytm, Amazon Pay, BHIM app) through aggressive growth strategies.

Strategy / Execution

Both brands chose the same weapon: Cashback.

  • PhonePe’s Playbook:

    • Partnered with Flipkart for cashback offers on shopping.

    • Offered direct wallet credits for bill payments, recharges, and money transfers.

    • Gamified usage with scratch cards and “rewards vaults.”

  • Google Pay’s Playbook:

    • Introduced the famous “Scratch Card” cashback system where every transaction gave users a chance to win rewards—sometimes as little as ₹1, sometimes as high as ₹1,000.

    • Simple, fun, and addictive—users began making small repeat transactions just to unlock rewards.

    • Positioned itself as trustworthy through Google’s global brand image.

The “Cashback War” quickly escalated, with both platforms burning hundreds of crores to attract users.

Impact / Results

  • UPI usage exploded, crossing 1 billion monthly transactions by late 2019, much of it driven by these apps.

  • Google Pay surged ahead with ~40% market share in 2020, largely due to the popularity of scratch cards.

  • PhonePe fought back, leveraging Flipkart integration and cashback-driven merchant adoption, eventually reclaiming leadership with over 50% share by 2022.

  • Customers became hooked on rewards, normalizing UPI payments for everything from groceries to rent.

  • While costly, the strategy created habit loops that made digital payments India’s default.

Key Learnings

  1. Incentives drive adoption – for behavior change at scale, short-term costs can create long-term habits.

  2. Gamification matters – Google Pay’s scratch cards turned payments into a fun, viral experience.

  3. Sustainability is key – cashback-driven growth can’t last forever; eventually, platforms must pivot to value-added services.

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