Unified Payments Interface (UPI): How It Works, NPCI, Digital Public Infrastructure, Growth, Going Global, Concentration Risk and Fraud (UPSC Notes + PYQs)

Before UPI

For most of India’s history after independence, paying someone meant cash or a cheque. Cards needed costly machines that small shops would not install. The RBI-backed Payment and Settlement Systems Act, 2007 set up a legal frame for payment systems, and in 2008 the RBI and the Indian Banks’ Association promoted the National Payments Corporation of India as a not-for-profit company owned by banks. NPCI built a chain of shared systems: the National Financial Switch for ATMs, the RuPay card in 2012, IMPS (Immediate Payment Service) in 2010, which allowed instant transfers at any hour, and Aadhaar-enabled payments. UPI, launched as a pilot on 11 April 2016 and opened to the public that August, sat on top of IMPS and made it easy to use.

How a UPI payment works

A user links one or more bank accounts to a UPI app and creates a Virtual Payment Address (such as name@bank) and a PIN. When she scans a shop’s QR code and approves the payment, the app sends the request to NPCI’s UPI switch, which asks her bank to debit her account and the shop’s bank to credit its account. Both happen within seconds, around the clock. Banks then settle the net amounts among themselves through their accounts with the RBI several times a day.

Three design choices explain its success. It is interoperable: any app works with any bank, so a Paytm user can pay a PhonePe user. It is open: banks and fintech firms can build apps on it, while NPCI runs the common rails. And it is free for users: since January 2020 the Government has set the merchant discount rate on UPI and RuPay debit cards at zero, paying banks a small incentive for low-value merchant payments instead.

Growth in numbers

UPI processed under 20 lakh transactions in its first full month. Demonetisation in November 2016, cheap mobile data after 2016 and the push for contactless payments during COVID-19 drove growth. In August 2025 it crossed 20 billion transactions in a month, worth over ₹24 lakh crore. It handles over four-fifths of India’s digital payments by volume, and international studies have put India’s share of the world’s real-time payments at close to half. Over 600 banks are live on UPI, and the typical transaction is small, a sign that it is used for daily purchases at tea stalls and vegetable carts.

Features added over time

UPI as digital public infrastructure

UPI is one layer of what India calls digital public infrastructure (DPI), the “India Stack”: Aadhaar for identity, UPI for payments and DigiLocker and the Account Aggregator system for consent-based data sharing. With Jan Dhan accounts, this JAM trinity lets the Government send benefits directly to bank accounts. Other open networks follow the same idea, such as the Open Network for Digital Commerce (ONDC), which aims to let any buyer app reach any seller, so that a few large platforms do not dominate e-commerce. During its G20 presidency in 2023, India promoted DPI as a model for the Global South, and the G20 adopted a framework on it.

UPI goes global

NPCI International Payments Ltd (NIPL), set up in 2020, takes UPI abroad. UPI or RuPay-based payments now work in Bhutan, Nepal, Sri Lanka, Mauritius, the UAE, Singapore, France and several other countries. The link between UPI and Singapore’s PayNow (February 2023) was the first to allow real-time cross-border remittances between two fast-payment systems. NIPL also helps countries such as Namibia and Peru build their own UPI-like systems. These links cut the cost of remittances, of which India is the world’s largest recipient, and extend India’s soft power.

Issues

• Concentration: two apps, PhonePe and Google Pay, both foreign-owned or backed, handle over 80% of transactions. NPCI proposed a 30% cap on any app’s share, but the deadline has been extended to the end of 2026.
• Who pays for the rails? With zero MDR, banks and apps earn little from UPI; the Government’s incentive scheme is small. Payment firms argue this is unsustainable for building fraud controls and reaching rural areas.
• Fraud: scams through fake collect requests, screen-sharing apps and “digital arrest” calls have grown. The RBI and NPCI use AI-based risk scores, device binding and limits on new users.
• Outages: a few disruptions in 2025 showed how much the economy now depends on one system.
• Digital divide: older people, women in rural areas and those without smartphones use it less.

UPI and the digital rupee

The RBI’s Central Bank Digital Currency, the e-rupee, began pilots in 2022. It is different from UPI. UPI moves money between bank accounts; the e-rupee is itself money, a digital form of currency issued by the RBI and held in a wallet. The two now work together: users can pay with the e-rupee by scanning UPI QR codes. Prelims 2026 tested this difference.

Way forward

Bring in more app competition and smaller players, give banks a fair way to recover the costs of running UPI safely, keep investing in fraud detection and consumer grievance redress, expand credit on UPI carefully to avoid a debt trap, and keep building international links so that UPI becomes a common rail for remittances.

PYQ trend

Prelims asked about UPI in 2017, BHIM and digital payments in 2018, and UPI versus the digital rupee and ONDC in 2026. Mains GS-III asks about digital payments, financial inclusion and DPI.

UPI: UPSC angle

UPI UPSC PYQs (Prelims)

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Mains PYQs on this topic

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