Unified Payments Interface (UPI)
Prelims:
Indian Economy
Mains:
GS Paper III – Indian Economy
Current relevance:
India’s Unified Payments Interface (UPI)
has emerged as the country’s leading digital payment system. In July 2026,
it processed 2,366 crore transactions worth nearly ₹30 lakh crore. UPI
constituted 85% of India's digital payment transactions by volume during
FY 2025-26.
Highlights:
1.
UPI – Institutional
Framework:
i.
Unified Payments Interface (UPI) enables instant
bank-to-bank digital payments by connecting users, payment applications and
participating banks.
ii.
It is operated by the National Payments
Corporation of India (NPCI).
iii.
NPCI provides the switching and routing
infrastructure connecting around 730 participating banks.
iv.
UPI was built as an interoperable layer over
the Immediate Payment Service (IMPS), which enables round-the-clock
inter-bank fund transfers.
v.
The RBI provided regulatory guidance
in the development of UPI.
vi.
UPI was piloted in April 2016 with 21
banks, and subsequently became available through banks' applications.
2.
Working mechanism:
i.
Payment Initiation:
The
payer enters the recipient's UPI ID in a UPI-enabled application and
initiates the required payment.
ii.
Routing through UPI:
The
application sends the payment request to the UPI system operated by NPCI, which
identifies and routes the transaction between the participating banks.
iii.
Authentication:
The
payer authenticates the transaction by entering the UPI PIN, confirming
authorisation of the payment.
iv.
Bank Verification:
The
payer's bank checks factors such as account validity, availability of
sufficient funds, authenticity, transaction limits and possible signs of
fraud.
v.
Debit and Credit:
After
successful verification, the payer's bank debits the amount, while the
recipient's bank credits the corresponding amount to the beneficiary's account.
vi.
Confirmation:
The
recipient's bank reports successful credit to the UPI system, which relays the
transaction status to the payer's bank and subsequently to the user's UPI
application.
3.
UPI ID and Payment
Architecture:
i.
A UPI ID acts as an alias for a user's
bank account, avoiding the need to directly provide bank-account details
during payment.
ii.
It consists broadly of a user/account
alias before the '@' symbol and the bank/service identity after it.
iii.
A single bank account can have multiple UPI
IDs or aliases.
iv.
These aliases can also be incorporated into
QR codes for making payments.
v.
Third-Party Application Provider (TPAP):
Provides the application through which users make UPI payments.
vi.
Payment Service Provider (PSP): The
bank or company that connects the application with the NPCI infrastructure.
vii.
Banks exchange multiple messages during a
transaction for initiation, authentication, authorisation, debit confirmation,
credit confirmation and transaction-status confirmation.
4.
Internationalisation
of UPI:
i.
NPCI International Payments Limited (NIPL), a
wholly owned subsidiary of NPCI, facilitates the international adoption of
Indian digital-payment systems, particularly UPI.
ii.
Bhutan became the first
foreign country to adopt UPI in 2021.
iii.
UPI
subsequently expanded its international presence, with adoption across Singapore,
the UAE, France, Mauritius, Sri Lanka, Nepal, Qatar, Cambodia, Greece and the
Maldives.
iv.
NIPL is also reportedly working towards
interoperability with payment systems in Indonesia, Malaysia and Thailand.
v.
The expanding international footprint
demonstrates the potential for India-developed digital payment infrastructure
to connect with overseas payment ecosystems.
Source: THE HINDU - https://www.thehindu.com/sci-tech/science/what-goes-on-behind-the-screen-when-you-pay-through-upi-explained/article71411087.ece