How Does UPI Work?
- UPI (Unified Payments Interface) is built on the Immediate Payment Service (IMPS) architecture.
- To use UPI, banks must join the system and link user accounts to mobile numbers through apps like GPay and PhonePe.
- UPI is designed as an interoperable platform, where any bank’s account holder can transact on any app.
- Despite appearing peer-to-peer, every transaction passes through the NPCI (National Payments Corporation of India), which acts as a centralized, critical intermediary by encrypting PINs and managing payment flow.
Why Did UPI Face Outages?
- NPCI experienced downtimes because individual banks flooded the system with “check transaction” requests to verify payment status.
- Since NPCI is a single point of failure, any overload disrupts the entire UPI network.
- Even lightweight options like UPI Lite — allowing PIN-less transactions up to ₹2,000 — still route through NPCI systems, meaning they are also vulnerable to NPCI issues.
Structure of NPCI and Its Impact:
- NPCI is a consortium owned largely by public sector banks due to the Payment and Settlement Systems Act, 2007.
- Banks manage much of the implementation, and NPCI oversees the UPI system’s design and coordination.
Why Are Banks Discontent with UPI?
- UPI has revolutionized digital payments (e.g., 58 crore transactions worth ₹73,000 crore on a single day recently).
- Banks incur about ₹0.80 per transaction (e.g., SMS costs, record maintenance) but cannot charge Merchant Discount Rates (MDR), making UPI financially unrewarding.
- Frequent outages occur at individual banks due to lower incentives and lack of stringent uptime commitments compared to private card networks like Visa and MasterCard.
- The Ministry of Electronics and IT has launched an annual UPI incentive programme that rewards high-performing banks and penalizes poor performers by withholding subsidies.
What is MDR (Merchant Discount Rate)?
- MDR is a fee paid by merchants to banks for processing digital transactions in real time.
- Currently, UPI and RuPay debit card transactions have zero MDR, meaning merchants do not pay any charges.
- The cost of maintaining the UPI infrastructure is currently borne by banks and the government.
