Why in News?

In March and April, the Unified Payments Interface (UPI) system faced three outages, disrupting payments on apps like GPay and PhonePe.

One major cause was individual banks overwhelming the National Payments Corporation of India’s (NPCI) systems by sending excessive transaction status check requests.

What’s in Today’s Article?

• How UPI Works
• Why NPCI Faced Several Outages
• Why Banks Are Displeased with UPI

How UPI Works

• UPI is built on the Immediate Payment Service (IMPS) architecture.
• For UPI transactions, banks must join the UPI system and allow users to link their bank accounts via a mobile number on a Payment Service Provider (PSP) app like PhonePe or GPay.
• Almost all public and private banks are part of this network.
• Interoperability
  • UPI is designed to be interoperable, enabling users to access their bank accounts through any UPI-enabled app and even register on multiple apps simultaneously.
• Role of NPCI
  • While UPI appears to be a peer-to-peer system, nearly all transactions are routed through the NPCI.
  • NPCI encrypts the user's PIN and forwards payment information to the payer’s bank, which then processes the transaction.
• Single Point of Failure
  • Since NPCI handles critical encryption and transaction routing, any downtime at NPCI results in complete disruption, as banks cannot independently process UPI transactions without it.

Why NPCI Faced Several Outages

• NPCI is a collective of banks, with public sector banks holding the majority stake, as required by the Payment and Settlement Systems Act, 2007.
• Being bank-led, much of the system's implementation is left to individual banks, though NPCI oversees the UPI design and management.
• Cause of Outages
  • Recently, individual banks overwhelmed the NPCI systems by sending excessive “check transaction” requests to verify completed payments.
  • This stressed the system’s single point of failure and caused brief outages.
• Introduction of UPI Lite
  • To reduce downtime impact, NPCI introduced UPI Lite, allowing users to make small payments (up to ₹2,000) without entering a PIN.
  • However, even UPI Lite transactions still pass through NPCI servers for device verification, meaning NPCI remains a critical intermediary.
• Persistent Single Point of Failure
  • Despite lighter processes like UPI Lite, NPCI continues to be at the center of all UPI activity, maintaining its position as a single point of vulnerability.

Why Banks Are Displeased with UPI

• Lack of Significant Fees
  • Although UPI has revolutionized payments in India, banks have limited opportunities to collect fees from transactions, despite the associated costs.
  • Banks incur around ₹0.80 per transaction, mainly due to SMS notification charges and the costs of maintaining payment records.
  • However, they cannot charge a Merchant Discount Rate (MDR) for these services.
• Impact on Bank Incentives
  • Without the ability to charge MDR, banks have few incentives to maintain rigorous uptime standards, leading to more frequent outages compared to the NPCI.
  • These outages result in increased payment declines.
• Comparison with Card Networks
  • Commercial card networks like MasterCard and Visa experience fewer and shorter downtimes, thanks to better monitoring and enforceable service level agreements (SLAs).
• Government’s Incentive Programme
  • To address the issue, the Ministry of Electronics and Information Technology (MeitY) has introduced a “carrot and stick” approach.
  • This includes an annual UPI incentive program that rewards banks based on their performance and penalizes those with poor uptime.
  • The subsidy compensates banks for not being able to charge MDR.
  • Banks with the lowest performance in uptime receive no compensation.