UPI Outages

The Unified Payments Interface (UPI) in India has faced outages, raising concerns about its reliability. In March and April 2025, three major outages disrupted services for popular apps like Google Pay and PhonePe. These incidents brought into light vulnerabilities in a system that processes vast sums of money monthly. The National Payments Corporation of India (NPCI), which oversees UPI, conducted an investigation into the outages. The findings revealed that technical oversights were to blame, particularly the absence of a transaction status check limiter in the system’s architecture.

About UPI’s Functionality

UPI is a mobile payment system that facilitates money transfers between bank accounts. It allows users to make payments without entering sensitive information each time. UPI transactions are processed in real-time and require only a two-click authentication process. Launched in April 2016, UPI leverages existing systems like Immediate Payment Service (IMPS) and Aadhaar Enabled Payment System (AEPS) for seamless transactions. It supports various payment types, including peer-to-peer and merchant payments, and enables recurring payments for bills and subscriptions.

Reasons Behind UPI Outages

The NPCI’s investigation identified that banks were responsible for the outages. Banks exceeded the allowed frequency of transaction status checks, overwhelming the system. The NPCI limits these checks to three times with a 90-second interval. However, banks continued to send multiple requests for older transactions. This misuse of the system’s architecture led to disruptions.

Banking Sector Challenges with UPI

Despite UPI’s success in revolutionising payments, banks face challenges. They process millions of transactions yet struggle to earn fees due to regulatory constraints. The Reserve Bank of India (RBI) estimates that banks incur costs of Rs 0.80 per transaction, primarily due to SMS notifications. However, they cannot charge a Merchant Discount Rate (MDR), leading to limited financial incentives to maintain system reliability. In comparison, commercial card networks like Visa and MasterCard experience fewer outages due to robust monitoring systems.

Regulatory Oversight by RBI

The RBI plays important role in regulating NPCI and UPI transactions. Recently, the RBI permitted NPCI to revise transaction limits for person-to-merchant payments based on user needs. This flexibility aims to enhance the UPI ecosystem’s responsiveness to evolving requirements. While person-to-peer (P2P) transactions remain capped at Rs 1 lakh, the RBI encourages banks to establish their internal limits within NPCI guidelines.

Future Directions for UPI

The RBI has proposed a comprehensive regulatory framework for loans against gold jewellery, addressing concerns in the sector. Additionally, the Regulatory Sandbox (RS) framework may become ‘theme neutral’ to encourage innovation in the fintech landscape. This approach aims to keep pace with rapid technological advancements while ensuring robust regulatory oversight.

Questions for UPSC:

1. Examine the impact of digital payment systems on the Indian economy.
2. Critically discuss the role of regulatory bodies in managing financial technology innovations.
3. Analyse how transaction limits can affect the efficiency of payment systems like UPI.
4. Point out the challenges faced by banks in the digital payment ecosystem and suggest possible solutions.

Answer Hints:

1. Examine the impact of digital payment systems on the Indian economy.

1. Digital payment systems have increased transaction efficiency, reducing time and costs for consumers and businesses.
2. They have contributed to financial inclusion by providing access to banking services for unbanked populations.
3. UPI has facilitated a surge in digital transactions, with billions processed monthly, boosting economic activity.
4. Increased transparency in transactions helps reduce corruption and black money circulation.
5. Digital payments enhance tax compliance, leading to higher government revenues.

2. Critically discuss the role of regulatory bodies in managing financial technology innovations.

1. Regulatory bodies like the RBI oversee compliance, ensuring consumer protection and financial stability.
2. They set guidelines that encourage innovation while mitigating risks associated with financial technologies.
3. Regulators facilitate collaboration between fintech companies and traditional banks to enhance service delivery.
4. They adapt regulations based on evolving technology trends and user needs, as seen with UPI limits.
5. Effective regulation can prevent systemic risks and enhance public trust in digital financial services.

3. Analyse how transaction limits can affect the efficiency of payment systems like UPI.

1. Transaction limits can prevent system overload and maintain operational stability during peak usage times.
2. However, overly restrictive limits may hinder user experience and discourage high-value transactions.
3. Limits can impact liquidity and cash flow for businesses relying on quick payments.
4. Adjusting limits based on user behavior can enhance efficiency and responsiveness of payment systems.
5. Regulatory flexibility in limits can encourage innovation and accommodate emerging use cases in digital payments.

4. Point out the challenges faced by banks in the digital payment ecosystem and suggest possible solutions.

1. Banks face revenue challenges due to regulatory constraints preventing them from charging fees on transactions.
2. High operational costs (e.g., SMS notifications) reduce profitability, resulting in limited incentives to maintain system uptime.
3. Increased competition from fintech companies pressures banks to innovate and improve service offerings.
4. Adopting technology solutions and partnerships with fintech can enhance operational efficiency and customer experience.
5. Advocating for regulatory changes to allow reasonable fees could improve banks’ financial sustainability in digital payments.