How UPI Became the Backbone of India’s Digital Payments
Welcome back to Digital Product Everyday!
This year, our main focus has been Digital Public Infrastructure (DPI). We’ve discussed what DPI is and its three main pillars:
Digital Identity Systems
Digital Payment Systems
Data Exchange Platforms
So far, we’ve explored the basics of Digital Identity Systems and their importance in DPI. After all, we cannot connect the world digitally if we don’t know who is who and who should access what. If you missed that discussion, I encourage you to check out my previous article on Digital Identity Systems.
Last week, we finally began discussing Digital Payment Systems. The goal is to understand their contribution to DPI and why we cannot have DPI without robust payment systems. Today, we’ll take a deep dive into one of the most successful digital payment systems in the world: India’s Unified Payments Interface (UPI).
But before that—something exciting happened this week. The Inclusive Fintech Forum took place in Rwanda, bringing together key players in the financial world to discuss how to push forward the financial inclusion agenda. If financial inclusion is the goal, then we’re talking about connecting the world digitally and ensuring that no one is left behind. I learned a lot at this forum, and I’ll share some key takeaways in a future article.
The Role of Payment Systems in DPI
I’ve mentioned multiple times in my writings that money is one of the most exchanged items in the world. This alone tells you why we cannot build DPI without enabling seamless digital payments. DPI is not just about connectivity for its own sake—every move must be driven by a real problem to solve or an opportunity to seize.
With that in mind, let’s explore how UPI has transformed digital payments in India and contributed to its DPI success.
Unified Payments Interface (UPI)
UPI is a real-time payment system developed by the National Payments Corporation of India (NPCI). It allows instant money transfers between:
Bank accounts
Wallets (in some cases)
Bank accounts and wallets
UPI enables seamless, interoperable transactions across banks and financial institutions, making it one of the most advanced digital payment infrastructures globally. What makes UPI unique is that it supports multiple use cases:
Peer-to-Peer (P2P) – Sending money to friends and family.
Peer-to-Merchant (P2M) – Paying businesses and service providers.
Bill Payments – Utilities, subscriptions, and other recurring payments.
Person-to-Government (P2G) – Paying taxes, fines, and public services.
Government-to-Person (G2P) – Social welfare benefits, stipends, and direct transfers.
Built on India’s Immediate Payment Service (IMPS), UPI operates 24/7 and has become one of the most used payment systems in the world.
Staggering Numbers: How Big is UPI?
As of January 2024, UPI processed over 12 billion transactions, amounting to approximately $220 billion. To put this into perspective:
UPI handled more in a single month than the GDP of most countries.
Over 400 million people actively use UPI.
It connects more than 300 banks and financial institutions.
These numbers prove how deeply UPI is embedded in India's digital economy. If a payment system processes $220 billion in just one month, imagine its impact over a year. This is the power of a well-designed payment system within a strong DPI framework.
How Does UPI Work?
So, how does UPI manage to achieve such impressive numbers? Let’s break it down step by step.
1. Mobile-Based Transactions
The first reason for UPI’s success is its mobile-first approach. As of early 2024, India had approximately 1.12 billion mobile connections, with 659 million smartphone users.
This means UPI had a massive target market to work with. Even if we only consider smartphone users, there’s still plenty of room for growth beyond the current 400 million active users.
UPI for Smartphones
For smartphone users, the registration process follows these steps:
Choose a UPI-enabled app
UPI is integrated into popular apps like Google Pay, PhonePe, Paytm, Amazon Pay, and bank-specific apps.
Key takeaway: Instead of creating a standalone app, UPI leveraged existing apps to drive faster adoption.
Verify your mobile number
The phone number must be linked to a bank account or wallet.
The app sends an SMS for verification to confirm ownership.
Security Note: This mobile-based verification later serves as a form of two-factor authentication (2FA) during transactions.
Link your bank account or wallet
Users select which linked account they want to connect with their UPI profile.
Why it matters: This allows payments using just a phone number or UPI ID without revealing full bank details.
Set up a Virtual Payment Address (VPA)
A VPA (UPI ID) is a unique identifier for transactions (e.g., username@upi).
Privacy Benefit: Users don’t need to share bank details, enhancing security.
Create a UPI PIN
Users set a 4 or 6-digit PIN to authorize transactions.
To set up the PIN, users must enter:
The last six digits of their debit card
The expiry date (some apps also ask for the CVV).
An OTP is sent for final verification.
After setting the UPI PIN, users can now send money, pay bills, or make purchases with ease.
UPI for Feature Phones (UPI 123Pay – Offline Mode)
UPI originally required smartphones with internet access, but in 2022, UPI 123Pay was introduced to include feature phone users (a segment of over 600 million people in India!).
Key UPI 123Pay methods:
IVR (Interactive Voice Response): Users call a number and follow voice prompts to make transactions.
Missed Call Payments: Users give a missed call to a designated number, then complete payments via SMS.
Sound-Based Payments: Uses audio signals for authentication (useful for offline payments).
Why Has UPI Been So Successful?
Multiple Ways to Pay: Users can transact via QR codes, UPI IDs, phone numbers, or bank details.
Low-Cost Merchant Acceptance: UPI eliminates the need for expensive POS machines—small businesses can just use QR codes.
Wide Range of Use Cases: From peer-to-peer transfers to bill payments, government transactions, and merchant payments.
Security & Trust: Built-in fraud monitoring, encryption, and 2FA have strengthened user confidence.
Conclusion: What Can Other Countries Learn?
UPI’s success has inspired other countries to build similar systems. In Rwanda, eKash (RNDPS) aims to facilitate seamless bank-to-wallet transfers. However, challenges remain—especially in driving adoption.
At RSwitch, we recently launched a Payment-to-Merchant (P2M) use case. In my next article, I’ll explore how this is shaping Rwanda’s digital payments landscape.
We’ve covered a lot today, but our learning journey never ends. In upcoming articles, we’ll discuss:
How UPI generates revenue
The role of instant payments in financial inclusion
Lessons for other markets
Thanks for reading, and see you next time!