ETtech Explainer: Why do UPI payments fail?

The Unified Payments Interface (UPI) is the lifeline of the Indian digital payments industry, settling more than 18 billion transactions monthly. But over the last two weeks, the payment railroad run by National Payment Corporation of India (NPCI) suffered major outages.

According to data from NPCI, the unscheduled downtime for UPI was 95 minutes in March. Again, on April 12, the service was operating at less than 80% success rate for around five hours. Intermittent failures on India’s most popular retail payment network have caused a major worry in the banking circles, resulting in an internal analysis conducted by NPCI as well. So, why do UPI payments fail? ETtech explains.

How does UPI work?

For a UPI transaction to go through, there are multiple layers which need to operate in tandem. A transaction gets initiated on the payer app like PhonePe or Google Pay and routed via NPCI to the sender’s bank account for verification. Once that gets done, NPCI routes the transaction to the beneficiary account, checking the credentials and settling the transaction. Eventually, the beneficiary’s app sends a confirmation message to the customer.

Given there are five layers involved in the transaction, there are chances of multiple points of failure.

What happened this time?

In a report that NPCI shared with banks recently, the retail payments body said it analysed the failures and pointed at the ‘Check Transaction’ API, which is available for banks to check the status of a transaction, as the failure point.

“The PSP (payment service provider) banks also did not wait for the response from (the) UPI system and were repeatedly flooding the UPI system with ‘Check transaction’ requests, leading to further congestion in the system,” NPCI said in its report.

Strain on the system

Multiple industry insiders pointed out that by bringing all small ticket-size transactions into the digital fold, UPI has tremendously increased the strain on the banking system. While NPCI pushed for UPI Lite for small-value transactions to be routed via a wallet mechanism, the feature has not achieved popularity.

Secondly, UPI has pushed both mobile wallets and debit cards to the fringes, bringing most of the recurring daily transactions within its own fold, thereby creating a concentration risk.

Bankers also told ET that there is only limited capability among lenders to invest in UPI, given there is not much revenue generating opportunity in this business.

Some senior payment industry executives pointed towards the need to restart conversations around NUE (New Umbrella Entity), a body which can compete with NPCI. NUE was proposed by the Reserve Bank of India in 2019 but the proposal was shelved.

Where do banks stand in this?

Generally, banks operate at an overall success rate of between 85% and 95% on UPI. This performance level has been consistent month-on-month, NPCI data show. Most of the transaction failures happen because of business issues like insufficient balance or may be wrong ID details. Typically, transaction declines are less than 1%. But excess load on NPCI’s servers or too many transactions getting processed at a specific period of time can always cause a functional network to become unresponsive. That is what happened in the last two-three major outages.

Why did this happen now?

Bankers in the know told ET that most of these problems occurred due to a massive jump in transaction volumes driven by Indian Premier League matches and associated participation among consumers in gaming and betting. While the April numbers are not out yet, in March, the average daily transactions shot up to around 630 million, compared with around 560 million in January, reflecting this trend.