The Deep Dive Into How UPI Handles ₹18.41 Trillion Transactions

UPI is not just India’s most successful digital payment system — it is a globally recognised example of public digital infrastructure. With over ₹18.41 trillion processed monthly, UPI combines the strength of the banking system, the flexibility of private apps, and the robustness of the NPCI switch.

This post goes deep into the internals of UPI: architecture, message flows, banks’ roles, security protocols, and how the system settles money across 300+ banks.

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🏛️ UPI Architecture: The 4 Pillars

1️⃣ The User Layer (Apps)

These are the apps people use for transactions — PhonePe, Google Pay, Paytm, BHIM, banking apps, etc.

Main functions:

• Create & manage VPAs (UPI IDs)
• Initiate payment requests
• Encrypt and send transaction data
• Show payment status to the user

2️⃣ The PSP (Payment Service Provider) Bank

Every payment app must have a partner bank known as the PSP Bank.

For example:

• PhonePe → SBI
• Google Pay → Axis Bank / ICICI
• Paytm → Paytm Payments Bank

Main functions:

• Validate user identity (VPA → bank account mapping)
• Forward requests to NPCI
• Handle device binding

3️⃣ The Issuer & Remitter Banks

Remitter Bank → Sender’s bank (Rahul → HDFC)
Beneficiary Bank → Receiver’s bank (Amit → ICICI)

Main functions:

• Check account balance
• Debit/credit funds
• Send responses to NPCI

4️⃣ NPCI (The UPI Switch)

This is the core brain. NPCI routes every UPI request between banks.

Key jobs:

• Route requests between banks
• Risk scoring & fraud monitoring
• Generate transaction reference numbers
• Settlement across banks (via RBI)

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📡 UPI Transaction: Full Internal Flow (Technical Breakdown)

Let’s use the same example: Rahul sends ₹100 to Amit.

Phase 1: Transaction Initiation

1. Rahul enters Amit’s UPI ID (amit@icici) in PhonePe.
2. PhonePe resolves the VPA (NPCI → ICICI Bank) to confirm Amit’s account exists.
3. Rahul enters amount ₹100.
4. PhonePe generates a unique transaction ID and encrypts the payload.
5. PhonePe sends the request to its PSP Bank (SBI).

Phase 2: Validation at PSP Bank

SBI checks:

• Is Rahul’s PhonePe device registered?
• Is UPI PIN set?
• Is the VPA format valid?

Then SBI forwards the encrypted request to NPCI Switch.

Phase 3: NPCI Routing & Security Checks

NPCI performs:

• VPA resolution — identifies Amit’s bank (ICICI)
• Risk score — device + PSP + bank + historical behaviour
• Fraud detection — velocity checks, unusual behaviour checks

NPCI sends request to Amit’s bank (ICICI) to verify his account.

Phase 4: Beneficiary Bank Verification (ICICI)

ICICI responds:

• Is Amit’s account active?
• Is the account allowed to receive UPI payments?

If OK, ICICI responds “Verified” to NPCI.

Phase 5: Debit Request to Rahul’s Bank (HDFC)

NPCI now sends a debit request to Rahul’s bank (HDFC).

HDFC checks:

• Does Rahul have ₹100 balance?
• Is UPI PIN authentication valid?
• Is account active & not blocked?

If valid, HDFC debits ₹100 instantly.

Phase 6: Credit to Amit’s Bank

NPCI sends credit instruction to ICICI.

ICICI:

• Credits ₹100 to Amit
• Updates account ledger
• Sends success response to NPCI

Phase 7: Final Confirmation

NPCI updates:

• PSP Bank (SBI)
• PhonePe
• HDFC & ICICI notifications

Rahul sees: “Payment Successful”
Amit sees: “₹100 received”

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🏦 The Hidden Part: RBI Settlement

Even though the money moves instantly between customer accounts, banks actually settle their net positions at RBI.

🔸 How settlement works:

• NPCI calculates each bank’s net position (credits – debits)
• NPCI instructs RBI to adjust the funds in each bank’s settlement account
• Settlement happens in batches (multiple times daily)

This ensures banks always maintain liquidity and security.

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🔐 UPI Security: Layer-by-Layer

1️⃣ Device Binding

UPI binds your mobile number + device + SIM → ensuring only your phone can do transactions.

2️⃣ UPI PIN Encryption

PIN is encrypted using highly secure 1-way hashing + hardware security modules (HSM) at NPCI/banks.

3️⃣ End-to-End Encryption

All data sent from app → PSP → NPCI → bank is encrypted with 2-level encryption.

4️⃣ Fraud Monitoring

NPCI uses:

• Velocity checks
• Geo-location mismatch detection
• Device fingerprinting
• Suspicious pattern detection AI

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🌍 The Future of UPI: What’s Coming Next?

1️⃣ UPI Globalization

Already accepted in:

• UAE
• Singapore
• Nepal
• France

2️⃣ UPI Tap & Pay

Using NFC to make UPI as quick as tapping a card.

3️⃣ Credit on UPI

Use credit cards directly through UPI handles.

4️⃣ UPI Lite & Offline UPI

Payments without internet.

5️⃣ AI-Driven Fraud Detection

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📌 Final Thoughts

UPI is not just a payment method—it is an architectural masterpiece combining banking, cryptography, public infrastructure, and private innovation.

Processing trillions every month within seconds, UPI is shaping the future of digital finance globally.

What are your thoughts on UPI’s evolution? Comment below! 🚀