The Case for UPI Lite
How UPI works and its newer advancements
Digital payments in India, particularly with the Unified Payments Interface (UPI), have now become the norm and amounted to over 150 billion transactions [1] in FY23–24. To put this into perspective, this is equivalent to around 100 transactions per person for the entire population of India.
The convenience offered by it, with real-time transfers, interoperability across apps, and a user-friendly interface, has led to the wide adoption of this money transfer method. UPI has also expanded to other countries such as Singapore, UAE, and France [2], with tourists now able to use UPI to book tickets for the Eiffel Tower.
This article will discuss the basic workflow of UPI and how newer enhancements such as UPI Lite and UPI Lite X would benefit users and the associated back-end infrastructure.
Throughout this article, the payer refers to the one initiating the payment and would be debited, while the payee refers to the one being paid and whose account would be credited.
What is UPI?
UPI is a system developed by the National Payments Corporation of India (NPCI) that allows instant
- peer-to-peer (P2P)
- peer-to-merchant (P2M)
transactions and was introduced in 2016 [3]. This runs as an open-source layer (API) on top of the existing Immediate Payment Service (IMPS) system and is regulated by the Reserve Bank of India (RBI). Over the last decade, its extraordinary growth was hailed as one of the best deep-tech innovations produced within the country.
UPI was born out of some of the limitations of IMPS [4] such as:
- Beneficiary Addition — mandatory waiting periods before sending amounts to new payees
- Transaction Charges — payee was subject to nominal amounts
(around 5–20₹ depending on remittance) - Sharing Account Number and IFSC Code — not everyone is comfortable doing this and it creates additional friction. Money Mobile Identifier (MMID) can also be used, but that would need pre-registration from both payer and payee
- Only Payments — there was no option for requesting money
UPI addresses each of the above points and that has contributed to its success. To better understand UPI’s modern enhancements, it would be useful to briefly recap the technical details of UPI.
UPI Flow
This section will discuss the various steps involved in money transfers using UPI.
The first step, whether paying to another peer or merchant in UPI involves the payer initiating it. Figure 1 shows the steps involved in this workflow. Once the amount is specified, this is communicated to NPCI (step 1). The NPCI back-end then coordinates with the sender’s bank and performs the debit (step 2). Once this is confirmed to NPCI, the credit part is communicated by NPCI with bank B (step 3). And on completion, the information is relayed to sender B (step 4). Note that some of the details such as address translations, validations, authentications and rule evaluations are skipped in this description. The reader is referred to Appendix A, which contains a fully expanded version of the payment flow.
UPI Settlement Process
Due to the high volume of UPI transactions and the liquidity requirements for banks, the settlement process happens at pre-defined intervals during the day instead of a continuous process. Currently, this occurs at 8 pre-defined but non-uniform intervals, with the overnight settlement period being the longest due to the low volume of transactions.
Banks need to provide NPCI with the authority to debit or credit their accounts [5] with the RBI using Real-Time Gross Settlement (RTGS). Note that the ‘RT’ in RTGS is not exactly real-time and can take up to 30 minutes in some cases.
For example, if after several UPI transactions, the net position is bank A owes 40,000₹ to bank B, then an RTGS debit of the same amount happens to bank A’s RBI account and is credited to the RBI account of bank B. Figure 2 shows this as the 5th operation in the workflow after the basic peer-to-peer UPI workflow is completed.
Reducing transaction volume leads to fewer transactions to be kept track of and quicker settlement cycles as well.
What is UPI Lite?
With the exponential growth of UPI in previous years, the need for a reduced number of transactions is becoming necessary. To better address this issue, it is helpful to look at the proportion of transactions by their value.
According to NPCI [6], it is estimated that 60% of digital payment transactions would be below 200₹. Thus, reducing the load for low-value transactions is the most impactful and least interfering approach in the current infrastructure.
Also, the large number of steps involved in each UPI transaction with the NPCI would imply that the organization is facing huge infrastructure costs. One of the key benefits of UPI is that peers are not charged any transaction costs and in order to preserve this feature, it is paramount that the number of transactions are drastically reduced while maintaining value.
For this purpose, UPI Lite has been introduced, particularly targeting low-value transactions. It introduces the concept of an on-device wallet but leverages the existing interfaces to maintain compliance. The use of a wallet removes the need to communicate with the payer’s bank on a per-transaction basis. Figure 3 shows a typical UPI Lite transaction. Step 0 is shown to indicate the top-up of the wallet from the payer bank and is not part of the regular workflow.
Once the transaction is initiated, the debit happens from the wallet without communication with the payer bank. Note that this part can also be done in offline mode. Then, NPCI is provided the updates and completes the payee part of the transaction as previously (Steps 2 and 3), thus being credited directly into the bank account even if a UPI Lite wallet exists.
Due to the offline part for debit, it is recommended that users disable UPI Lite before transferring phones so that their wallet balance is credited back to their bank account. As the UPI Lite transactions are of low value, PIN-free operation also has been provided as a convenience. This also declutters the settlement process for banks and expedites it.
What is UPI Lite X?
UPI Lite still has an online part in the workflow for the payee and it would be useful if a fully offline approach could be designed. Approaches such as Apple Pay offer a fully offline and contactless approach using Near-Field Communication (NFC), which can be translated into a variant of UPI.
UPI Lite X [7], is a fully offline approach based on NFC and utilizes the existing UPI Lite infrastructure. This implies upper limits on transactions and PIN-free usage. Both the payer and payee should have UPI Lite X enabled, however. The settlement is done in a batch process once the user comes online. All these improvements lead to a further increase in success rate.
Comparison
The following table summarizes the various payment approaches discussed in this article.
Future Directions
UPI has also become a soft-power tool for India and many nations have come forward to adopt it directly or create similar payment methods within their domicile. International expansion is definitely on the cards for UPI and as mentioned, the process is already underway.
With further adoption of variants such as UPI Lite X, fully offline approaches would take precedence and decrease the load per user on the UPI infrastructure. This would also enable more users, particularly those from low-connectivity regions to also become part of the ecosystem.
Reduction in the number of calls per transaction and power consumption would lead to a drastic improvement in energy efficiency. Typical NFC communication utilizes 10–20 mW of power, whereas internet communication is estimated to consume around 500 mW [8]. With the number of calls effectively reduced, this leads to around 10–50x in efficiency and in turn, costs. This would enable maintaining zero transaction charges in the long run and help it scale in a sustainable fashion.
Summary
This article talked about the growth of digital payments in India, with UPI playing a pivotal role, facilitating over 150 billion transactions in FY23–24. UPI’s real-time transfers, interoperability, and user-friendly interface have made it the preferred choice for many. However, as transaction volumes rise, the introduction of UPI Lite and UPI Lite X becomes essential to address the resulting infrastructure challenges.
UPI Lite targets low-value transactions, which are the majority in volume, by enabling PIN-free payments from an on-device wallet, thereby reducing processing loads and operational costs. UPI Lite X takes this further by offering fully offline transactions, enhancing accessibility in low-connectivity areas. Shifting towards these variants is crucial for maintaining zero transaction costs and achieving greater energy efficiency, ensuring that UPI can continue to scale sustainably in the future.
Appendix A — Full UPI Flow
This section contains details, as per the NPCI UPI Specifications [9] for the payer-initiated flow
Payment Service Providers (PSP) help users register for UPI and link their bank accounts to the UPI platform. Well-known entities in the space include PhonePe, GPay and PayTM.
Figure A1 shows an example scenario where the payer uses PhonePe to send money to another user on GPay. For ease of reading, the example institution names are provided in parentheses.
First, the payer app (PhonePe) is initialized and their credentials are verified, more commonly using fingerprints on phones. The payer device initiates a pay request to PhonePe, which validates the payer details and forwards it to NPCI.
The next part involves deciphering the payee bank (SBI) details by NPCI. This can either be done using an identifier such as a phone number (6a) or if there is a virtual address such as `test@paytm`, this would be sent for translation to the payee PSP (PayTM).
Depending on any rules on the payee PSP side (PayTM), the payee details are confirmed and are sent in the response to NPCI. This is followed by the debit request to the payer bank (Axis) by NPCI, which also contains the user authentication details. Once authenticated, the payer bank (Axis) performs the debit and sends back the response to NPCI.
Since there is no direct bank-to-bank communication, it removes the friction of creating tie-ups between financial entities directly. After receiving the debit response, NPCI initiates the credit response to the payee bank (SBI), which then sends an acknowledgement.
Then, NPCI sends confirmations to both payer and payee PSPs and once the apps are notified, the flow is complete.
Failure at each step is also appropriately accounted for through the use of timeouts or ‘Check Status’ API if requests are not reached. Request decline or service unavailability is also handled as part of the flow, either by not commencing further steps, communicating the error or performing transaction reversals.
References
[1] The Indian Payments Handbook, PwC, https://www.pwc.in/assets/pdfs/indian-payment_handbook-2024.pdf
[2] UPI is Now Accepted in France, NPCI Press Release, https://www.npci.org.in/PDF/npci/press-releases/2024/Press-Release-UPI-is-Now-Accepted-in-France.pdf
[3] Unified Payments Interface, Wikipedia, https://en.wikipedia.org/wiki/Unified_Payments_Interface
[4] How Does UPI Work? UPI Process Flow Explained, https://www.youtube.com/watch?v=wWDzhLSK1K8
[5] UPI Settlement Process, NPCI, https://www.npci.org.in/PDF/npci/others/UPI-Settlement-Process.pdf
[6] UPI Lite Product Booklet, NPCI, https://www.npci.org.in/PDF/npci/upi-lite/Product-Booklet.pdf
[7] UPI Lite X, NPCI, https://www.npci.org.in/what-we-do/upi-lite/upi-lite-x/product-overview
[8] Arshi, O., Rai, A., Gupta, G. et al. IoT in energy: a comprehensive review of technologies, applications, and future directions. Peer-to-Peer Networking and Applications 17, 2830–2869 (2024). https://doi.org/10.1007/s12083-024-01725-8
[9] UPI Technical Specifications v1.2.3, NPCI
