Developments in Digital Payments in India: UPI, RTGS, NEFT, PPIs and CBDC for RBI Grade B Finance

Last updated: 2026-11-13 · MockMentor

"Developments in Digital Payments" is a separate line of the Financial System unit in the RBI Grade B Phase 2 Finance syllabus, and it is one of the most reliable sources of questions. Objective questions ask about timings, limits and features of RTGS, NEFT, IMPS and UPI, and about bodies such as NPCI. Descriptive questions in recent years have asked about UPI, merchant discount rates, cross-border payments and the risks of digital fraud. This chapter covers the legal framework, each payment system, recent innovations and the challenges ahead.

In one line: India built the world's largest real-time payments system in UPI, which handled over 24,000 crore transactions worth about ₹314 lakh crore in 2025-26, on top of RBI-run RTGS and NEFT and the retail systems of NPCI, all governed by the Payment and Settlement Systems Act, 2007.

Basic concepts

• Payment system: a set of rules, institutions and technology that lets money move between payers and payees. Under the Payment and Settlement Systems (PSS) Act, 2007, it includes clearing, payment and settlement services, but not stock exchanges.
• Clearing and settlement: clearing is the exchange and confirmation of payment instructions; settlement is the actual transfer of funds between banks, usually in their accounts with RBI.
• Gross and net settlement: gross settlement settles each payment one by one; net settlement adds up many payments and settles only the net amount at set times.
• Interoperability: the ability of customers of different banks or apps to pay one another, as in UPI.
• Merchant Discount Rate (MDR): the fee a merchant pays to its bank for accepting a card or digital payment, shared among the bank, the card network and others.
• Prepaid Payment Instrument (PPI): an instrument that stores money for buying goods and services, such as a wallet or prepaid card.

Why in News?

1. In 2025-26, UPI processed about 24,162 crore transactions worth about ₹314 lakh crore, and UPI completed ten years in August 2026.
2. RBI's directions on authentication for digital payments, issued in 2025, moved banks towards a risk-based approach to the additional factor of authentication from April 2026, allowing options beyond SMS one-time passwords.
3. NPCI's deadline for capping any single third-party UPI app at 30% of transaction volume was extended to the end of 2026, as two apps continue to handle most UPI payments.
4. UPI has been linked with fast payment systems or accepted in a growing number of countries, including the UAE, Singapore, France, Sri Lanka, Mauritius, Nepal and Bhutan.

Legal and institutional framework

Payment and Settlement Systems Act, 2007

• Makes RBI the authority to regulate and supervise payment systems.
• No one can run a payment system without RBI authorisation, except RBI itself.
• Gives legal backing to netting and settlement finality, so that a completed settlement cannot be reversed if a participant becomes insolvent.
• Provides for penalties and grievance redress.

The Board for Regulation and Supervision of Payment and Settlement Systems (BPSS), a committee of RBI's Central Board chaired by the Governor, oversees this area. RBI's Department of Payment and Settlement Systems runs it day to day.

National Payments Corporation of India (NPCI)

NPCI was set up in 2008 by banks under the guidance of RBI and the Indian Banks' Association, as a not-for-profit company under Section 8 of the Companies Act. It runs retail payment systems such as UPI, IMPS, RuPay, NACH, AePS, the National Electronic Toll Collection (FASTag) system and Bharat Bill Payment System (through its subsidiary NBBL). NPCI International Payments Limited (NIPL) takes UPI and RuPay abroad.

Major payment systems

Systems run by RBI

Both are part of the "large-value" and "retail" backbone that settles in banks' accounts with RBI.

Systems run by NPCI

Paper-based systems

The Cheque Truncation System (CTS) replaced physical movement of cheques with images, and was extended across the country by 2021. RBI moved CTS to continuous clearing, with cheques cleared within a few hours on the same day, from October 2025. The Positive Pay System requires the issuer to confirm key details of cheques of ₹50,000 and above, to curb fraud.

Unified Payments Interface (UPI)

How it works

UPI lets a user link one or more bank accounts to a mobile app and pay anyone by entering a Virtual Payment Address (VPA, such as name@bank), scanning a QR code or entering a mobile number. It runs on the IMPS rails and settles between banks several times a day. A user authorises payments with a UPI PIN.

Features and innovations

Pricing

Since January 2020, the MDR on BHIM-UPI and RuPay debit card transactions is zero by law, and the government pays banks an incentive to cover part of their costs. Merchant payments through PPIs over ₹2,000 carry an interchange fee. The question of whether to allow MDR on UPI for large merchants is an ongoing debate.

Concentration of UPI apps

Two third-party apps handle the large majority of UPI transactions. NPCI has proposed a cap of 30% of volume per app to reduce concentration risk, but the deadline has been extended several times. Supporters say the cap protects the system from a single point of failure; critics say it punishes success and would confuse users.

Prepaid Payment Instruments

Since 2022, PPIs can be issued in the form of cards or wallets and must be interoperable through UPI and card networks.

Payment aggregators and gateways

Payment aggregators help merchants accept payments from customers and pool and settle the money to merchants. RBI's guidelines of 2020 require them to be companies with a net worth of at least ₹15 crore at application and ₹25 crore by the end of the third year, to keep customer funds in escrow accounts with banks and to follow KYC rules. Cross-border payment aggregators came under RBI rules in 2023 and 2025. Payment gateways, which only provide technology, are not regulated as strictly.

Card payments and tokenisation

• Card networks: RuPay, Visa, Mastercard, American Express and Diners Club. RuPay has a large share of debit cards because of Jan Dhan accounts.
• Card-on-file tokenisation became mandatory from October 2022: merchants can no longer store card numbers and must use tokens.
• Contactless payments without a PIN are allowed up to ₹5,000.
• Credit cards have grown fast, and RBI's master directions of 2022 govern their issue and conduct.

Central Bank Digital Currency: the e-rupee

The e-rupee is a digital form of the rupee issued by RBI, a direct liability of the central bank like cash. The Finance Act, 2022 amended the RBI Act to include digital currency in the definition of bank notes.

Benefits include lower cost of cash, faster settlement and a sovereign alternative to private crypto assets and stablecoins. Concerns include privacy, the risk that people move deposits out of banks in a crisis and low demand where UPI already works well.

Other developments

• e-RUPI (2021): a person- and purpose-specific digital voucher, delivered by SMS or QR code, for government benefits such as vaccination or health services.
• Payments Infrastructure Development Fund (PIDF, 2021): subsidises the deployment of card machines and QR codes in tier 3 to tier 6 centres and the north-east; extended to 2025 and beyond.
• Digital Payments Index (RBI-DPI): a composite index with March 2018 as base (100), published twice a year to measure the spread of digital payments; it has risen several times over since its base year.
• Payments Vision 2025: RBI's plan for "E-Payments for Everyone, Everywhere, Everytime", with themes of integrity, inclusion, innovation, institutionalisation and internationalisation.
• Cross-border payments: Project Nexus of the Bank for International Settlements, which India has joined, will link the fast payment systems of several countries.
• Offline and low-value payments: a framework for offline digital payments of small value was set up in 2022.

Comparison of the main fund transfer systems

How a UPI payment flows

1. The payer scans a merchant's QR code or enters a payee address in a UPI app (the payer's PSP app).
2. The app sends the request to NPCI's UPI switch through the payer's bank.
3. NPCI checks the payee address with the payee's bank or app and routes the request.
4. The payer enters the UPI PIN, and the payer's bank debits the account.
5. NPCI sends a credit instruction to the payee's bank, which credits the payee instantly.
6. Interbank settlement happens later in several daily cycles through the banks' accounts with RBI.

The apps such as those of large technology companies are Third Party Application Providers (TPAPs); they work through sponsor banks, which are responsible for compliance. This multi-party design is what makes UPI interoperable: any app works with any bank.

Fees in digital payments

Zero MDR on UPI and RuPay debit cards means banks earn nothing from merchants for these, which is why the government pays an incentive scheme each year for low-value UPI and RuPay transactions.

NPCI's subsidiaries and the global reach of UPI

UPI acceptance abroad works in three ways: Indian tourists paying at foreign merchants by scanning QR codes, linking of UPI with foreign fast payment systems for remittances (as with Singapore), and helping other countries build their own UPI-like systems, as in Namibia and Peru. The UPI-PayNow link of February 2023 was the first linkage of two national fast payment systems for person-to-person remittances.

Frauds in digital payments and the response

Common frauds

• Phishing links and fake customer care numbers that steal login details or OTPs.
• Fake QR codes sent to sellers, which ask them to "scan to receive money" but actually debit their account.
• Collect requests disguised as refunds or prizes.
• Screen-sharing apps that let fraudsters see a victim's phone.
• Mule accounts that receive and move stolen money.
• Impersonation of police or officials in "digital arrest" scams.

Measures

Timeline of digital payments in India

Benefits of digital payments

1. Lower costs of handling and printing cash.
2. Faster, 24x7 payments.
3. A record of transactions, which supports credit scoring for small businesses.
4. Better tax compliance and formalisation of the economy.
5. Direct Benefit Transfer of subsidies with less leakage.
6. Wider financial inclusion.

Challenges

• Fraud: phishing, fake QR codes, social engineering and mule accounts have risen with volumes.
• System outages: high dependence on a few systems makes outages costly.
• Concentration: a few apps and networks dominate.
• Cost: the zero MDR model makes it hard for banks and apps to fund investment.
• Digital divide: some users lack smartphones, connectivity or digital literacy.
• Data privacy and consent.
• Cyber attacks on infrastructure.
• Cash is still widely used: the currency in circulation has kept rising, showing that digital payments have not replaced cash.

Way forward

1. Build stronger fraud detection with AI tools, shared fraud registries and faster reversal of fraudulent transfers.
2. Find a sustainable pricing model for UPI, such as a small MDR for large merchants.
3. Diversify the app ecosystem and strengthen backup systems.
4. Expand UPI abroad through bilateral links and Project Nexus.
5. Use the e-rupee where it adds value, such as programmable benefits and cross-border wholesale payments.
6. Deepen digital literacy, especially among older and rural users.

Possible exam and interview questions

1. Trace the development of digital payments in India. What are the main challenges facing UPI as it scales further? (620 words)
2. Should merchant discount rates be allowed on UPI transactions? Discuss both sides. (420 words)
3. Distinguish between RTGS and NEFT. Why is RTGS called a gross settlement system?
4. What is the e-rupee, and how does it differ from UPI and from cryptocurrencies?
5. Interview: Will India become a cashless economy?

Related reading: technology in banking, functions of RBI, and financial inclusion.

More in Finance

• Financial System
• Functions of RBI
• Banking System
• Banking Reforms
• Financial Institutions

Prepare with MockMentor

RBI Grade A/B 2027 Super-Elite Course (₹7,500) – Complete Phase 1 and Phase 2 preparation with the Descriptive Writing Programme. 365 days validity.