How India's UPI Is Reshaping Global Digital Payments

As of 2023, India handles nearly 49% of real-time digital payments worldwide. About 84% of the country's electronic transactions use the Unified Payments Interface (UPI), a system that has transformed cashless payments.

This has made UPI a focal point of global interest, including in Japan, which recently signed a memorandum of understanding with India and sent a team to study the technology.

What Exactly is UPI?

Most of us remember a time when cash was the main form of payment, and then digital payments entered the scene. Now we have a whole array of digital payment options available to us.

I live in Japan, and one of my big challenges in recent years has been keeping track of all the different cards and payment apps. For groceries at the supermarket, I use a credit card, but my little neighborhood store only accepts cash. To ride the train, I use SUICA or another IC card, but when I want to buy concert tickets, I need a digital wallet like PayPay. In-app purchases require Apple Pay on an iPhone, and Google Pay for similar purchases on an Android device. And that friend I owe money to? She uses LINE Pay — so now I have to sign up for that, too.

Digital payments are great. However, as a result of private-sector participation and free-market competition, the payment landscape has become extremely diverse and fragmented. Each option now exists in its own silo.

*The multitude of cashless payment options available in Japan (courtesy of Usha Jayaraman)*

One App, One Payment

India's UPI is an elegant, low-cost solution to this problem. It comprises a set of application programming interfaces (APIs) that integrate diverse digital payment systems by allowing them to communicate with each other using a standardized protocol.

With UPI, I would not need to sign up for LINE Pay to pay my friend. I could use any app I choose. Similarly, I could pay for groceries, use public transportation, buy concert tickets, and make in-app purchases on both Android and iOS devices with my preferred app. Furthermore, using UPI does not require investing in card readers or other expensive hardware. This means my little neighborhood store may be more open to accepting digital payments, too.

How Does UPI Work?

UPI was developed by the National Payments Corporation of India (NPCI), a public utility that operates under the regulatory oversight of the Reserve Bank of India (RBI). It works by connecting diverse payment methods and integrating them with India's banking network.

UPI mainly uses a set of APIs, which are instructions that enable payment apps and banks to communicate with each other. These APIs perform tasks such as sending payment requests, transferring funds from the payer's account into the payee's account, and receiving payment confirmations.

For instance, Google Pay and PhonePe are both digital wallets, but they do not directly communicate with each other. Therefore, in a scenario where a Google Pay user wants to transact with a PhonePe user, they could both use UPI instead. UPI's API would instruct Google Pay how to frame a payment request to the NPCI, which would then route the request to the payer's bank. The bank would transfer funds from the payer's account to the payee's account for the specified amount and send back payment confirmation.

*Payment successful (courtesy of Usha Jayaraman)*

Over 300 banks and numerous third-party payment apps are part of the UPI ecosystem in India. UPI-based payments are typically made through direct bank transfers between the transacting parties, with payment apps serving as user interfaces. However, as of December 2024, payments can also be made directly from approved prepaid payment instruments (digital wallets, vouchers, etc.), which helps bring unbanked rural users and foreign tourists on board.

What Makes UPI so Attractive?

The attraction of UPI is that it allows people with different payment apps and payment method preferences to digitally transact with each other seamlessly. This expands the scope of digital payments to include peer-to-peer (P2P) transactions, peer-to-merchant (P2M) transactions, bank transfers, bill payments, and even in-store purchases. Payments are extremely easy to set up and use, go through instantly, and are free for users and smaller merchants.

To use UPI, all you need is a phone. You sign up by linking your bank account or prepaid wallet to any UPI-enabled payment app of your choice. You then get a Virtual Payment Address (VPA, e.g., "username@bank") and set a PIN to authorize payments.

Payments can be made simply by specifying the payee's VPA (or scanning a QR code) and entering your PIN. Compare this with conventional bank transfers, where sensitive bank details such as account numbers and IFSC codes have to be shared and specified correctly before the payment can go through.

In addition to being easy, payments are also instantaneous, as UPI uses the Immediate Payment Service (IMPS), a real-time interbank electronic fund transfer system developed by the NPCI. This is essential for promoting its widespread use in the retail sector.

Moreover, since no hardware (card reader) installation is required, and smaller transactions are free for both users and merchants, even small street vendors can accept cashless payments via UPI. This dramatically expands the scope of its use in India, where petty retail is the norm rather than the exception.

*UPI accepted at a corner shop (courtesy of Usha Jayaraman)*

Cost-Efficient Design

One of the most remarkable aspects of UPI as a public utility is its extremely cost-efficient design. Unlike card-based systems, which require investment in card readers on the part of merchants, UPI can be used simply by downloading a free app to your phone. Also, unlike credit cards and digital wallets, UPI involves no intermediary or merchant fees as it is based on direct bank-to-bank transfers.

The only costs involved are operational costs, such as server maintenance, cybersecurity, and settlement via IMPS. Also, the more people use the system, the thinner these costs are spread. Recent estimates suggest that each transaction costs banks ₹0.10 to ₹0.50 (roughly $0.01 USD, based on the current exchange rate).

Following its introduction in 2016, UPI was initially free for all users and merchants, while banks were reimbursed by the government for the operating costs they incurred. As of 2025, it remains free for users and smaller merchants, but banks, payment apps, and merchants with larger turnovers are absorbing some of the operational costs as government subsidies are pared back.

Going Global

UPI has sparked the interest of countries around the world for bringing order to the chaotic world of digital payments so effortlessly. In some cases, countries are seeking to design and implement systems modeled on UPI for their domestic markets. Meanwhile, others seek to join the UPI ecosystem for cross-border transactions with India.

Countries including Bhutan, Nepal, and Sri Lanka, for instance, have already deployed UPI for domestic settlements in partnership with India. Additionally, Singapore, France, and the United Arab Emirates have linked their domestic systems to UPI, enabling cross-border transactions with India.

Japan, too, has expressed interest in UPI and may consider both joining the UPI ecosystem to enable cross-border payments and using UPI as a model to design a tailor-made solution for its own domestic needs. Despite its tech prowess, Japan lags behind in the adoption of digital payments, with elderly and rural populations still clinging to cash. Perhaps the simplicity of a system like UPI could encourage the switch to cashless.

Author: Usha Jayaraman