As UPI Transactions Jumped, Failure Rate Doubled This Year

Between January and October, the UPI transaction decline rate due to technical faults rose from 1% to 2.31%, according to BloombergQuint’s calculations based on the data available for the top 30 remitter banks (by transaction volume) available with National Payments Corporation of India.

The rate is computed by dividing the total number of transaction failures every month by the total volume of transactions across these banks.

The value of UPI transactions grew rapidly by 81% to Rs 3.91 lakh crore in November from Rs 2.16 lakh crore in January, despite a dip between April and May, when transaction volumes dropped due to the nationwide lockdown. The data for transaction failure rate for November is not yet available.

NPCI declined to respond to the email queries sent by BloombergQuint.

“After the lockdown curbs were lifted, India’s top 10 banks, with the largest share of account holders, faced the maximum pressure, as most of the UPI transactions flowed through them,” said Kunal Pande, partner at KPMG in India.

The top 10 banks in India (by total transaction volume) accounted for 59% of the 1,487 crore UPI payments made between January and October, and 62% of all the failed UPI transactions during the period, according to NPCI data.

“Clearly banks weren’t able to keep up with the pace at which the UPI grew, it’s very evident,” said Deepak Abbot, co-founder of fintech startup indiagold, and former executive at Paytm.

This year, some of India’s largest banks, including State Bank of India and HDFC Bank Ltd., faced instances of system outages. Taking cognisance of that, the banking regulator temporarily barred HDFC Bank from rolling out new digital banking launches and sourcing of new credit card customers till it upgraded some of its systems.

Abbot said the actual transaction failure rate may be even higher than what the NPCI data suggests. “Many transactions are declined at the time of initiation on the payment application itself, because the payment service provider’s bank server is down and those transactions don’t even hit the NPCI switch.”

Understanding UPI Payment Flow

Every UPI transaction goes through four main channels.

The customer enters his/her UPI PIN on the mobile payment app, the payment is initiated on the partner’s payment service provider or acquiring bank’s UPI server, it then moves to a centralised NPCI switch and hits the beneficiary bank’s server.

Presently, a total of 51 banks, including payment banks, are licensed as “PSP and issuer” by the NPCI, while another 149 banks are just issuers.

Besides operating the UPI platform, NPCI prescribes rules and responsibilities for the UPI participants and is also authorised to conduct audits and call for data, information and records from UPI participants.

The Broken Links

The rise in failed UPI transactions, according to Pande, is mainly because the partner banks’ infrastructure capacity hasn’t scaled up quickly enough to support the increased volume of UPI transactions.

Agreed Shalini Warrier, executive director, chief operating officer and business head – retail at Federal Bank Ltd. “The increase in UPI transaction volumes is unprecedented.”

“While banks and NPCI are working together to ensure the infrastructure is enhanced to cater to these high transaction volumes, there have been some hiccups in scaling up capacities as it was difficult getting the right specialists and engineers during the pandemic,” she said.

The issue of growing failed transactions, according to Pande, could also be mitigated faster if banks switch their UPI systems to nimbler solutions such as cloud infrastructure. “If banks were to move their systems handling UPI transactions to a cloud-based infrastructure, the response time to increase capacity for handling sudden volume spikes can be reduced significantly to a day or two, unlike the case with the legacy IT infrastructure.”

Warrier disagreed. “Cloud has its benefits in terms of fast scalability, and banks are using it in certain areas. But UPI architecture, for a bank, is as core as its core banking solution framework and it is best to keep it on-premises, so that the bank can determine the kind of architecture, flexibility and security, based on its own standards,” she said, adding that there are other options to ensure scalability.

Another reason for the increase in failed UPI transactions, according to Ashneer Grover, chief executive and co-founder at digital payment firm BharatPe, also has to do with lower investments on the UPI infrastructure.

“Even though for banks the primary mode of engagement with the customers is becoming more and more digital, their investments into their technology infrastructure hasn’t grown incrementally over the years,” he said.

The Way Out

The RBI has urged banks and financial institutions in the country to increase investments into their IT systems and technology, but policymakers have actually reduced the incentive for lenders to invest in upgrading their UPI systems.

For one, the government directed banks to waive merchant discount rate, or MDR, charges on all digital transactions using RuPay and UPI platforms starting January 2020. This has left banks with no earnings from such transactions.

“While the government and NPCI will be looking at the MDR aspect, of course, if it can be made a little more profitable, it will help banks, while we make sure that UPI doesn’t lose its appeal for customers,” said Warrier. “Even without MDR, banks are fully committed to strengthening their digital payments infrastructure.”

Another solution, according to Mahesh Ramamoorthy, managing director - banking solutions (international markets and Asia-Pacific) at technology solutions firm FIS, lies in having an ongoing collaborative approach.

“Large banks, major payment service providers and NPCI need to come together and have a collaborative approach towards the issue of payment failures,” he said. “The approach needs to take into account the rapid growth rate of UPI transactions, data analytics and how each of the major players in the UPI ecosystem will stand to be incentivised to strengthen the digital ecosystem.”

The role of NPCI, said Abbot, also needs to be strengthened further. “As a de facto regulator for retail payments, NPCI needs to take the onus of maintaining every bank’s UPI server, by carrying out regular audits and ensuring that its recommendations are implemented by the partner banks. Alternatively, RBI can form a separate committee to carry regular IT infrastructure audits at banks.”