Lakshya

Banking & Capital Markets Systems · Chapter 3 of 13

Payments, and the liability nobody sees

NPCI rails versus RBI rails, why a switch is not the NFS, where the aggregator boundary sits, and who actually carries the blame when UPI fails.

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India's payments architecture is the part of this stack with no real analogue elsewhere, and it is where a candidate can most easily be caught out — because the interesting questions are about who is liable, not about which app is winning.

Two operators, and they are not the same thing

NPCI-operatedRBI-operated
WhatUPI · IMPS · NACH (National Automated Clearing House) · RuPay · AePS · FASTag · Bharat Connect (formerly Bharat BillPay)RTGS (Real Time Gross Settlement) · NEFT (National Electronic Funds Transfer) · the e₹ central bank digital currency (CBDC) pilots
NatureA not-for-profit company owned by banks, building retail railsThe central bank itself, running large-value and interbank settlement
Worth knowingNACH is the bulk repetitive rail — EMIs, SIPs, salaries, DBT subsidies — successor to ECS. It is unglamorous and it moves an enormous amount of India's recurring moneyBoth went 24×7×365: NEFT from 00:00 on 16 Dec 2019 (11.4 lakh transactions in the first eight hours), RTGS from 00:30 on 14 Dec 2020

The 24×7 change is load-bearing for any system-design answer and candidates routinely miss it. Once the settlement rail never closes, there is no longer a nightly window in which reconciliation, batch posting and end-of-day can safely happen — which is precisely the assumption a batch-oriented core banking system is built on. A very large amount of Indian banking engineering over the last five years exists because of that one sentence.

A switch is not the NFS

A switch is the real-time middleware between acceptance points — ATM, point of sale, e-commerce — and the core banking system. It does ISO 8583 message translation, authentication and routing. Every bank has one, bought or built.

The National Financial Switch is something else: the NPCI-operated shared interbank ATM network that your bank's switch connects into. It moved from IDRBT to NPCI in 2009 and by 2017 covered roughly 236,000 ATMs and 99 direct member banks.

  • FSS — Chennai-based, and independent, not NPCI-owned, contrary to a common assumption.
  • Euronet — built Cashnet, India's first shared ATM switch.
  • ACI Worldwide — modernised SBI's own ATM, POS and e-commerce switch, announced September 2020.

Where the aggregator boundary actually sits

A payment aggregator holds merchant funds in escrow before settlement. A pure gateway does not. That single difference is why RBI authorises aggregators directly and does not authorise gateways: once you hold someone else's money, you are a prudential concern.

Razorpay and Cashfree hold RBI payment-aggregator authorisation, along with cross-border variants. PayU's initial application was returned by RBI in 2023, with permission to reapply — a useful reminder that this is a licence, not a formality.

The point to be able to defend: none of these companies is a bank. They cannot hold deposits or lend from a banking balance sheet, and settlement finality always runs through an escrow arrangement with a partner bank underneath them. They are an orchestration and experience layer over NACH, UPI, IMPS and card rails — not a replacement for any of them.

THE APP OWNS THE CUSTOMER. THE BANK OWNS THE LIABILITY. THEY ARE NOT THE SAME COMPANY. THE APPS (TPAPs) 79–83% of all UPI volume, carried by just PhonePe + Google Pay They own: the customer relationship, the brand, the monetisation surface, the app you actually open. They are NOT banks. They cannot settle anything. THE SPONSOR BANKS (PSPs) They own: settlement finality, the KYC and AML obligation, the regulatory relationship — and the failure attribution when a payment declines. So NPCI’s monthly decline league tables name BANKS — and never PhonePe or Google Pay. Feb 2026 worst performers: Baroda UP Bank, Bank of India, AirtelPayments Bank. THE DAY THE ASYMMETRY BECAME VISIBLE — 5 MARCH 2020 RBI placed Yes Bank under moratorium. PhonePe routed roughly HALF its volume through Yes Bank alone, and went down for about 24 hours. Its own systems were fine. Its sponsor bank was not. NPCI then mandated a multi-bank model — 3 to 10 sponsor banks for any app above 5% share. AND THE CAP THAT KEEPS NOT ARRIVING NPCI’s rule caps any single third-party app at 30% of rolling three-month volume. It has been extended repeatedly — the current date is 31 December 2026. Two apps at 79–83% against a 30% cap tells you how enforceable it has proved. Treat the date as provisional.
This is the sharpest thing in the chapter. Two apps carry four-fifths of the volume and appear in none of the failure statistics, because failure attribution follows the settlement leg.

The question this sets up, and how to answer it

“Why does UPI fail, and whose fault is it?”

The weak answer talks about the app. The strong answer separates the legs: a technical decline is almost always the remitter bank, the beneficiary bank or the sponsor bank — core system unavailability, a timeout in the ISO 8583 leg, or a switch under load — while a business decline is limits, balances or risk rules. The app can only surface it.

Then name the structural consequence: the app owns the customer and therefore the complaint, while the bank owns the settlement and therefore the cause. That gap is why NPCI publishes bank-level decline tables at all, and it is why a payments engineer's real job is usually reconciliation and attribution rather than the happy path.

Yes Bank's March 2020 moratorium is the case to cite: PhonePe's own systems were healthy and it was down for a day anyway.

Check yourself

Which rails does NPCI run, and which does RBI run?NPCI: UPI, IMPS, NACH, RuPay, AePS, FASTag, Bharat Connect. RBI: RTGS, NEFT and the CBDC pilots. NPCI is a bank-owned not-for-profit; RBI is the central bank.
Why does 24×7 settlement matter architecturally?It removes the nightly window that batch-oriented core banking assumes — no safe period for reconciliation, batch posting and end-of-day. Much of the last five years of Indian banking engineering exists because of that.
What is the difference between a switch and the NFS?A switch is a bank's own ISO 8583 middleware between acceptance points and the core. The NFS is NPCI's shared interbank ATM network that the switch connects into.
What separates a payment aggregator from a gateway?The aggregator holds merchant funds in escrow before settlement. That is why RBI authorises aggregators directly — holding other people's money is a prudential matter.
Why do NPCI's decline tables never name PhonePe or Google Pay?Because failure attribution follows the settlement leg, which sits with the sponsor and beneficiary banks. The app owns the customer and the complaint; the bank owns the cause.
What did the Yes Bank moratorium demonstrate?PhonePe routed about half its volume through one sponsor bank and went down for 24 hours with healthy systems of its own. NPCI then mandated 3–10 sponsor banks for any app above 5% share.
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