NPCI Develops Offline UPI Payment System Using NFC

#GS-3 #Economy #Banking #Infrastructure #Science & Technology #ICT #Current Events #National

Why in News

The **National Payments Corporation of India (NPCI)** is developing a new offline payment system for **UPI**.
This new system uses **Near Field Communication (NFC)** technology so users can pay by tapping their phones without any internet connection.

It is an advanced contactless payment system built on top of the existing **UPI** network.
It allows people to make digital payments at merchant terminals even when both customer smartphones and merchant terminals lack internet connectivity.

The system is designed and engineered by the **NPCI**, which manages retail payment and settlement systems across India.
Its main goal is to prevent payment failures caused by weak or missing mobile network signals.
This will extend **UPI** payments to underground metro stations, flights, remote villages, and city network outages.

First comes the pre-authorization phase while connected to the internet, where the phone receives bank-authorized cryptographic tokens or a prepaid balance.
Next is the local exchange phase offline, where the user taps their phone on an **NFC** terminal to exchange payment details using short-range radio waves.
Finally comes the deferred settlement phase, where transaction records are stored on devices and sent to **NPCI** for final settlement once internet returns.

The system offers dual-offline **NFC** compatibility, meaning tap-and-pay works even if neither the phone nor the PoS machine is connected to a network.
It uses cryptographic tokenization to prevent fraud by replacing live bank balance checks with single-use tokens saved inside smartphone hardware.
It supports transaction limits up to **₹2,000**, which makes it suitable for medium-value purchases compared to small-value options like **UPI Lite**.
It uses a merchant-centric store-and-forward model designed for retail terminals, allowing shopkeepers to accept continuous payments during outages.

Each payment is capped at a maximum limit of **₹2,000** and depends on pre-allocated tokens stored on the phone to limit financial risk.
The system requires both the smartphone and merchant PoS terminal to have built-in **NFC** chips, excluding basic feature phones.
Deferred settlement creates a small time gap between payment execution and actual money transfer, requiring smart algorithms to handle any disputes.