System Design interview question · Indian product design problems · mid level
Walk me through a UPI person-to-person payment. What do the payer's app, the PSP, the NPCI switch and the two banks each do?
Free to read in full. This is 1 of the 200 questions in the System Design and Distributed Systems interview pack, with 268 diagrams. Get the pack, ₹999 · $20
Why it is asked
UPI is the payment system most Indian candidates use every day, so interviewers at payment companies and banks expect you to know who owns each step and who actually holds the money.
The answer
In a UPI person-to-person payment, the payer's app sends a request through its PSP to the NPCI switch, NPCI asks the payer's bank to debit and the payee's bank to credit, and the result flows back to both apps.
The parties:
- UPI app (PhonePe, Google Pay, Paytm): the screen the user sees. It holds no money.
- PSP (payment service provider): a bank that connects the app to UPI and issues the user's VPA (virtual payment address, such as asha@bankx), which hides the account number.
- NPCI (National Payments Corporation of India): runs the UPI switch that routes messages between banks.
- Remitter bank: holds the payer's account and is debited.
- Beneficiary bank: holds the payee's account and is credited.
Asha pays Ravi Rs 500: 1. Asha enters ravi@banky. Through NPCI, Ravi's PSP returns his registered name, so Asha can check it. 2. Asha types her UPI PIN inside NPCI's common library in the app. It is encrypted on the phone. 3. Her PSP sends a pay request with a unique transaction ID to NPCI. 4. NPCI asks the remitter bank to debit. The bank checks the PIN, the balance and limits (Rs 1 lakh, Rs 100,000, for P2P; some banks set less), then debits. 5. NPCI asks the beneficiary bank to credit Ravi, then sends the final status to both PSPs.
Since 1 October 2025, P2P payments are push-only: only the payer can start them. NPCI stopped P2P collect requests (the payee asking for money) to cut fraud. Several times a day NPCI totals what each bank owes the others (settlement), and money moves between their accounts at the RBI, India's central bank.
What the interviewer listens for
- The app holds no money; banks debit and credit, NPCI only switches messages
- The payee's PSP resolves the VPA to an account and a name
- The UPI PIN is encrypted on the phone and verified by the payer's bank
- Debit first, then credit, then the final status to both PSPs
- P2P payments are push-only since October 2025
Follow-ups the interviewer may ask
- What happens if the beneficiary bank does not answer after the debit? Hint: the payment becomes pending (or deemed approved, treated as successful), status checks follow, and an amount that cannot be credited must be reversed by T+1 (the next day).
- How can one app serve customers of hundreds of banks? Hint: the app talks only to its PSP; NPCI routes each message to the right bank, so the app never connects to the customer's bank directly.
- Why does the payer see the payee's name before paying? Hint: the address check lets the payer catch a wrong VPA before any money moves.
Common mistakes
- Saying the UPI app or NPCI holds the money; it stays in bank accounts the whole time.
- Saying the app checks the UPI PIN; it is encrypted on the phone and checked by the payer's bank.
- Describing a P2P collect request as a normal flow; it was stopped in October 2025.
Written by Roni Das, who builds distributed systems and AI systems for a living.
Learn it properly
This is taught step by step in the course lesson Design a Payment System.
One question is not enough for the interview.
This is 1 of the 200 questions in the System Design and Distributed Systems pack
Each question has why it is asked, a full answer, what the interviewer listens for, the follow-ups, the common mistakes and a diagram (268 diagrams in all). A PDF you keep, junior to staff level.
India: UPI, cards or netbanking through Razorpay. Elsewhere: card or PayPal. Download at once from My packs.
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