How Digital Payments Actually Work in India – Step by Step

DIGITAL PAYMENTS

AT-ion

5/8/20242 min read

a person holding a credit card in their hand
a person holding a credit card in their hand

We’ve become used to fast, smooth payments — scan a QR, tap a card, or click 'Pay Now'. It feels instant. But behind the scenes, every digital transaction goes through a series of steps involving networks, banks, and sometimes multiple intermediaries.

In this post, we break down how common payment methods in India actually work — and what happens after you hit “Pay”.

Card Payments (Visa/Mastercard/RuPay)

  1. You swipe or tap your card on a POS terminal or enter details on an online checkout page.

  2. The POS/Checkout sends your card info to a payment gateway.

  3. The gateway routes the request to your bank (issuer) via a card network.

  4. Your bank checks if you have enough balance.

  5. If approved, the amount is authorized — the merchant sees “Payment Successful”.

  6. Actual settlement may take 1–3 working days, depending on the bank.

Merchant Fees: Typically 1–2% (MDR – Merchant Discount Rate)

UPI (Unified Payments Interface)

  1. You scan a QR or enter a UPI ID.

  2. Your app sends a request to NPCI, the UPI platform.

  3. NPCI contacts your bank (payer) and the receiver’s bank.

  4. Your bank verifies and debits the amount.

  5. The receiver’s bank gets a credit confirmation.

  6. The transaction is settled instantly in most cases.

Merchant Fees: Zero (as of now)

Note: UPI works only when both sender and receiver are linked to banks.

Wallets (PayTm, PhonePay etc.)

  1. You add money to your wallet in advance (prepaid).

  2. At checkout, your wallet app transfers funds to the merchant’s wallet/account.

  3. In many cases, the backend uses UPI, cards, or net banking as rails.

  4. The actual merchant settlement could be instant or delayed, depending on the provider.

Merchant Fees: Varies. Some charge ₹5–₹10 per transaction or a % fee.

Note: Wallets are not legal tender and rely on third-party infrastructure for settlement.

Common Misconception: "Instant = Settlement"

Just because a payment is marked successful doesn’t mean the merchant gets the money immediately.

  • UPI: Mostly real-time

  • Cards: Often delayed

  • Wallets: Depends on provider

This delay matters, especially for small and medium businesses that depend on daily cash flow.

Final Thoughts!

Digital payments in India have evolved quickly, and work well for most users. But on the backend, each method has its structure, speed, and cost.

Understanding this helps us ask better questions about how to improve the system for users, merchants, and the ecosystem at large.

AT-ion is building infrastructure for the next phase of digital payments, thoughtfully, and in sync with India’s regulatory goals.

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