THE UPI FRAUD LATTICE

by Sumit Chaudhary and Dhruv Gurnani from Chanakya National Law University Patna

Introduction

The growth of UPI is an indication of the volume of transactions and the arrival of a layered and interoperable national payment lattice. Its architectural options generate network effects like crucial digital utilities. As per NPCI UPI Product Statistics, it shows that its system has processed 20.008 billion transactions in August 2025, with a value of ₹24.85 lakh crore. This structural shift is strengthened by the RBI Annual Report 2024-25: UPI has become 84% of India’s retail digital payment volume, with the volume of transactions increasing by 41.7% and 30.3%, respectively, every year. These contributions demonstrate that the architecture, not UPI subsidies or mandates, drives adoption at the national level.

The “payment lattice” is based on the federated API architecture outlined by the UPI Procedural Guidelines that connect the PSPs, TPAPs, the issuing/acquiring bank, and the switching core of NPCI. Interoperable identifiers (VPAs, Aadhaar, mobile), device binding, and 1-click 2FA reduce authentication friction. The  NPCI API Usage Guidelines impose encryption, documentation, and consent layers; these are standards that have the benefit of creating a consistent security perimeter across all applications.

The lattice is based on the statutory provisions related to the Payment and Settlement Systems Act, 2007, which allows RBI to authorise, regulate, and implement operational and cybersecurity requirements (Sections 3, 10, 17, and 18). According to the Worldline Digital Payments Report , UPI registered 93.23 billion transactions and 42% year-over-year growth. UPI is now a mobile-first, nationally integrated payment lattice that is architecturally based, creating systemic economic reliance between its architecture and regulatory framework.

National Threat Landscape: What CERT-IN, RBI and Government Data Reveal

India has a national cyber-risk posture with a visible shift in the digital fraud cases to behavioural vulnerability on the infrastructural level. In the document published by CERT-In Advisory CIAD, the threat environment has been increasing, with 2,041,360 incidents of security, 959 alerts, and 72 advisories in 2024. The systematic trend is supported by regulatory complaint data. According to the annual report of RBI Integrated Ombudsman, which highlights that 934,355 complaints were reported,  marking an increase by 32.8% in a single year, with the highest risk group being mobile/electronic banking. This correspondence between the threat intelligence of CERT-In and the grievance statistics of the RBI proves that cyber-risk has ceased to be marginal and is now embedded in the Indian digital payment rails.

The fraud-governance framework adopted by RBI, as characterised by the IIBF/Master Circular on Fraud Classification & Reporting, illuminates structural reporting loopholes, especially in detecting unauthorized transactions, attributing them, and monitoring them, and establishes latency between breach and regulatory publicity.

The DSCI Quick Heal Cyber Threat Report 2025, which was conducted using industry telemetry with 369 million malware detections, confirms that BFSI continues to be a high-intensity target.

UPI Technical Vulnerabilities: App and Network Layer and Device Risks

UPI’s security posture is becoming increasingly characterized by vulnerability at all three levels: device, application, and network, with user-side vulnerability overlapping attacker capability. The UPI Information Security Framework 2025 and NPCI API Security Guidelines demonstrate that, even though NPCI prescribes the use of fake APKs, app cloning, reverse engineering, and malicious repackaging, which continue to remain a mobile-attack vector.

Network-layer exposure increases these vulnerabilities: rogue Wi-Fi, simple man-in-the-middle attacks, insecure DNS resolution, and unencrypted traffic of third-party libraries. Analytically, these stratified vulnerabilities constitute a mobile-first attack lattice: attackers use the node that is the cheapest (the device) and, bypassing the strong backend controls, attack the human-device interface.

Focus on Social Engineering and Behavioral Attacks: Fraud Vector

The payment-fraud ecosystem in India is becoming progressively behavioural, with attackers evading technical defences to use cognitive shortcuts.  The Threat Landscape Report 2024 by Cloud SEK indicates that a swift rise was witnessed in QR code replacement scams, phishing UPI hands, app-cloning counteractions, and social engineering manipulation of the so-called ‘collect requests’.

The cyber cells in Mumbai and Hyderabad are registering growth in fake support desk scams and merchant impersonation. The RBI Ombudsman scheme has recorded growth in year-over-year UPI-based social-engineering grievances.

The Economic Times reports that these attacks, which have resulted in citizens losing ₹22,845 crore, can be understood through certain behaviours related to QR fraud investigations: These behaviors encompass urgency bias, authority bias, and a misplaced trust in digital brands. urgency bias, authority bias, and a misplaced trust in digital brands.

Legal and Regulatory Response: Adequacy, Gaps & Enforcement Challenges

The legal system of India covers several vectors of fraud in online payments; however, there are still gaps in the system and enforcement. The Information Technology Act, 2000 criminalises Phishing, QR-replacement scams, and UPI handles  impersonation in Section 66C(identity theft), Section 66D(cheating by impersonation), and Section 43(tamper or abuse of computer resources). This legislation is reinforced by the SPDI Rules, 2011, which requires that privacy notices (Rule 4) be issued as well as reasonable security practices (Rule 8).

The Digital Personal Data Protection Act, 2023, enables a stronger layer of governance. Section 8 necessitates purpose limitation and security measures, Section 9 addresses data breach necessities, and Section 10 enforces enhanced responsibility on those data fiduciaries of noteworthy size, making them directly responsible to banks, TPAPs, and large PSPs. The Payment System Systems Act, 2007 (PSS Act) gives the RBI the power to regulate the people who use the payment system and put in place measures to reduce fraud and report it.

Regulatory rules elaborate on this architecture: The NPCI Notice has tightened compliance through enhanced intent verification and transaction-risk scoring, but the EY Digital Payments Security Report shows how these controls are frequently bypassed through social-engineering vectors. The Digital Banks Report  by NITI Aayog states that there isn't a unified way to report fraud, and the rules for verifying customer identities vary among different payment service providers, which is made worse by the rapid growth of UPI. Although it has multiple layers of statutes and guidelines, the ecosystem is still operationally disjointed, and the legal response of India is partial to the sophistication and scale of the current digital-payment fraud.

Future Risks: AI-Driven Fraud, Deepfakes, and the Evolution of Instant-Payment Crime

Digital payment crime is evolving quickly since criminals have turned to AI to scale their attacks. IEEE research on the security of mobile payments indicates that AI can predict passwords, evade application defences, and scan thousands of victims within minutes. According to research by ACM CCS, fraud groups use graph-based models to mimic real user behaviour so that the fraud detection systems at banks can't spot anything unusual. This conclusion is in line with the results of the social-engineering experiment (source), in which AI-generated voices and personalised messages are found to significantly increase the success rates of scams.

Recent threat-intelligence reports also show deepfake-enabled fraud becoming scalable, with attackers able to bypass verification processes, including video-KYC, through AI-generated voices and synthetic identities, as per the Cloudsek threat report.

Conclusion

The surging digital payments ecosystem in India needs a security framework that is both standards-based, operationally enforceable, and behaviourally consistent. The blueprint has a multi-layered foundation in the OWASP Secure Coding Guidelines that ensures that every PSP, TPAP and merchant has a standard baseline. RBI’s 2024 Master Directions mandate greater compliance with admissibility, responsibility to procure source code, the need to conduct continuous security audits, cloud security management, anomaly detection, and a transition to real-time resilience, rather than compliance.

At the technical level, institutionalised mandatory device binding, tokenisation, anomaly detection under AI, and annual third-party audits should be implemented. This is supplemented by the CERT-In requirements for log retention, near-real-time alerts, and reporting of incidents. Deloitte’s global findings indicate that 6 out of 10 consumers do not believe that they are sufficiently informed about digital risks, and it is important that clear communication and adoption of security-by-design should be adopted. There should be regulatory provisions for the Unified Fraud-Reporting Grid (similar to the NPCI Fraud Bureau), a shortened chargeback and refunding time, and organised coordination among RBI-CERT-In-NPCI to share live threat intelligence.

Lastly, a behaviourally consistent market reaction is essential: the concerted measures of PSPs and banks to hold national fraud awareness exercises, merchant security training, and intelligence-sharing forums are a necessity. A security blueprint can only be effective when there is convergence between the standards, enforcement, and market behaviour in a lattice of trust.