What is UPI and How Does It Work? The Complete Guide

India has seen a remarkable increase in digital payment options, making transactions quick, easy, and secure. This shift is steering India towards a cashless economy, aligning with the vision of DIGITAL India. The rise in fintech companies has further secured and expedited payments. A prime example of contactless payment technology is UPI, which, as per NPCI’s latest report, surpassed over 8 billion transactions in January 2023.

In this blog, we’ll dive into what UPI stands for, how it works, its features, benefits, and so much more. Without further ado, let’s get into it!

What is UPI?

Unified Payments Interface has been developed by the National Payments Corporation of India (NPCI) – an initiative of the Reserve Bank of India (RBI) and Indian Banks’ Association (IBA), and an umbrella organization for operating retail payments and settlement systems in India. 

UPI’s core function is to support a real-time and secure money transfer between two bank accounts. It does this by adding multiple bank accounts into a single mobile application, allowing for seamless fund transfers and merchant payments from one place. It also enables ‘peer to peer’ and ‘peer to merchant’ collection requests, which can be scheduled and paid as requested

Launched on 11th April 2016, UPI is a real-time, single-window payment program that allows users to transfer payments in real-time from one bank account to another. UPI enables the user to transfer cash safely, discreetly, and efficiently without disclosing any bank-specific information.

In India, UPI is one of the most preferred digital payment solutions, with over 8 billion transactions per month (as per Feb ‘23 statistics of NPCI). 

What is a UPI ID?

UPI ID also known as virtual payment address is a unique ID for using UPI. The UPI Id can be created by registering your phone number with one of the UPI-enabled mobile applications using your bank account details.

Registration Process to Use UPI

The quick and hassle-free process of transferring and receiving the fund at the fingertips has made UPI one of the most favorite and popular digital payment solutions. Users can easily transfer money only by knowing their Aadhaar number, mobile phone number registered with the bank account, or UPI ID. 

To complete a UPI registration process, follow these simple steps-

• Download an application that supports UPI services like BHIM, Paytm, Gpay, etc
• Enter the mobile number which you wish to register for UPI.
• Your mobile number will be verified through an SMS.
• Choose your bank name from the list and ensure that the mobile number must be the same as the one registered with your bank.
• Set up a UPI PIN if you are linking your bank for the very first time. 
• After completing the registration process you can choose any mobile number from your contact list to receive or send money.

Who are the Primary Participants in a UPI Transaction?

To complete a UPI registration process, follow these simple steps-

1. Payer app/ Payment Service Providers (PSP): 

Payer apps are the apps that allow customers to initiate and complete transactions like BHIM, Paytm, GPay, etc.  PSPs i.e Payment Service Providers, provide a “front end” or “mobile app” to the customers. 

2. National Payments Corporation of India (NPCI) 

National Payments Corporation of India (NPCI) is an umbrella organization for operating retail payments and settlement systems in India. NPCI provides a UPI interface where the entire transaction flow happens on a real-time basis. NPCI maintains the network infrastructure relevant to the operation of the UPI platform, maintains uptime, and ensures timely settlements to banks.

3. Issuing(Remitter) Bank

In a UPI transaction, the funds are transferred from the issuing bank account to the beneficiary’s bank account. After performing a transaction, the user’s bank account will be debited. The remitting bank also holds the responsibility of authenticating the UPI PIN set by the customer and sends a debit response to NPCI once the debit is successfully done. 

4. Acquiring (Beneficiary) Bank 

Any credit going to a UPI user will be credited to a beneficiary’s bank account. The bank receiving the funds in UPI transactions will be acting as a beneficiary bank. After the credit is successfully done into the beneficiary account, the acquiring bank needs to send a credit response to NPCI.

5. Payee PSP

Banks in the role of Payee PSP can onboard a customer/merchant to receive money or raise a collect request.

What are the Benefits of UPI?

For Banks

• High-security payment transactions with two-factor authentication.
• Safe and secure solution with low cost by leveraging existing infrastructure.
• Enables seamless merchant transactions with scalable collections and disbursements.

For Merchants

• Seamless fund collection from customers.
• No risk of storing the customer’s virtual address.
• Ability to accept payments from customers having no access to the internet

For customers

• Mobile-first customisable design – UPI has been developed to embrace the smartphone boom in India with the mobile phone as the primary device for payment authorization.
• Push and pull payments for innovative use-cases – Payments can be initiated by either the sender (payer) or the receiver (payee)
• Use one single application for accessing different bank accounts.
• Conveniently make utility bill payments, over-the-counter (OTC) payments, and QR Code (Scan and Pay) payments.
• The use of a Virtual ID is more secure without sharing credentials.
• Ease of raising complaints from mobile apps directly.
• Immediate money transfer available 24*7 and 365 days a through mobile phone.

Safety and Security of UPI Transactions

NPCI developed UPI with safety as an utmost priority. Here’s a list of the security measures taken to ensure safe transactions: 

Multi-Layered Encryption: This acts as a shield, keeping user data and transaction details confidential.

Virtual Payment Addresses (VPAs): Users transact without sharing bank details, reducing fraud risk.

Two-Factor Authentication: Involves a UPI PIN and a registered mobile number, adding an extra security layer.

Device Binding: Links the UPI app to a specific device, preventing unauthorized access.

Regulatory Oversight: The Reserve Bank of India monitors UPI’s operations, enforcing strict safety guidelines.

How Does UPI Work: Transaction Flow and Process

The quick and hassle-free process of transferring and receiving the fund at the fingertips has made UPI one of the most favorite and popular digital payment solutions. Users can easily transfer money only by knowing their Aadhaar number, mobile phone number registered with the bank account, or UPI ID.

Let’s take a look at the transaction process a little more in-depth:

1. Initiating Payment: Users start the transaction on their UPI app using the recipient’s UPI ID or number.
2. Verification and Confirmation: The user’s bank verifies and sends the request to NPCI.
3. Transaction Routing: NPCI directs the request to the recipient’s bank.
4. Fund Transfer: The recipient’s bank credits their account, completing the transaction.

UPI in International Transactions

UPI’s role in global transactions has made it easier for Indians abroad and simplified sending money to India. Here’s how:

• Payments Abroad: Indians traveling or living in countries like Singapore and France can use UPI for payments. This means they can pay in rupees without worrying about exchanging currency or carrying cash in the local currency.
• Growing Reach: The aim is to expand UPI to more countries, making it easier for Indians around the world to use this payment method.
• From the U.S. to India: People in the U.S. can now send money to India easily using UPI. This method is quicker and often cheaper than old ways of sending money.
• Simple Process: To send money, a person in the U.S. just needs the Indian recipient’s UPI ID. There’s no need for detailed bank info, making it straightforward.
• Helps Indian Economy: These money transfers from the U.S. are important for India. They bring in foreign money and help families in India.

UPI vs. Other Payment Methods (IMPS, Cards, Cash)

Unified Payments Interface (UPI) has some clear advantages over other common payment methods like IMPS, cards, and cash. It’s easier to use because it works with simple IDs that replace complicated bank account details needed in IMPS.

When it comes to safety, UPI is ahead as well, as it gets rid of the need to carry cards that can be lost or stolen. Plus, UPI is more convenient than cash. It lets you do transactions digitally, which is a lot faster and safer than dealing with physical money. All these points show how UPI is changing the way we handle our daily financial tasks. Now, let’s take a closer look at these differences in a tabular format for a clearer comparison.

UPI 2.0 – The Next Step in Digital Transactions

UPI 2.0 is an updated version of the Unified Payments Interface, offering new features to make digital transactions even more convenient and secure. Here’s a detailed look at what UPI 2.0 brings to the table:

Bill Sharing: Splitting bills with friends or family is now easier. UPI 2.0 lets users divide the cost of expenses and send requests for their share, streamlining group payments.

Overdraft Facility: Now, UPI users can connect their overdraft accounts to their UPI profiles. This means they can spend more money than what’s in their account, which can be helpful in emergencies or urgent needs.

One-Time Mandate: UPI 2.0 allows users to set up automatic payments for regular expenses like utility bills or subscriptions. This means payments will happen on their own, saving users the trouble of remembering each bill.

Biometric Authentication: For extra security, UPI 2.0 includes biometric checks like fingerprint or iris scans. This means transactions are safer, as they ensure that the person making the payment is the rightful account owner.

Higher Transaction Limits: UPI 2.0 supports larger money transfers, allowing for bigger transactions than before. This is particularly useful for high-value purchases or business transactions.

Invoices with Payment Requests: Businesses can now send detailed invoices directly through UPI, making it easier for customers to see what they’re paying for. This feature is great for transparency and simplifies the payment process.

Signed QR Codes: With UPI 2.0, QR codes now come with added security. They are digitally signed to ensure they’re authentic, reducing the risk of fraud in QR code transactions.

Concluding Thoughts

UPI has been a monumental success in digitising financial transaction on an everyday basis. With the introduction of UPI 2.0, things are going to be taken up a notch further thereby inching towards realising a dream of a fully digital India.

Frequently Asked Questions (FAQs)