What is the UPI payment system, and how does it work?
Hassle-free payments within a tap from your smartphone. Electricity bills? Paid! Grocery bills? Paid! Medical bills? Paid! Movie tickets? Booked! Dinner Date expenses? Sorted!
Ever wondered HOW? What is the UPI payment system, and how does it work?
What is the UPI?
The National Payment Corporation of India (NPCI) launched the Unified Payments Interface (UPI) in 2016.
Unified Payments Interface offers person-to-merchant (P to M) as well as peer-to-peer (P to P) transactions in real-time, that too for free. The transaction of funds takes place between two bank accounts, via the mobile platform. The Reserve Bank of India regulates UPI’s instant payment system.
UPI is an easy-to-use, secure, and interoperable payment system that integrates various participating banks across a single window of the mobile application. UPI offers multiple banking features, fund routing, as well as P to M & P to P transactions, in a single interface.
Benefits of the UPI payment system
- Instant, real-time, seamless transactions that are FREE OF COST!
- 365 days, 24*7, round the clock, money transfer facility.
- One application across a single window, for operating multiple bank accounts.
- Two-factor authentication in a single click! Completely secure; in alignment with the regulatory guidelines.
- Once you fill in the details, UPI does not ask repetitively for account numbers, card numbers, and other such details.
- Allows merchants to smoothly collect funds from consumers.
- Suitable for both e-commerce and m-commerce merchandise.
- With the Bharat QR (Quick Response) you can scan the code and pay.
- One-stop solution to COD (Cash on Delivery), running to the ATM for money withdrawal or not having loose money. (Especially when the shopkeeper offers you toffees in exchange).
- Hassle-free Over-the-Counter (OTC) payments, utility bill payments, as well as payments to peers & merchants.
- Completely safe and secure, as the virtual ID requests no credential sharing.
- Raise a query or a complaint ticket directly from the mobile application.
Why did UPI come into action?
- In 2011, RBI concluded that on average, an individual performed only six cashless payments annually, even though 10 million retailers accepted card payments.
- More than 140 families, in one way or other, had no access to banking facilities.
- On the political front, most of the transactions intended for black money transfer or corruption were in cash.
Following this, RBI released a ‘Vision Statement’ in the year 2012, with a commitment to build a simple, secure, accessible, efficient, interoperable, inclusive, and authorized payment & settlement system in India. After its pilot launch in April 2016, the UPI-enabled applications were available for public use in August 2016.
This is a Green Initiative for the Environmental Preservation. An eco-friendly approach for reducing paper usage and establishing a sustainable domestic payments market.
UPI statistics 2018–2022.
The total volume of UPI transactions increased from a mere 23% in the year 2018–2019 to a hiking 55% in the year 2020–2021. In the second half of 2021, UPI witnessed a digital transaction volume of $68 billion. In the first half of 2022, UPI crossed a stupendous $1 trillion in digital transactions.
Considering Global aspects of the UPI payment system
UPI payments are already valid in Singapore and Bhutan. Moreover, for global merchants a real-time currency conversion facility will shortly be available in the countries like Nepal, UAE, Malaysia, Philippines, Vietnam, Thailand, Cambodia, Taiwan, Hong Kong, South Korea, and Japan, by the end of the year 2022.
How does the UPI payment system work?
The Unified Payment Interface works on the Interoperable, four pillar-Push & Pull model. This model allows transactions for remitters or beneficiaries, on the front end and back end. Here the front end involves Payment Service Providers, and the back end involves participating banks that settle transactions for their users.
Simply put, UPI provides an interface or acts as an intermediate body between users and the bank. For making transactions through UPI, you must register with the UPI application.
How to register with the UPI application?
- Grab your smartphone. Make sure of two things:
- Your mobile number is pre-registered with your bank account
- The bank you have an account in is a UPI participant bank.
- Download a UPI supporting application on your smartphone. You can select from UPI applications like BHIM, Google Pay, Phone Pay, Paytm, SBI Pay, BOB pay, and others, available in the play store.
- Once the application gets installed, allow permissions.
- The application will verify your phone number by sending an OTP (One Time Password).
- Create your UPI PIN: a 4-to-6-digit secret code that will link your UPI with your bank account. This is your password to authenticate all transactions.
- Click: Add Bank Account option. Select your bank from the list. You can add, manage, or link multiple bank accounts.
- Now create your UPI ID/VPA.
- Add details to create your profile, and you are all set to go cashless!
What is VPA?
UPI registers you with a Virtual Payment Address (VPA), that is unique to you, e.g., abc@xyzbank. Like your email address, you have your unique Virtual Payment Address. VPA enables you to push & pull funds from your bank accounts, via the mobile platform. You can link multiple bank accounts with the same VPA.
How to perform a transaction with the UPI application?
- Your credentials are stored securely in the UPI database.
- To make a transaction, enter the recipient’s registered mobile number, UPI ID, or scan a QR code. Bharat QR is a quick response code storing UPI data. It can be static or dynamic, depending on usage.
- For transactions, enter the amount you want to transfer and your UPI PIN.
- Interface converts your amount & password into an encrypted packet and forwards it to your bank server, via Virtual Payment Network (VPN).
- Your bank server decrypts this encrypted packet, makes sure that you have sufficient bank balance for the transaction, re-verifies UPI PIN, and deducts the amount from your bank balance.
- Your bank server credits this amount to the recipient’s bank account, notifying both parties about the successful transaction.
Who are the Participants in the UPI payment systems?
- NPCI (National Payments Corporation of India): A specialized division of the Reserved Bank of India, that regulates the retail payments and settlement systems in India.
- Payer app/PSP (The Payment Service Providers): The payer applications like BHIM, Google Pay, Phone Pay, and others, allow users to initiate or complete transactions.
- Sender’s Bank: Money is debited from the sender’s bank account.
- Receiver’s Bank: Money is credited into the receiver’s bank account.
- Payee PSP (The Payment Service Providers): The merchant acquires this payment gateway, for P to M (Person to Merchant) transactions.
What type of transaction does the UPI support?
The UPI supports:
- Financial transactions that include Pay Requests and Collect Requests.
- Non-Financial transactions that include: registration for internet banking, setting/changing the PIN, generating an OTP, checking transaction status, checking Account Balance, and raising a ticket
When can you use BHIM Aadhaar Pay?
You are out of cash in circumstances like having lost your smartphone, being stuck in a place where there is no network connection, forgetting your smartphone or your smartphone’s battery is dead. Also, for the ones not having smartphones, having safety constraints due to multiple users on a single smartphone, or for any other reason.
NPCI has another option. BHIM (Bharat Interface for Money) Aadhaar Pay. It is mostly for P to M transactions.
- BHIM UPI app allows the merchant to receive payments from the customer’s bank account. But bank accounts of the merchant and consumer must be pre-linked with their Aadhaar Card.
- For this, the merchant should have a smartphone with the BHIM Aadhaar application, and a Point-of-Sale (POS) device attached to a certified biometric scanner.
- For a transaction, enter the amount to transfer and your Aadhaar card number. Place the thumb on a biometric scanner. The transaction will be accomplished after verification.
Is UPI safe?
NPCI claims the UPI payment system to be the most secure platform for cashless transactions.
You go through the three-layer security check while performing transactions:
- Mobile number verification: The UPI application sends you an OTP, known only to you. This authenticates you as the sole user of this app. If you change your mobile number, you must re-initiate this verification process. In case of losing your smartphone, you can instantly block the mobile number and stop further transactions. It acts as a safety net against identity theft.
- Transaction security: The UPI application provides you with an option to set MPIN. You can set a 4-to-6-digit password for opening the application, as well as verifying the transactions. Only you are aware of your MPIN. Henceforth there remains no threat of security breach.
- Verify the authenticity of another party: If the QR code of a merchant is tampered with, fraud, or not verified by the UPI payment system; you instantly get a notification on the UPI application. This allows you to check the authenticity of a merchant’s payment system and prevents you from falling into fraudulent traps.
For safety reasons, never share your UPI PIN, MPIN, or Aadhaar number with anyone. Keep it a SECRET!
Go Cashless with the UPI!
The Reserve Bank of India (RBI), published a ‘Payments Vision 2025’ statement in June 2022. This futuristic statement stated a threefold upsurge in the number of digital payments by the year 2025. RBI has envisioned an escalating 50% of annual growth rate for the UPI payment system.
India is observing a Digital Revolution! Let us be a part of the Green Initiative and go cashless with the UPI!