What is UPI & How Does UPI Work?

5 mins read
by Angel One

Over the centuries, humans have developed various trading systems, including barter systems and currency. Today, we have everything accessible from our phones, from ordering food to paying our bills, and Digital payments make life more accessible than ever.

UPI has played a crucial role in paving the way for India’s digital revolution.

The National Payments Corporation of India (NPCI) launched UPI in 2016 with 21 member banks under the Green Initiative in India.

UPI had processed 93,000 transactions in August ’16, totalling ₹30 million which rose to 432.5 million transactions for a total value of ₹567.345 billion in July ’21. This trend indicates that Indians are more inclined toward online transactions than ever.

The Unified Payments Interface enables the real-time transfer of funds from one bank account to another.

In this article, we explore the concept in more detail.

What is the meaning of UPI?

A UPI gateway allows you to transfer money between bank accounts in a unified manner. Simply put, you can send or receive money, be it for a transaction, payment of a bill, or a transfer.

The process of making a payment is very straightforward. To initiate a payment, you need the mobile application and the UPI ID of the payee, for example, xyz@ABCbank. Once you have the credentials, you can transfer money directly to an individual’s account in one step. One crucial element to remember is that you may be required to enter your pin or other sensitive information while making each payment.

It is as easy as it sounds. Convenient, quick, and free. Moreover, you can make UPI transactions around the clock, 365 days each year.

Who initiated UPI?

UPI is a joint initiative of the Reserve Bank of India, the Indian Banks Association, and the National Payments Corporation of India (NPCI). With NPCI, multiple banks can interconnect and transfer funds among themselves. NPCI has also launched an initiative called Immediate Payments Service (IMPS), and UPI is the upgraded version of IMPS.

What is UPI ID and PIN?

In its simplest form, a UPI ID is a personal identification code for a bank account that can receive and send funds. This is otherwise known as the virtual payment address or VPA.

On the other hand, a UPI PIN is a four-digit identification number that must be entered to enable money transfer every time you make a transaction. An account holder can choose their PIN.

How does UPI work?

In order to understand how UPI works, let us first define the parties involved in the transaction:

1. Requester and Merchant

It refers to the participants in the transaction between whom the transaction is about to take place. It is the requestor who initiates the payment, while the merchant is the one who receives it.

2. Payment Service Provider

PSPs are responsible for handling authentication for the user and connecting them to the bank and NPCI. Furthermore, they manage the backend infrastructure for the UPI applications (aka 3rd Party Application Provider or TPAP).

3. UPI apps

A few mobile apps use UPI to make payments – like BHIM UPI, PayTM, and Google Pay. They are typically deeply rooted in the PSP, integrating the PSP’s capabilities with their own.

Let’s examine the process flow in more detail:

  1. When you purchase any item or wish to transfer funds, you are redirected to a UPI app wherein you enter the VPA or the UPI id of the payee.
  2. This data is forwarded to the UPI interface at NPCI.
  3. After that, the UPI transmits the information to the PSP, which then links the bank account information of the payer and recipient based on its internal mapping of VPAs to account numbers.
  4. In the following phase, UPI connects with the payer and recipient banks to debit and credit the amount, respectively.
  5. As soon as the movement is complete, UPI confirms the transaction with the PSP, and voilà, the transaction is completed.

What are the features and benefits of using UPI?

  • Streamlining online payments simplifies the process.
  • You can fund your shopping sites, food delivery services, and hailing services instantly using UPI payments.
  • UPI payment is accepted at major restaurants, grocery stores, and department stores in and around your locality.
  • The payment of rent, mobile recharges, and utility bills can be done online instantly.

Is it secure?

The encryption format used by UPI transactions is highly secure and not easy to hack.

Upon signing up for a UPI app, your phone will send a push SMS for verification. This keeps the OTP from being copied from another device. Push SMSes bind your device to your mobile number and must be configured whenever your device is changed.

By creating a PIN for your transactions, UPI adds an extra layer of security. Each time you make a transaction, your PIN is required. Just having physical access to your phone will not suffice. Thus even if your phone is stolen, you will still have to enter your PIN to make transactions, and your money stays safe.

How to set up UPI

Following your download of the selected UPI app, you will need to choose a bank from the offered options. An OTP will be shared with you by your bank in order to verify that it is your account. Your virtual payment address (VPA) will be created once the OTP is verified.

Here’s how to create a UPI account using the Google Pay app:

Step 1: Get the Google Pay app from the Google Play Store or Apple App Store.

Step 2: Input your mobile number, which you registered with your bank account.

Step 3: Configure a four-digit password or a pattern for your account. When logging in, you must input this password.

Step 4: Choose a bank account and link it. You can create your UPI PIN by providing the last six digits of your debit card and the expiration date.

After the setup, you can either transfer money to your account or request that money be sent to your account.