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UPI (Unified Payment Interface)

Updated: Aug 10, 2020

I have been trying to bring out the simplest way to explain UPI from the past three weeks. After reading multiple articles, putting in all my knowledge and experience. I am writing this blog and hope it makes UPI much easy to understand for a common man.

In my previous blogs on the #digital #payment series, I have tried to explain how basic payment infrastructure works. UPI is the Key to India's Digital Payments Infrastructure. It has set proven recognition in front of the world as the world's most advanced instant payment system.

Let's Understand India's Digital payment infrastructure basics - History of UPI.

One of the first steps that the Indian government took was establishing an Electronic Clearing Service (ECS) to handle periodic/bulk payments (think salary payments, dividend disbursements, others).

Given India's economic diversity, ECS did not prove to be sufficient. New payment systems (or "rails") were established as needed, and India soon ended up with an alphabet soup of payment systems. In addition to Visa and Mastercard, India now has the following payments rails, managed by the National Payments Corporation of India (NPCI).

Below are Payment systems operated in India by NPCI

Let's have a quick recap - how any payment system operates.

Sender --> Sender Digital ID/Authentication --> Sender's Bank --> Sender's Bank Authentication (via sender's digital id in bank) --> Payment et rail --> receiver's bank --> receiver's bank authentication (via receiver's digital id in bank) --> receiver's digital Id/authentication --> Receiver

Despite the government's best efforts, the payments systems established were not entirely inclusive or comprehensive.

Only 5% of payments begin done by Digital payments, and around 95% of all transactions are conducted purely in cash.

JAM happen:

Jan-Dhan: Bank Account connectivity for every Indian Jan-Dhan improved access to banking and financial services

Aadhar: Single unique digital Identification for every Indian

Mobile: Mobile penetration surged

The Indian government was quick to realise that there were immense benefits in having the three trends intersect. So it created the JAM (Jan-Dhan Aadhaar Mobile) initiative to link bank accounts, Aadhaar numbers, and cell phone numbers.

Now Goal was of creating infrastructure was to address the 5 C's that underpinned the vision for payments in India; Coverage, Convenience, Confidence (integrity and security), Cost, and Convergence.

The demonetization exercise of November 2016 acted as a further catalyst to the adoption of digital payments. Mobile wallets exploded nationwide and captured the mindshare of the urban elite.

The issue of financial inclusion was this fifth 'C' — Convergence — that posed a daunting challenge.

Take mobile wallets. Say you have money on your Paytm account, but your friend uses a different wallet (Citrus Pay). The available solution was: Your Paytm wallet → your bank → , your friend's bank, or your CitrusPay wallet → , your friend's CitrusPay wallet.

It was crucial to break the silos and integrate the platforms.

Imagine a world where Vodafone customers could only talk to other Vodafone customers, and it took three days to speak to a customer on another telecom provider. It is crazy that across the world, the equivalent of that is happening with monetary transactions.

Given the patchwork quilt, what India needed was standardized protocols using which different banks, bank-like, and non-bank entities could talk to one another.

Hence UPI was born.

UPI was treated as a common standard language for all payment rails in India. Through a set of application programming interfaces (APIs), UPI linked different user interfaces, provided seamless authentication and authorization, and ultimately ensured interoperability among existing players. UPI's APIs enables two entities to execute a payment transaction by exchanging the bare minimum amount of information required. Its a central repository managed by NPCI riding on Adhar based payment solution infrastructure and IMPS infrastructure

UPI takes status quo rails, status quo infrastructure, and binds them all together. Such an interoperable system lays the foundation for the conversion of physical cash to digital cash at will, making the need for physical money obsolete.

how payment looks like after UPI

Sender--> sender's global identifier(VPA) --> sender's bank/PSP --> UPI Repository --> receiver's bank/PSP --> receiver's global identifier(VPA) --> receiver

Above was all I tried to explain the backend of UPI.

The first bank that provided internet banking to its customers in India – ICICI Bank
The first bank to introduce ATM in India – HSBC
First public bank to introduce credit card to customers in India – Central Bank of India
First bank to provide mobile ATM – ICICI Bank

Now, lets quickly have a look at How it works for a consumer:

  • Make sure your bank account is linked with your mobile number (does you receive balance SMS on your name, if yes it's connected)

  • The bank account linked with Aadhar (it's a mandatory gov. regulation so by default you have done it, not to worry)

  • Debit/ATM card of your account (just for first time VPA creation as security authentication)

  • Install any UPI app (Bank apps like imobile for ICICI, Yono for SBI or Payment service providers app like PhonePe, Gpay, BHIM, Paytm or others)

  • Enter your mobile number

  • It will fetch all bank details registered with that mobile number.

  • select your bank details

  • it will come as last 6/4 digits of your debit card number issued against bank account you selected

  • enter require details and validate

  • once Authorized by your bank (instantly generally) your VPA has been created by that PSP

  • you can check your VPA at "my account" section of your PSP app (like Gpay or PhonePe)

  • The common format for VPA is <Mobile number @ bank>/<email id @ bank>/<account number@IFSCcode.ifsc.npci>

That's It; you are ready to pay to anyone.

How to Pay:

  • select UPI payment option and enter your VPA if online or sharing your mobile number or VPA with the sender

In case someone requests you for Payment

  • once sender sends a request for you to pay, you will receive an SMS or Popup asking to approve this Payment

  • once you click on accept, all you have to do is authenticate via UPI PIN or biometric (based on your settings and app)

  • once an approved transaction is done and you receive success status with transaction number of Payment instantly

In case you pay to someone

  • enter receiver's VPA or scan receiver's QR or Account number + IFSC by clicking make Payment

  • it will validate your receiver's identity

  • once verified, enter the amount

  • enter your UPI PIN / biometric authentication

  • and Payment is made

Currently, UPI support payment max up to 1 lac in a day (or can be changed based on your bank /payment service provider)

UPI is a vast and complex topic; I tried to provide a glimpse of everything in the above blog. Hope That Helps.

You can ping me or comment below in case of any queries, and I would be able to solve the same with the best of my abilities.


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