117.6 Lakh Crores(117.6 Billion) transactions processed in 2023.
₹182.2 Lakh Crores (219.48 Billion USD) worth amount transferred using UPI in 2023.
India is #1 in digital payments across the world.
and the numbers are mind-boggling ! The best part – its growing.
Not often do you see an article with no heading but this one needs you to witness India’s digital success right on top.
These crazy numbers have now become a reality because of indigenous technology of India and the hero of India’s payment industry – UPI.
Today we are going to understand UPI in depth. How it works and look at this technology from behind the scenes.
What’s UPI?
UPI stands for Unified Payments Interface. It is a system to enable every individual transfer funds and process transactions to merchants, banks or even peer-to-peer, using a Virtual Payment Address instead of card details, bank account or IFSC code. It is fast, secure and reliable instant payment method that takes IMPS (Immediate Payment System) to a different level.
Who built UPI?
UPI was created by NPCI (National Payments Corporation of India), a non-profit organisation created by Reserve Bank of India (RBI) and Indian Banks’ Association (IBA). Read more on NPCI.
Understanding UPI – End to End
Terminologies
Let’s understand some terms.
- NPCI – NPCI stands for National Payments Corporation of India. NPCI is the organisation that owns and administers UPI. Technical ownership like –
- UPI transactions database,
- UPI frameworks (APIs),
- UPI servers
- Secure UPI Network to process UPI transactions.
NPCI also acts as an regulatory authority which decides – - which banks will partner with UPI,
- what banks are allowed to become PSPs,
- which third-party applications (TPAPs) can allow its users/merchants collect UPI transactions.
- what will be the UPI transactions limit,
- establish UPI guidelines, rules and regulations.
- conduct audits on the PSPs and other participants in a UPI transaction.
Read the roles of NPCI here.
- Virtual Payment Address (VPA or UPI ID) – Forget UPI, if you want to transfer money to your friend, you use your bank account number and IFSC code. You do this because your bank needs to confirm your identification, check balance in your account before proceeding with the payment. NPCI, ensures that bank stores these data for you and issues you, a unique address (or a simple ID). This means when you make a transaction with this unique address, NPCI takes the unique address and fetches the mapping of your bank details from PSPs to complete transaction. This unique address which is called VPA or simply, UPI ID. When you initiate a transaction with UPI ID, NPCI acts as a mediator, resolves the bank account number and IFSC code mapped against that UPI ID and sends the details to the bank. (Relax ! The entire process is discussed at the end)
Example of UPI ID – UPI ID is generally denoted as “xxxx@yyy“, where
– the first part (xxxx) can be a phone number or identifier generated out of your name and
– the second part (yyy) is the PSP (bank) code.
For e.g. –
using phone number :
9898989898@psp
using name :
alice.bob@psp
Not just a string value ..
So here is the fun part, even though UPI ID is a string, but various third-parties have generated QR code against the UPI ID, so that all you have to do is scan the QR code and pay !
Your phone number can also be your UPI ID !
Yes, it can be that easy, if your phone number is linked to your UPI ID, you can simply tell your phone number and the sender can send money in bank account, just using your phone number, nothing else. Seamless !
Safety first !
Along with your UPI ID, you have a UPI PIN (4 digit or 6 digit) which user can set himself. - PSP – PSP stands for Payment Service Provider. It is one of the crucial participant in a UPI transaction that directly talks to UPI system. In other words, PSPs communicate (send and receive requests/responses) from UPI servers. We will understand its role in a sec. One thing to note is that NPCI allows only banks to operate or function as PSPs. Since PSPs are banks, they are also the financial bodies that store the customer’s account details mapped with UPI IDs. Here is the complete list of PSPs issued by NPCI. Read the roles of PSP here.
- TPAP – TPAP stands for Third-Party Applications. These include Google Pay, PhonePe, Amazon Pay, or even business like – Tata Neu, Make My Trip etc. Basically anyone who wants to integrate UPI payment system in their applications or website via PSP is a TPAP. Here is the list of TPAPs by NPCI. Read the roles of TPAP here.
- Sender – Person sending money to another person. (I will avoid the payer, payee notation to avoid confusion).
- Receiver – Person receiving the money from sender.
- Sender’s Bank – The bank which holds sender’s fund.
- Receiver’s Bank – The bank which holds receiver’s fund.
- Sender’s UPI application – UPI application (TPAP) used by sender to initiate the payment. Let’s say sender uses PhonePe.
- Receiver’s UPI application – UPI application (TPAP) used be receiver to receive the payment. Let’s say receiver uses Google Pay and shows the QR code. (Note that- This is optional. Receiver may not use any application but simply tell sender it’s UPI ID or phone number to enter and pay.)
- Sender’s PSP – This is sender’s PSP which will communicate with the UPI platform.
- Receiver’s PSP – This receiver’s PSP which will communicate with the UPI platform.
- Sender’s UPI ID – sender@spsp (spsp – short for “Sender’s PSP”)
- Receiver’s UPI ID – receiver@rpsp (rpsp – short for “Receiver’s PSP”)
Let’s make a UPI transaction and Learn in 12 simple steps !
Alright, so now we know all players, let’s put them in action.
- First, the sender opens the ‘Sender’s UPI application‘ (PhonePe) to pay. He initiates a payment and enter’s Receiver’s UPI ID (receiver@rpsp), enter’s the amount (say ₹1,000) to send, enter his UPI PIN and hit send.
- This payment details is sent to the Sender’s PSP which will take this data and call the UPI servers hosted by NPCI using API.
- UPI system will ingest this request and read the data.
- It will then call the receiver’s PSP to validate the receiver’s UPI ID and return receiver’s account details.
- Receiver’s PSP will validate the receiver’s UPI ID, fetch the account number mapped against receiver@rpsp and send the account details in encrypted response back to UPI.
- UPI upon receiving the response will verify the account details and then make a debit request to the Sender’s Bank.
- Sender’s Bank receives the request, verifies the account details of the sender, checks that there is enough balance to perform payment of (₹1,000) amount, debit that amount from sender’s bank account and return a success response back to the UPI. At this step, sender gets his bank notification message of (₹1,000) amount getting debited.
- UPI will then make a credit request to the Receiver’s Bank.
- Receiver’s Bank takes the request and credits that much amount to the receiver’s bank account and returns the success response back to UPI. At this step, receiver gets his bank notification message of (₹1,000) amount getting credited.
- UPI will finally send a success response to the Sender’s PSP.
- Sender’s PSP will send a success response back to the Sender’s UPI Application.
- Sender’s UPI Application will display a transaction completed message.
That’s it, that’s your complete UPI transaction which did not involve any account details or card details to be entered by the user.
France becomes First European country to launch UPI !
Along with France, following are the countries which have partnered with NPCI –
| Country |
| UAE |
| Singapore |
| Nepal |
| Bhutan |
Overall..
We have seen how the UPI works from back stage and how it increased India’s digital foot-print in the world economy exponentially.
Comment below, if you have anything to share or ask.
Happy Reading !