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

Over the last few years India has witnessed a surge in facilities for seamless digital payment to all citizens in a convenient, easy, affordable, quick, and secure manner. These facilities have contributed to creating a robust ecosystem for a cashless economy which has put the country on its path of making the dream of DIGITAL India a reality. The shift to digital payments has also been fueled by the unprecedented growth in the number of fin techs in the country which has made payments secure and instant. One of the key products for contactless payments is UPI. According to the latest report of NPCI, UPI crossed a significant volume of 8 billion-plus transactions in January 2023.

What is UPI?

Unified Payments Interface has been developed by the National Payments Corporation of India (NCPI) – 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.

How Does UPI Work?

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?

There are primary five participants in a UPI transaction-

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.

Frequently Asked Questions (FAQs)

1. What happens if the user enters an incorrect UPI-PIN during a transaction?

Answer- If the user enters an incorrect UPI PIN, the transaction will fail. In case the user enters the wrong UPI PIN for more than three times, the user must reset their UPI PIN or wait for 24 hours to make their next transaction.

2. I have paid for my transaction but have not received anything. Why is that?

Answer- After completing a transaction, users can see a success status on the BHIM screen and receive an SMS from their respective bank. Sometimes it can take longer due to operator issues. 

3. Does the customer need to register a beneficiary before transferring funds through UPI? What details of the beneficiary will be required?

Answer- No, registration of beneficiary is not required for transferring funds through UPI as the fund would be transferred based on Virtual ID/Account

4. What happens if a customer loses their cell phone?

Answer- In case a customer loses their mobile phone, they need to block their mobile number thus no transaction can be initiated from the same mobile number.

5. What if my account is debited but the transaction does not go through?

Answer- UPI provides for real-time reversals for declines and the amount would be transferred back to the payer account immediately. In case, it does not reverse the amount immediately, you can contact your bank for the same.