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UPI – The Driver of Economic Growth and Inclusion

Jun 23, 2022

India’s first step toward building a world-class digital payments ecosystem was earmarked by the launch of the Unified Payment Interface (UPI) in 2016. The advent of UPI transformed the dynamics of the Indian payments landscape. While demonetization drove the adoption of digital payments, the pandemic fueled the surge in UPI, making it the most accepted digital payment mode in the country. Today, UPI is ubiquitous and the largest retail payment system in terms of transaction value and volume.

This brainchild of the National Payments Corporation of India (NPCI) is regulated by the Reserve Bank of India (RBI) and supported by Indian Banks Association (IBA).

What is UPI/ UPI Transaction?

UPI is a mobile payment system that entitles users to transfer money to another party instantly. It facilitates inter-bank peer-to-peer (P2P) and person-to-merchant (P2M) transactions. A user can link multiple bank accounts in a single UPI-enabled mobile application and make transfers without entering the bank details such as account number, IFSC code, or net banking user-id/password.

Although UPI transactions are akin to NEFT/RTGS/IMPS, it’s more standardized across banks, convenient, hassle-free, and have zero/minimal charges. UPI not only enables quick bank transfers from wherever within a few clicks, but it also boosts transparency and interoperability. UPI apps use a unique identifier (otherwise known as UPI ID) to send/request money faster than NEFT and work 24 X 7. It also upholds contactless payment by generating a specific QR code for each user account.

How does UPI work?

UPI payment system has become a fundamental part of our daily lives. We have leveraged the UPI apps to make payments to merchants/Kirana stores or send/request money from our friends or family.

Here is how a UPI transaction usually takes place.

  • User downloads UPI app from play store
  • Specifies the mobile number to connect the device to the service provider
  • Upon authorization, creates a profile by setting up the Virtual Payment Address (VPA), otherwise known as a UPI ID
  • Links the bank account with UPI ID using the registered mobile number
  • Looks up another user/merchant through their mobile number, UPI ID or QR code to initiate a transaction
  • The payer enters the UPI pin to complete the transaction and transfer the money to the payee’s account

(Note: It is important to note that the sign-up flow for a merchant is identical)

Looks like a simple process, right?

Well, there is much more going on in the background to make a UPI transaction successful. For example, during a UPI transaction, the money from the sender’s bank account is first transferred to the payment app’s pooling account or general ledger (GL) and then to the receiver’s bank account. This ecosystem primarily involves five entities.

1. Payer PSP

Payer PSP is nothing but a Payment Service Provider that allows customers to send money via digital transactions. It captures PIN/Biometric authorization credentials, validates, and sends a payment request to the Payee PSP via UPI.

2. National Payments Corporation of India (NPCI)

NPCI acts as a trusted switch between the banks and Payment service providers (PSPs). The role of NPCI is to manage the data flow between the banks and the payment apps and route it to the correct and verified destinations.

3. Remitter Bank

Remitter Bank refers to the sender/payer’s Bank, also known as Issuing Bank. Upon NPCI’s request, it deducts money from the payee account and sends a response to NPCI once the debit is successful.

4. Beneficiary Bank

Beneficiary Bank refers to the merchant/receiver/payee’s Bank, otherwise known as Acquiring Bank. It processes the credit request from NPCI, credits money to the payee’s account, and sends a response to NPCI once the credit is complete.

5. Payee PSP

Upon receiving the request, the Payee PSP acts as a Beneficiary PSP and provides the account details against a virtual address credit request. It validates the payee details and sends a response to the UPI to receive funds from the payer.

Types of UPI Transactions

UPI transactions are classified into two types:

Direct Payment

Direct payment or push payment refers to sending money. Here, the payer (the sender) initiates the transaction. For example, sending money to your friends/family or paying a merchant at the checkout by scanning a QR code. In direct payments, the user can initiate the transaction using the UPI ID or QR code.

Collect Request

A transaction is called a collect request when the payee (the receiver) starts the transaction. Say, you are shopping online, and you choose the payment mode as “via UPI,” and enter your UPI ID, then, a collect request with the bill amount will be sent to your UPI app. Once you accept the request, the payment will be processed. This is a typical example of a collect request. A collect request is also known as a pull payment and can be initiated only by UPI ID.

Features and Benefits of UPI

Since its launch, UPI has made financial transactions much easier for account holders. With over 200 banks, many digital wallets, and payment applications supporting UPI, funds transacted over UPI are already more than those transacted through debit and credit cards.

Virtual Payment Address (VPA) or UPI ID is the key feature of UPI. UPI Virtual Payment Address is represented as <unique_identifier>@<address_provider> and serves as the addressing layer for a bank account. It helps sustain privacy and keeps a check on financial frauds.

Here are some of the benefits of the UPI Payment system.

  • Universal payment system for accessing multiple bank accounts

UPI empowers the users to link numerous banking accounts with a single UPI-based app and allows users to choose one account as a default account for making payments. This is the main advantage of UPI, as it eliminates the need for installing individual apps for different banks.

  • Unique identifier enables easy and more secure transactions

UPI addresses the security and privacy concerns by implementing the user-specific Unique Identifier (UPI ID or VPA). The user can transfer funds using the UPI ID, thus ridding the need to provide the bank account details. Additionally, the UPI ecosystem has single-click two factor authentication to protect users from financial fraud during digital transactions.

  • Expands business opportunities for banks

UPI has made P2M transactions hassle-free and convenient. Almost every local grocery shop and street vendor have QR codes to accept UPI transfers/payments. This empowers banks to tap into the C2B segment. It also supports the growth of ecommerce transactions and has made online shopping quick and effortless as it drastically reduces the time taken to process a payment.

In a conventional card transaction, the user enters the debit card/credit card number, expiry date, and CVV code and waits for the OTP to make a payment. With UPI, the user enters the UPI ID and gets an alert on their phone to verify the transaction and completes the payment within a few seconds. This gives banks the opportunity to infiltrate the ecommerce/m-commerce sector.

  • No need to register the beneficiary

Unlike IMPS/NEFT, UPI does not ask users to fill in banking details such as account number or IFSC code to register the payee as a beneficiary. This means the users need not wait for 30 minutes (in most cases) to activate a beneficiary. The interface allows the users to transfer money by simply keying in the virtual address or UPI ID to make the requisite payment.

  • Instant transfer — anytime anywhere

Customers can do UPI-based transactions round-the-clock, 365 days. Users can make payments or transfer funds instantly from anywhere at any given point of time without worrying about banking hours, bank/public holidays, or even a bank strike.

How is India using UPI?

With over 200 million users and 323 banks on the bandwagon, UPI exhibited stupendous growth in terms of the number of users and transactions. Thanks to the scalability, UPI saw newer heights in May 2022. It clocked 5.95 billion transactions in May 2022 *, the highest number of monthly UPI transactions ever since its inception in 2016. Moreover, it recorded a 10% month-on-month growth not only in total transactions but also in value. (*As per NPCI data)

Connectivity and convenience are the prime factors contributing to the growing preference for UPI among customers and merchants. The most used UPI-based applications are PhonePe, Google Pay, Paytm, Amazon Pay, MobiKwik, iMobile, Chillr, and the BHIM app. Some popular banking applications with UPI features include Axis Pay, Baroda MPay, Pockets-ICICI Bank, SBI Pay, Yes Pay, and Airtel Money.

Scaling up UPI

NPCI and RBI have constantly been scaling up UPI’s serviceability. At first, UPI payments could be made only via bank accounts. Then, UPI apps allowed users to add debit card details for transactions. Now, RBI has announced Rupay credit cards can be linked to UPI for payments. Experts believe it will not be long before Visa and Mastercard credit cards join the club.


Until recently, UPI was limited to smartphone users with an internet connection. While India is home to over 180 crore mobile phone users, only 78 crore have smartphones and the rest use feature phones. To empower all such users to leverage the mainstream digital payments system, the Reserve Bank of India introduced a new mode of payment mode, UPI 123PAY, on March 8th, 2022.

Since its launch, the platform has recorded 21,833 successful transactions with more than 37 thousand registered users. Economic experts claim this is undoubtedly the beginning of digital financial inclusion.

Aadhaar-based activation

Furthermore, NPCI included a unique feature in UPI for customers who do not own or wish to own debit/credit cards. It enables such users to activate UPI using their Aadhaar number. The OTP required to set up the profile will be sent to the mobile number linked with the Aadhaar card. Upon verification, the user can create the profile and initiate the transaction. However, the feature is yet to be launched for public use.

NIPL and international partnerships — UPI around the World

The success of UPI took the world by storm. In fact, several countries are trying to replicate UPI’s settlement infrastructure. With this incredible technological feat, the Indian fintech industry is at the forefront of some of the most developed countries.

NPCI established a special payments arm, NPCI International Payment Ltd (NIPL), to internationalize RuPay and UPI and facilitate real-time bank account payout in India. NIPL inked partnerships with several countries such as the UAE, the US, the UK, Nepal, Bhutan, China, Japan, and Singapore to launch Indian payment rails in their jurisdictions.

Some of the prominent international partnerships include LuLu Financial and Al Ansari Exchange (UAE), Discover Financial Services (DFS) (USA), Japan Credit Bureau (JCB) (Japan), Union Pay International (UPI) (China), PPRO Financial (UK), Monetary Authority of Singapore (MAS), Network for Electronic Transfers (NETS), and Liquid Group, (Singapore), and Royal Monetary Authority (RMA) (Bhutan).

As an inland initiative, in 2021, Induslnd Bank joined with NPCI to simplify cross-border payments or NRI remittances. The bank is said to use UPI ID to transfer money to the beneficiary. According to the agreement, Induslnd Bank will act as a gateway between the MTOs and NPCI’s UPI system for validating and settling payments into the payee’s account. With this new partnership, IndusInd Bank will become the first Indian bank to offer cross-border payments or NRI remittances via UPI. The product is in the testing phase and is expected to go live in Q2 of 2022.

These partnerships are significant milestones in the evolution of the UPI payment system as it is expected to enable hassle-free low-value transactions and cross-border remittances.

UPI is the cornerstone of India’s economic transformation and revolution, aiding the country to move into the future with a paperless economy, thereby curbing the money laundering activities and tax evasions. The interface has a tremendous potential to empower the development of next-generation digital platforms for lending and payments.

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