With the advent of Unified Payment Interface (UPI), India has moved forward in leaps and bounds towards a cashless economy. As per the latest statistics published by NPCI, as of March 2022, the overall transaction volume stood at Rs 34,314 billion. Two years ago, the value stood at Rs 21,317 billion. 

Regardless, there are still many who are not aware of how UPI payments work. Here is what you should know. And how one can set up a UPI account and start making cashless payments with ease.  

What is UPI?

UPI is a new payment mode, launched in FY2016-17, that allows individuals to transfer money from one bank account to another instantly. One can make payments via certain mobile-based applications, respective banks’ net banking platforms and also through certain mobile wallets applications.

Further, UPI money transfer is available 24×7. Hence, to put it simply, UPI is an advanced version of IMPS (Immediate Payment Service).

What are UPI PIN and ID?

A UPI ID or PIN is a four or six-digit passcode that users must enter to authorise every transaction. On the other hand, a UPI ID is a unique virtual payment address that one requires to send or receive money via any UPI platform, be it a mobile application or via net banking. 

How to use?

Users can set up their UPI account by following these steps:

Step 1: Download any NPCI-approved UPI app from Play Store or App Store such as BHIM, Google Pay or respective bank apps (which has UPI enabled)  

Step 2: After opening the application, enter the phone number that is linked with your bank account. 

Step 3: Allow all permissions that the app asks for.

Step 4: After entering the OTP, proceed to the next step. 

Step 5: Set a PIN (login password)

Step 6: Tap on the ‘Add Bank Account’ option and choose your bank, for example, ICICI Bank, SBI or HDFC Bank. 

Step 7: Set your UPI PIN after providing your card details.

After completing the steps mentioned above, individuals can request funds or make payments via the app. 

Note that individuals can only link their bank account with a Payment Service Provider (PSP), that is, a mobile app. One can also link multiple bank accounts with his/her UPI account.

How to Transfer Funds via UPI? 

Individuals can transfer funds in any of the following ways: 

  • By entering the receiver’s UPI ID
  • By scanning QR code 
  • By entering the bank details of the receiver (account number and IFSC code) 

Note that the maximum limit for each UPI transaction per day is Rs. 1 lakh as per NPCI’s website. However, this limit may vary from one bank to another. 

Now that you know what UPI is and how you can transact with it, let’s understand how it works. 

How does the UPI Payments System Work?

To understand how UPI works, it is essential for individuals to know about the following entities that are involved in the transaction process:

  • National Payments Corporation of India (NPCI)

NPCI operates settlement systems and enables digital payments in India. In the case of UPI payments, this entity links banks and Payment Service Providers (PSPs). It ensures that data flow between mobile-based payment applications and banks are sent to the right destination. 

  • Payment Service Provider (PSP)

Payment Service Providers refer to mobile-based applications that enable users to initiate and complete UPI transactions. Examples of such mobile applications include PhonePe, BHIM, and Google Pay. 

These applications enable users to create a UPI ID through which they can accept or make payments. Currently, as of October 2021, there are over 20 NPCI-certified mobile apps that can issue UPI handles. That said, all these PSPs require a sponsor bank before they are able to onboard users. For example, some of the sponsor banks of Google Pay are ICICI, HDFC, SBI and Axis. 

  • Sender’s bank 

In the case of UPI transactions, funds are transferred from the sender’s (issuing) bank to the receiver’s (merchant’s) bank account. Issuing banks have to debit money once the NPCI places a request. Moreover, they have to send a response to NPCI once the debit is successful. 

  • Receiver’s bank

As a part of the UPI transaction process, the acquiring/ receiver’s bank has to credit funds upon the NPCI’s request. Also, acquiring banks have to send a credit response to NPCI once the credit is successful. 

  • Payee PSP 

Payee PSP refers to the payment gateway/acquirer that a merchant utilises for P2M transactions. 

These are some of the entities that collectively work towards ensuring that the UPI system functions flawlessly.