How UPI Works: Understanding India's Real-Time Payment System

UPI has made making payments so much easier that it has become an important part of people's daily lives in India. Now, let's understand how it was developed and launched.

Introduction to UPI

UPI was developed by the NPCI (National Payments Corporation of India) and launched on April 11, 2016 by Dr. Raghuram G. Rajan (former Governor of the Reserve Bank of India). It allows making real-time payments 24/7 throughout the day by providing support for the following types of payments:

1. Peer-to-Peer (P2P)
2. Peer-to-Merchant (P2M)
3. Interbank transactions

Key Features

On top of all of this, UPI offers several advantages:

• Free for most users - No transaction fees for regular users
• PIN-based authentication - Secure verification of payer's identity
• Bank account linked - The PIN we set is associated with our bank account, not the Payment Service Provider's application

Understanding UPI Infrastructure

Important: UPI is the infrastructure (APIs provided by the NPCI itself) for the payment apps to use to allow real-time payments between the parties. The UPI infrastructure APIs are only available to licensed Payment Service Providers (PSP) such as Paytm, PhonePe, GooglePay, etc., and registered banks, not to any random person who can access them through any public platform.

Before understanding the process, you should know that payment service providers are:

• Connected to your bank account to validate account ownership
• Connected to the UPI network through APIs provided by the NPCI

The UPI Payment Flow

Step 1: Initiating the Transaction

The payer initiates the transaction by entering any one of the following payee's information:

• Virtual payment address (VPA)
• UPI ID
• Phone number

Along with the amount that needs to be transferred to the payee.

Step 2: Request to PSP

After entering the information, the request is forwarded to the payer's PSP, which makes the request to the UPI network maintained by the NPCI.

Step 3: Payee Verification

After receiving the request from the payer's PSP, the UPI network makes a request to the payee's bank to verify the information and check if there is any account associated with it in its database.

Two Scenarios:

Scenario A: Invalid Account

• If there is no account, the payee bank makes a request to the UPI network with the message "There is no account associated with this information"
• Then the UPI network makes a request to the payer's PSP with the message "Invalid Information"

Scenario B: Valid Account

• If there is an account associated with the information entered by the payer of the payee, the payer's PSP prompts the payer to enter their UPI PIN

Step 4: Identity Verification

The payer's PSP makes a debit request to the payer's bank along with the UPI PIN in encrypted form, which is used to validate the payer's identity by the bank.

Step 5: Fund Availability Check

After the payer's identity verification, the bank checks whether the payer's account has sufficient funds or not to make the payment.

Two Outcomes:

Insufficient Funds:

• If the payer's account doesn't have sufficient funds, the transaction fails with the message "Insufficient funds to make the payment"

Sufficient Funds:

• If the account has sufficient funds, the amount gets deducted
• The payer's bank makes a request to the UPI network with the message "Amount credited"

Step 6: Credit to Payee

After receiving the debit request from the payer's bank, the UPI network makes a credit request to the payee's bank to credit the amount to the payee's account.

Step 7: Transaction Completion

After the payee's bank account gets credited with the amount, the payer and payee get respective messages on their PSP apps:

• Payer: "Payment Successful"
• Payee: "Payment received successfully"

Security Features

Key Security Measure

Critical Security Feature: One key security feature of UPI that prevents wrongful or mistakenly any amount being debited from the payer's bank is that the payer's PSP doesn't prompt the payer to enter the UPI PIN until the payee's identity is verified by the payee's bank.

This ensures that:

• No accidental payments to invalid accounts
• User verification only happens after recipient verification
• Protection against fraudulent transactions

Visual Representation

This process facilitates UPI to handle instant or near real-time processing of the payments. Below is a visual representation of what the UPI process looks like when everything goes correctly.

Process Flow of How does the UPI work

Why UPI is Revolutionary

UPI has transformed digital payments in India by:

1. Instant Transfers - Real-time payment processing
2. Universal Compatibility - Works across all banks and PSPs
3. Simple Interface - Easy-to-use for all age groups
4. Secure - Multiple layers of security and verification
5. Free - No transaction fees for most users
6. 24/7 Availability - Works round the clock

Conclusion

UPI represents a massive leap in digital payment technology, making financial transactions accessible, instant, and secure for millions of users in India. The seamless integration between banks, PSPs, and the NPCI infrastructure has created one of the world's most successful real-time payment systems.

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