Unified Payments Interface (UPI) system : Faster, easier and smoother

All that a customer needs is a smartphone with the Unified Payments Interface (UPI) application for instant online payment of utility bills, school fees, over-the-counter payments and online shopping.


Undeterred by the rising bad debts, Indian banks are getting tech savvy with the launch of next-generation payment services, taking customers to the virtual world of new age banking landscape. Unified Payments Interface (UPI), the advanced version of Immediate Payment Service (IMPS) — a round-the-clock funds transfer service launched by Reserve Bank Governor Raghuram Rajan last week — is set to become an efficient alternative to mobile wallets and make cashless payments faster, easier and smoother for millions of people in India.

All that a customer needs is a smartphone with the UPI application (app) downloaded for instant payment of cash. It does all the functions of a debit card or internet banking in a more secured environment. Created by the National Payment Network Company (NPCI), set up with the support of the Reserve Bank of India and Indian Banks Association (IBA), UPI is a unique payment solution as the recipient is now empowered to initiate the payment request from a smartphone without using credit or debit card and internet banking. While as many as 29 banks have concurred to provide UPI service to their customers, 21 banks have already joined the UPI as payment service providers (PSPs) and their service will be available to the customers in the next one or two months.

“For a number of years, we have been saying we need a revolution in banking in India. I think we can confidently say the revolution is upon us. What we have in India is the most sophisticated public payments infrastructure in the world,” Rajan said at the launch of the UPI last week.

“Some banks have gone live with UPI out of 29 banks that had concurred to provide UPI service to their customers. We are confident that several banks will join UPI this year and the number will multiply further. Our focus is in line with the RBI’s vision of migrating towards a ‘less-cash’ and more digital society,” said AP Hota, MD & CEO of NPCI. UPI is expected to give mobile wallets like PayTM and Mobikwik a run for their money.

Multiple accounts

When the customer downloads the UPI app of a bank, UPI facilitates ‘virtual address’ as a payment identifier for sending and collecting money and works on single click two-factor authentication. It also provides an option for scheduling push and pull transactions for various purposes like sharing bills among peers. A customer can use UPI app instead of paying cash on delivery on receipt of product from online shopping websites and can perform expenses like paying utility bills, over the counter payments, barcode (scan and pay) based payments, donations, school fees and other such unique and innovative use cases.

UPI will offer a facility to identify a bank customer with an email-like virtual address. For example, a State Bank of India customer called XYZ will get a virtual address XYZ@sbi. A customer can have multiple virtual addresses for multiple accounts in various banks. In order to ensure privacy of customer’s data, there is no account number mapper anywhere other than the customer’s own bank. This allows the customer to freely share the financial address with others. XYZ can execute a transaction using an MPIN which is known only to him. A customer can also decide to use the mobile number as the name instead of the short name for the virtual address like 1234567890@sbi.

Nandan Nilekani, Advisor to NPCI, said: “It has been made possible because NPCI built the Immediate Payment Service platform and this is a layer we have put on IMPS. It (IMPS) didn’t really have the easy debit capability and that has been addressed by this platform. We think with UPI coming, it is going to be an important merchant platform.”

How does it work?

When customer XYZ initiates e-commerce purchase of shirts online using only his virtual ID after selecting UPI as the payment mode, a pop-up/push notification is received on his payment service provider (PSP) app requesting for a confirmation of the payment. He simply enters his secure pin to authenticate the purchase transaction and within seconds receives a confirmation of a successful online purchase from the merchant.

XYZ had created his virtual ID/ address as part of the registration process with PSP. XYZ reaches the payment section on the merchant site post adding goods to his shopping cart and selects UPI as the payment mode. He is only required to enter his virtual ID to proceed and nothing else. When the transaction request hit merchant’s server, it is immediately passed on to the acquiring bank’s server where a UPI collect transaction is initiated on the virtual ID shared by XYZ from the merchant’s server.

This request is then routed to UPI server and using XYZ’s virtual ID the transaction request is directed towards his PSP app. A pop up appears on the app screen requesting for the secured pin. He authenticates the transaction request and the transaction proceeds to the UPI system where the actual account details are fetched up against the mapped virtual ID.

This transaction is then pushed to XYZ’s bank account, where the credentials are validated and his account is debited. The confirmation is again pushed back to UPI servers and in turn it initiates a credit message to the merchant’s acquiring bank and the credit to the merchant happens in real time. Customers can use UPI in merchant establishments, online payments, utility bill and school fees payments and even app-based taxi hailing services.

Abhishek Sinha, Co-founder & CEO, Eko India Financial Services, said, “UPI enables instant and secure P2P transactions with a simple user experience. By unbundling the various payment layers of source of funds, authentication and user interface UPI will unlock the network of customers across issuers. This provides for a great and enabling foundation for fintech companies to provide innovative user experiences, tools and services to all these customers including the low and moderate-income customers who haven’t had access to the best of product, pricing and the user experience of the growing number of PMJDY accounts.”

Banks vs mobile wallets

For banks which were smarting under the onslaught of mobile wallets like PayTM, Mobikwik, Oxigen and Citrus Pay, UPI has come as a boon to retrieve the lost ground. The RBI has allowed only banks to become PSPs of UPI service, keeping mobile wallets out of the service. Though mobile wallets have been urging the banking regulator to include them as service providers, it has not relented so far, sources said.

The launch of UPI has happened at a time when growth of mobile wallets as a means of paying for digital and physical commerce transactions was gaining significant popularity. The success of mobile wallets even prompted some banks to come out with similar products and RBI Deputy Governor HR Khan last year went on to say that “we are already at the stage when the e-commerce has encroached into the banking territory.”

Banking observers say UPI, which may become a game changer, is likely to take the wind out of mobile wallets’ sails. “It will put pressure on the Indian mobile wallet industry because most of the wallet companies do not have payment bank licenses and will have to partner with the banks on the platform. Of course, wallets might still continue to be used by India’s unbanked poor for transferring funds to remote rural areas, but state-owned banks may eat into this market by pushing their rural penetration,” Majumdar & Partners said in a report.

Taxi hailing companies like Uber and Ola, food ordering services like Zomato and Tiny Owl and online grocery shops like Big Basket will be able to take advantage of the UPI system. Going forward, such companies should be able to register its identifier on the UPI system and receive funds from a customer’s bank account through the UPI. Such tech-based companies are now banking on mobile wallets.

As Khan said, the day is not far off when the banks would be viewed more as technology companies offering banking products and services.