How UPI Works?

UPI stands for Unified Payment Interface which was introduced by the NPCI Or National Payment Corporation of India to facilitate online, real-time transaction of payment from one bank account to another.

It was introduced in 2016, and since then the penetration of the UPI system in India has given rise to online digital transactions.

The UPI Boom is so big that India is now the world’s largest digital transacting country with 74 billion transactions in the year 2022.

UPI allows two types of payments- P2P or peer-to-peer and P2M or Peer-to-Merchant. It is a completely cashless payment and saves a lot of time as the transactions are instant.

Now, even a small roadside vendor has digital payments as a method of payment which provides the technology to spread across the spectrum and build a complete ecosystem.

You must be wondering how UPI works. Well, this article covers this thoroughly. We will discuss the entire ecosystem of UPI and how it works.

But first, let’s find out the benefits of UPI.

Benefits of UPI Payments

The benefits of UPI Payments are amazing and this system of payment is a game changer for all who are using it. The following are the benefits of UPI Payments-

• UPI is the cheapest mode of payment. It is even cheaper than cash itself and NPCI does not charge any fee to the bank hence, even the bank provides UPI Payments as a free service.
• UPI uses VPAs or Virtual Private Networks to create a virtual network for an individual using which transactions can be done. It helps in securing the private information of the individuals.
• You can use a single UPI application for using your multiple bank accounts
• You do not need to share your bank account details like account number, Bank IFSC Code, etc. to get the money into your account simply share a QR code or VPA to receive the money into your bank account.
• Apart from sending money, you can also initiate a request for money, where you can generate a payment intimation for your customers
• You can use UPI 24X7, 365 days for making payments without much of a restriction  

How UPI Works?

Unified Payment Interface can be used for sending payment from one person to another whether it’s an individual or a business. Whenever you are making a transaction, various parties get involved, which are as follows-

• Payer
• Receiver
• Payer’s Bank
• Receiver’s Bank

Payer

The payer is the person who is required to pay and when using UPI, he/she must have a UPI-enabled app installed on their mobile devices.

The payer has the option to pay using UPI with a QR Code, VPA, Bank Account details, or mobile number. Based on the available option, you can initiate the payment by logging into your account and entering the amount you want to send.

Receiver

The receiver is the person or merchant who is receiving the money in his/her bank account. They will provide you with the medium of UPI Payments i.e., QR Code, Mobile Number, Bank details, etc.

Payer’s Bank

It is the bank that is associated with the payer and will initiate the payment required made by him/her. The Payer’s bank will use the UPI network to establish a connection between the payer’s bank and the receiver’s bank.

After entering the amount and MPIN, the fund transfer process is initiated and over the UPI network, the payment is settled to the receiver’s bank.

Receiver’s Bank

The receiver’s bank is at the receiving end of the UPI where the merchant or individual has his/her account registered. The amount paid by the individual is deposited here in the receiver’s bank account.

UPI Transaction Process

UPI uses 4 step process for a transaction and all of these steps take place in real time. The following are the 4-step process followed by UPI Transaction-

• Step 1: In this step, the payer initiates the payment by scanning the QR or entering the details of the receiver in his UPI App.
• Step 2: In the next step, the payer’s bank gets activated and processes the payment request by checking for the available funds in the bank account. If the account is low in funds then it will not move further and sends a message of error and if there are funds then the funds will be deducted and a payment initiation will be sent to the app
• Step 3: In the next step, is that the payer’s bank makes the connection with the receiver’s bank over the UPI Network, and the payment is received by the receiver’s bank
• Step 4: After receiving the money, the receiver’s bank initiates the received message to the payer’s bank which in turn forwards this message to the UPI App. With this, the entire cycle gets completed with a successful transaction.

Is UPI Safe?

UPI is one of the safest technology which is used for digital transactions however, the only problem or threat is the user’s unsafe practices. There are some general rules you keep in mind then, UPI can be used safely, which are as follows-

• Do not share your password or PIN for any purposes
• Do not share your SIM card with anyone as a mobile phone can be used for connecting with the bank UPI network
• Be vigilant when someone is demanding you to scan a QR especially when you have to receive the amount instead of payment. Remember, you’ll only scan the code if you want to pay, and not the other way around.

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