India has come a long way in online payments in a very short period of time. With the launch of NEFT and IMPS, cash transfers between accounts has been made electronic, paperless and instant.
NPCI (National Payments Corporation of India) has recently launched UPI (Unified Payments Interface) as a new way to transfer money in India. This blog post’s content is based on a recent webinar. Watch the UPI webinar by razorpay for more detail information.
UPI holds the potential to change the face of online payments in India, but there is still a lot of confusion around what UPI is supposed to be. Hopefully, by the end of this blog post, you will have a better and clear idea of what the buzz around UPI is all about.
What UPI is
- UPI is a way to transfer moneyThe easiest way to think of UPI is that it is a payment method to transfer money between 2 parties. It is similar to NEFT or RTGS transfers in that way. Even though it is being promoted as a “Payment Interface” and an API, it is easier to think of it as a way to transfer money.
- UPI is interoperable between banksThis is really important. By standardizing UPI as the “money-transfer-API”, NPCI is forcing banks to improve their interoperability. This will let customers manage their bank accounts on multiple banks over a single banking application (from any of the banks). Huge deal going ahead.
- UPI is running on top of the existing IMPS Infrastructure*The asterisk is because IMPS is being used “as of now”. This might change in the future as the scope of UPI is increased.
- UPI is betting heavily on smartphones in IndiaSmartphone penetration in India is on the rise. UPI is heavily betting on smartphones, which means it will require mobile banking applications as a basic minimum. We also have NUUP/*99#, the national based-payments infrastructure run by NPCI and it is somewhat interoperable with UPI. However, to leverage the entire suite of UPI, we’ll need to get smartphones in everyone’s hands.
What UPI is not
- UPI is not going to be immediately available everywhereUPI is currently in beta, with access restricted to certain parties. Even after this period ends, there will be very few parties actually talking to UPI. However, every bank will have its own timeline on their UPI integrated applications going live. Expect to see it getting announced by banks somewhere in Summer this year.
- UPI is not a mobile wallet killer (yet)This is probably the most talked-about question, and the answer is not very clear as of now. As with every new technology, the answer depends on the adoption. UPI does have some barriers to entry, such as smartphone penetration and even things like availability of apps in Indic languages. Mobile Wallets have flourished in India because they have allowed customers to spend money online far more easily compared to other payment methods. UPI is far more easier to use for the end-customer while also having the advantage of being interoperable. (You can’t check your Paytm balance from your MobiKwik app, but you can do that with UPI).However, UPI is still not there. This is an early avatar, and it will require a lot of polish before people will start trusting UPI as the payment method for everyone. Meanwhile we’ll still have to rely on payments being made of Credit Cards and the plethora of netbanking options we currently have.
- UPI is not going to replace Net BankingThe simple reason being: UPI does one thing and it does it well (money transfers). Netbanking applications provided by banks do far more things. For eg, you can apply for health insurance on your bank portal. UPI gives you the most useful feature from there, in a far more accessible manner.
- UPI is not a magic bullet for payment processingBelieve this from someone who works at a fintech company. Payments are hard. Online payments, even more so. UPI might solve some of the problems and solve them really well, but it will take a lot of time and nurturing before UPI can be anywhere close to a single solution. For instance, you can’t ask someone with a non-participating bank account (such as a foreign bank, or a small co-operative bank) to transfer funds using UPI. There is no escrow mechanism in UPI, and rightly so, because it doesn’t belong in such a service. However, there are use-cases for escrow payments that will still require banks or other companies to build on top of UPI, perhaps.
What UPI means for everyone?
- Customers can now transfer money far more easily using their phonesFor a start, as a customer you get to do away with the netbanking websites and bank-specific mobile applications and get a common interface on a single app (which is still provided by any of your banks) to make fund transfers. However, the implementation of these apps is still left to the banks, and they can still add layers of complexity on top of this. For eg, UPI spec recommends an “Add beneficiary details” step before every payment, even on mobile applications as a phishing prevention measure. However, it should lead to a better “common” experience for the end-customer, in general.
- Merchants can now collect money from their customers easilyA small-time merchant benefits greatly from UPI and can send invoices to their customers from the mobile app. Even small-time kirana stores can start accepting large payments from their regular customers over UPI. All the merchant needs to ask for is your mobile number and send you a “collect” request, which will appear as an option in the mobile app.
- Enterprises have to handle the hassle of another payment methodThis is where it gets complicated. For larger merchants, it gets unwieldy to use a mobile app to ask customers for payments. However, since customers are already paying them via other methods, this is an extra payment method that they need to integrate and test. Even then, every merchant would need to get vetted by NPCI before being granted access to UPI.
- Banks can now compete with wallets in mobile paymentsBanks have a silver-lining: If they work hard enough on their mobile app experience, they can gain back the market they have lost to mobile wallets.
- Wallets have to convince NPCI to add them to UPIWallets are currently not in scope as a provider in UPI. This is more of of a consequence of the decision to use IMPS rather than NPCI ignoring wallets. However, this might change in the future, as wallets might be included in the scope. Expect this to be big news if/when it happens.
Features of UPI
Here are the features that make UPI ubiquitous in the country today:
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- Instant money transfer via mobile devices is available 24/7, 365 days a year.
- A single mobile application allows access to multiple bank accounts.
- Two-factor authentication with a single click is in compliance with regulatory guidelines, offering a seamless and highly secure payment feature.
- The customer’s virtual address enhances security by eliminating the need to enter details like card number, account number, or IFSC code for both Pull and Push transactions.
- QR codes provide a convenient solution for cash-on-delivery situations, eliminating the need to rush to an ATM or provide exact change.
- Merchants can accept payments through a single application or in-app payments.
- The application supports utility bill payments, over-the-counter payments, and QR code-based payments (scan and pay).
- The platform allows for scalable solutions for donations, collections, and disbursements.
- Users can raise complaints directly from the mobile app.
Why should you use UPI?
If you’re a business owner, here’s why you should use UPI:
- Effortless gathering of funds from customers using single identifiers.
- Eliminates the risk of storing customers’ virtual addresses, as seen in card-based systems.
- Targets customers without credit or debit cards, expanding the reach of the service.
- Ideal for electronic commerce (e-commerce) and mobile commerce (m-commerce) transactions.
- Solves the issue of collecting cash on delivery (COD) payments.
- Provides customers with a seamless two-factor authentication (2FA) experience through a single click.
- Supports in-app payments (IAP).
If you’re a customer, here’s why you should use UPI:
- Available 24/7.
- A unified application for accessing multiple bank accounts.
- The use of Virtual ID enhances security by eliminating the need to share credentials.
- Authentication with a single click.
Registration Process in UPI-enabled Application
Steps to register in UPI
Here are the steps involved in UPI registration:
- Install a UPI payment application on your mobile device from your app store
- Launch the app
- Navigate to the ‘My Profile’ section
- Choose ‘Create New VPA’
- Enter the desired VPA ID and verify its availability.
- Head to the ‘Add/Link/Manage Bank Account’ section and link the bank account to your VPA
- Submit the request, and your UPI/VPA ID will be successfully created
Generating UPI PIN
Here are the steps involved in generating a UPI PIN:
- Launch your UPI payment application
- Navigate to the My Profile/My Account section and click on UPI Settings
- Select the UPI-linked Bank Accounts option to view your list of connected accounts
- If a UPI PIN has not been set for a particular bank account, you will find a ‘Set PIN’ option under that account.
- Choose ‘Set PIN’.
- Now, provide the last 6 digits of your card number and its expiry date.
- You will receive a One-Time Password (OTP) on your registered mobile number.
- Enter the OTP and select a UPI PIN of your choice
- Click ‘Submit’, and your UPI PIN will be successfully set!
How to Generate M-PIN?
Here are the steps involved in generating your UPI M-PIN:
- Choose the set M-PIN option
- Now, provide the last 6 digits of your card number and its expiry date
- You will receive a One-Time Password (OTP) on your registered mobile number.
- Enter the OTP and select an M-PIN of your choice
- Click ‘Submit’, and your UPI M-PIN will be successfully set!
Ways to transfer money using UPI?
The following are the ways to transfer money using UPI:
- Mobile number – Transfer money to a mobile number that’s linked to UPI
- QR code – Transfer money by scanning a QR code
- VPA – Send money to or request money from a virtual payment address
- Account Number – Transfer money to a bank account
Is KYC Required For UPI Money Transfer?
No. UPI does not require KYC since UPI is already linked to your bank account.
How Does UPI Work?
The primary purpose of UPI is to facilitate convenient and secure money transfers between bank accounts. This is achieved by consolidating multiple bank accounts within a single mobile application, enabling effortless transfer of funds and payments to merchants. Additionally, UPI facilitates ‘peer-to-peer’ and ‘peer-to-merchant’ collection requests, which can be scheduled and settled as per the request.
Participants in UPI
The following are the participants in UPI:
- Payer PSP
- Payee PSP
- Remitter Bank
- Beneficiary Bank
- NPCI
- Bank Account holders
- Merchants
UPI History
Before 2016, India utilized various systems such as RTGS, IMPS, and NEFT to transfer money between banks. However, due to the multitude of systems, rules, and increasing paperwork, there was a necessity for a unified system that could automate and standardize India’s payment platforms.
In 2016, NPCI took on the task of transforming India’s payment systems. They developed the Unified Payments Interface (UPI), which served as an architectural framework with a standardized set of Application Programming Interface (API) specifications to facilitate online payments. The primary objective was to simplify the process and provide a unified interface across all NPCI systems, thereby promoting interoperability and enhancing the customer experience.
The pilot program, involving 21 member banks, was launched on April 11, 2016.
UPI Market Share
In 2022, over half of all digital financial transactions made in India were made via UPI. In the month of May 2023 alone, there were over 9.4 billion transactions on UPI, handling a total value of almost 15 lakh crore rupees.
UPI – Future of Indian Payments?
The success of UPI depends on whether it sees mass adoption. And the people who can ensure that are right here in this webinar. NPCI has taken a huge leap by releasing UPI and working on it. Now it is upto companies, developers, merchants, and even customers to make sure that it sees its full potential. Go ask your bank when are they integrating with UPI, and when can you start using it.
No other country in the world can boast of a payment solution as well designed as UPI. However, we need co-operation from all parties, including the Banks, to make UPI the success that it can be.
In case you have any queries regarding UPI, you can reach out to us at razopay support team.
