How UPI Works: A Comprehensive Guide

More than 50% of transactions on Razorpay are through UPI payment method and it has become somewhat of a default payment mode for most of the people in India. UPI is perhaps the fastest product to hit 2 billion transactions-a-month in 2020 since its inception in August 2016.

What is UPI? 

UPI stands for Unified Payments Interface and is a product of NPCI (National Payments Corporation of India). In simple words, UPI is an advanced version of IMPS and UPI ID/VPA can be considered as a unique email ID for the payments that are used by the banks to conduct the transaction using IMPS.

How is UPI different/better than IMPS? 

If a customer uses the IMPS services, the transaction would be done in a matter of a few seconds, but this also required the customer to enter banking details again and again which was a cumbersome task. Also, the platforms provided by most of the banks (website or app) were not great. In short, UPI is a better avatar of IMPS. 

History of UPI

The National Payments Corp. of India (NPCI), which was set up in April 2009 with the core objective of increasing the adoption of digital payments, in association with the Reserve Bank of India and Indian Banks Association (IBA), undertook the task of implementing a Unified Payment Interface to make it easy for users to transact.

The pilot launch was on 11th April 2016 by Dr. Raghuram G Rajan, Governor, RBI at Mumbai.

How UPI works? 

To process a UPI transaction, the following entities are involved: 

1. Payer app/PSP: 

PSP stands for Payment service provider. Payer PSPs are apps that allow customers to initiate/complete transactions. For example: Gpay, Phonepe, Bhim, PayTM, etc. 

These apps have replaced the traditional bank apps and allow users to create UPI handles to make or accept a transaction. Any customer can install these apps and can create their UPI handle. NPCI takes care of the app certification and as of now there are 20+ third party apps certified by NPCI for issuing UPI handles. However, all these UPI apps need a sponsor bank to start onboarding users. 

List of major UPI apps and their respective sponsor banks:

2. National Payments Corporation of India (NPCI) 

NPCI is a non-profit org set up by RBI and funded by different major banks. It acts as a trusted switch to connect banks and Payment service providers (PSPs). Similar to the role played by VISA in case of Card payments, NPCI makes sure that data flow between banks and payment apps are routed to the correct and verified destinations.

NPCI, in the case of UPI payments, have made the banking services interoperable. Users can use any UPI app to link any of their bank accounts and can transfer or accept payments. 

NPCI also exposes a bunch of non-financial interoperable APIs for everyone in the ecosystem. For example: Validate VPA/UPI ID, Bank list, etc. 

3. Issuing Bank (Sender’s Bank)

In case of UPI payment, the money is transferred from the issuing/sender’s bank account to the acquiring (merchant/receiver’s) bank account. Issuing bank has to debit money on NPCI’s request and send a debit response to NPCI once the debit is successfully done. 

4. Acquiring Bank (Receiver’s bank)

The acquiring (receiver) bank’s job is to credit money on NPCI’s request and send a credit response to NPCI once the credit is successfully done. 

5. Payee PSP

This is the acquirer or payment gateway used by the merchant in case of P2M (Person to Merchant) transactions. 

How to start using UPI payments as a customer? 

1. Install any UPI app/PSP available in play store or app store. 
2. Open app and enter your phone number that is linked to your bank account
3. The app will now ask for the necessary permissions, allow them
4. Now, wait for the OTP and tap on the next button
5. Set your UPI pin
6. Click on ‘Add Bank Account’ and then select your bank from the list
7. Enter your UPI pin and you will get your UPI ID/VPA
8. Now whenever you want to make any payment, you just need to enter 

Types of UPI payment flow: 

Intent Payment

The payer/sender initiates the transaction. For example: You sending money to your friend or making a payment to a store by scanning a QR code. 

Collect

The payee/receiver initiates the transaction. For example: Your friend creates a UPI collect request asking you to settle the splitwise balance. 

Why is Razorpay the preferred payment gateway for UPI payments? 

1. First payment aggregator to launch UPI payments in 2016 

Razorpay was the first in the industry to bring UPI payments to merchants. We were also the first payment aggregator to launch UPI AutoPay and UPI 2.0 features. Our close partnership with NPCI gives us an extra edge to stay one step ahead of our competitors. Interestingly, Razorpay is also the market leader in P2M (person to merchant) UPI payments in India. 

2. Multi bank model approach 

Razorpay closely works with multiple banks and payment technology service providers to solve for the exact customer requirement. In case of UPI payments, we work with 6 different banks and route transactions based on our Smart Routing solution. This helps businesses to keep getting best in class success rate, even if there is downtime on one bank or the other. 

3. Reconciliation and Refunds 

Razorpay Dashboard provides different types of reports to help you with reconciliations. Thus, even if we are using multiple banking partners to process your online payments, you don’t have to worry much about the reconciliation. The best in class Reconciliation system, along with our ‘Instant Refund’ product makes Razorpay the preferred UPI payment partner in India. 

4. Developer friendly APIs

Easiest integrations and omnichannel support for all your queries. And the best part? If you are using Razorpay Checkout, not a single extra line of code is required for accepting UPI payments. 

Want to start accepting UPI payments for your business? Visit our sign up page here.