FinTechNavigating The Unified Payments Interface: A Comprehensive Journey Through Transaction Flow

INTRODUCTION

The Unified Payments Interface (hereinafter referred to as “UPI”) functions as a real-time payment system within India, enabling swift and cost-free money transfers between bank accounts via mobile devices. Users can conduct transactions using unique UPI IDs or Virtual Payment Addresses (hereinafter referred to as “VPAs”), as well as by selecting recipients from their phone contacts or entering their contact details directly.

This system streamlines fund transfers among individuals and businesses, enabling users to engage in various financial activities such as online transactions, utility bill payments, and in-store purchases through QR codes, VPAs, or UPI-registered mobile numbers.

UPI was introduced in 2016 and is spearheaded by the National Payments Corporation of India (hereinafter referred to as “NPCI”), which oversees retail payment systems in India under the guidance of the Reserve Bank of India, the central banking authority. NPCI’s primary objective is to propel India towards becoming a digital economy.

THE TRANSFORMATIVE IMPACT OF UPI ON INDIA’S FINANCIAL LANDSCAPE
UPI has emerged as the favoured payment method for numerous Indians, contributing to the development of an accessible financial ecosystem. Presently, the scan-and-pay feature of UPI is utilized for diverse transactions, ranging from significant expenditures on luxury items to modest purchases like a 10-rupee cup of tea.

The user-friendly interface and convenience of UPI have streamlined payment processes, benefiting both individuals and businesses. This platform has empowered small enterprises to improve their financial efficiency, thereby opening up new avenues for advancement and expansion. According to a report, UPI transactions are projected to continue growing steadily, reaching a significant milestone.

The influence of UPI extends beyond enhancing financial inclusion, it has become a driving force for economic progress and advancement. UPI’s role in fostering a shift towards a transparent and accountable economy is notable, especially by diminishing reliance on cash transactions. The accessibility of transaction data via UPI has spurred the expansion of fintech firms and start-up ventures, stimulating innovation within the financial industry and generating employment prospects.

The success of UPI can be credited to its smooth integration with diverse banking platforms and its compatibility with numerous third-party applications. UPI’s open framework enables developers to devise inventive solutions, fostering a broad ecosystem of UPI-enabled apps that provide an array of services, including bill payments, online shopping, and fund transfers. This compatibility has eradicated the necessity for multiple payment apps and streamlined the user experience, allowing individuals to transact seamlessly across various platforms.

HOW DOES UPI WORK

To conduct a UPI transaction, you need a VPA, similar to how a credit or debit card is necessary for card-based payments. A VPA acts as a unique identifier for UPI money transfers, allowing both sending and receiving funds directly to your bank account.

Once you have set up your UPI account using any UPI-enabled app, a VPA will be automatically generated for you. To initiate a UPI transaction, open your UPI payment application and from there, you can choose the recipient from your phone contacts, or enter their mobile number if not saved previously, or scan their QR code. Finally, enter the UPI PIN associated with the selected bank account, and the specified amount will be promptly transferred from your account to the recipient’s account. The effective functioning of the UPI relies upon the synchronized collaboration of its principal stakeholders/key participants: the NPCI, Payment Service Providers (hereinafter referred to as “PSP”), and Third Party Application Providers (hereinafter referred to as “TPAP”).

PERFORMING A UNIFIED PAYMENTS INTERFACE TRANSACTION

1. Push Method

The push method in UPI involves the efficient initiation and authorization of payments. This method is utilized when the sender initiates a payment to transfer funds to a recipient, commonly for purposes such as purchasing goods or services, settling bills, or sending money to acquaintances.

• Phase 1 involves the initiation and authorization of transactions in the following steps:

1. Customers commence transactions via their UPI-enabled applications by inputting recipient details, amount, and an optional note.

2. The customer’s application forwards the transaction request to their chosen PSP, which assists in managing the transaction.

3. The PSP then transmits the request to the NPCI, responsible for overseeing UPI transactions.

4. The issuing bank, where the sender maintains an account, verifies the transaction’s validity, ensures sufficient balance, and verifies customer details.

5. Upon successful validation, the issuing bank approves the transaction and generates a digital signature for security purposes.

• Phase 2 involves authentication and fund transfer in the following steps:

1. The PSP furnishes the UPI system with the sender’s bank details for authentication and routing.

2. The NPCI validates the sender’s account information, balance, and fund availability.

3. Upon confirming adequate funds, the NPCI debits the required amount from the sender’s account.

4. The recipient bank, where the payee maintains an account, receives the transaction sum and credits it into the recipient’s account.

5. Subsequently, the UPI server dispatches a confirmation to the customer’s application, affirming the successful transaction along with a reference ID.

2. Pull Method

 The pull method entails regulated payment requests and execution. In pull transactions, the recipient initiates the request for funds from the sender, typically utilized for purposes such as bill payments or collecting payments from customers. The recipient generates a payment request, and the sender has the option to accept it and transfer the funds. With this method, the recipient assumes responsibility for initiating and finalizing the transaction, ensuring secure and authorized fund retrieval.

• Phase 1 involves the initiation of transactions and the communication of payment messages, comprising the following steps:

1. Recipient’s Request: The individual receiving the payment generates a request containing all necessary details through their UPI application.

2. Payment Message Transmission: The payment request progresses from the recipient’s application to the NPCI, signalling the need to pull funds from the payer.

• Phase 2 involves the transaction process among financial institutions and banks, comprising the following steps:

1. The payment request is transmitted to the creditor’s bank, which then forwards it to the debtor’s bank via the NPCI.

2. In instances where a merchant seeks payment for a customer’s bill, they initiate a payment request through their bank to the customer’s bank (the debtor’s bank) using the NPCI.

3. The debtor’s bank assesses the request, scrutinizing the customer’s account details and available balance.

4. Upon verifying that the customer has sufficient funds in their account, the debtor’s bank authorizes the transaction and confirms it with the NPCI.

5. Subsequently, the debtor’s bank transfers the requested amount to the creditor’s bank, thereby completing the transaction.

The UPI facilitates seamless transactions through both the push and pull methods and that’s how the transaction takes place through both the methods.

AMLEGALS REMARKS

The UPI has revolutionized India’s financial landscape, providing a real-time, cost-effective method for transferring funds between bank accounts via mobile devices. UPI’s introduction in 2016 under the stewardship of the NPCI has significantly contributed to propelling India towards a digital economy. Its user-friendly interface and compatibility with various banking platforms have facilitated widespread adoption, making it the preferred choice for numerous Indians. Whether through the push method, where the sender initiates and authorizes payments, or the pull method, where the recipient requests funds from the sender, UPI ensures secure and efficient transactions.

This comprehensive payment ecosystem, coupled with UPI’s transformative impact on financial inclusion, economic progress, and technological innovation, underscores its pivotal role in shaping India’s digital future.

– Team AMLEGALS assisted by Mr. Samarth Sheth (Intern)