FinTechUnified Payments Interface: Empowering India’s Digital Economy and Reaching Global Markets

INTRODUCTION

Unified Payments Interface (“UPI”) has emerged as a pivotal force in India’s transition towards a digital future. Through its facilitation of smooth, secure, and comprehensive transactions, UPI has reshaped the transaction landscape in India, granting empowerment to millions and fostering economic development. UPI has catalysed a significant transformation in India’s payment industry and is increasingly reaching non-resident Indians across various countries, thereby expanding its accessibility and impact.

The National Payments Corporation of India (“NPCI”) introduced UPI in 2016, and since then, it has gained significant traction. Its widespread adoption highlights the pressing demand for secure, efficient, and user-friendly payment solutions. With increasing recognition of the undeniable benefits of UPI by various countries, it stands poised to transform the global financial arena, establishing fresh benchmarks for secure, convenient, and effective financial transactions.

MEANING OF THE TERM ‘UPI’

What is UPI?

The UPI serves as a real-time payment system within India, facilitating swift and fee-free money transfers between bank accounts via mobile devices. Users can execute transactions using distinct UPI IDs or Virtual Payment Addresses (“VPAs”), as well as by selecting recipients from their phone contacts or inputting their contact details directly. This system optimizes the transfer of funds among individuals and enterprises, empowering users to conduct various financial activities such as online transactions, utility bill payments, and in-store purchases utilizing QR codes, VPAs, or UPI-registered mobile numbers.

Features of UPI

UPI is a rapid and real-time payment system that operates continuously, 24 hours a day, 7 days a week, and 365 days a year, facilitating swift money transfers and payments within seconds.

One distinguishing feature of UPI is its capability to enable users, as well as online merchants, to request money through messages, utilizing the bank’s payment request feature. This functionality is absent in older systems like NEFT and IMPS.

Notably, the NPCI does not impose any additional fees for conducting transactions or requesting money via UPI. Consequently, peer-to-peer transactions made by individuals through UPI are entirely free of charge.

Moreover, UPI imposes no lower limit on the amount of money that can be transferred, thereby simplifying the process for brick-and-mortar establishments to accept small payments efficiently.

Additionally, NPCI’s UPI AutoPay feature streamlines recurring payments, offering users the convenience of automatically settling utility bills and similar expenses.

Unique Attributes of UPI

What distinguishes UPI is its remarkable user-friendliness, surpassing even conventional cash payment methods, thereby providing an unmatched level of convenience. UPI effectively resolves several challenges that were prevalent in the era before digital payments, including:

1. By eliminating the necessity of carrying physical cash, UPI diminishes the risk of theft or misplacement of funds, enhancing overall security for users.
2. It streamlines the cumbersome procedure of writing and depositing cheques, offering a more efficient and convenient alternative for financial transactions.
3. UPI significantly reduces the time-consuming task of visiting banks or ATMs for conducting transactions, providing users with greater convenience and flexibility in managing their finances.

PARTICIPANTS IN UPI

The successful operation of the UPI relies on the coordinated efforts of its key participants: NPCI, PSP, and TPAP. NPCI as the overseer and operator of UPI, ensures its secure and effective functioning. Payment Service Provider (hereinafter referred as “PSP”) ensures that UPI applications adhere to safety protocols, while Third Party Application Provider (hereinafter referred as “TPAP”) serves as a facilitator and participant in UPI transactions through PSP-affiliated banks.

These three principal members fulfil distinct roles to ensure the seamless operation of UPI in India. A comprehensive understanding of NPCI, PSP, and TPAP’s roles is essential for grasping the mechanics of the UPI system. Apart from the above mentioned participants there are three other participants – banks, merchant and customers. The responsibilities of three main UPI member, offering insights into their contributions to UPI’s smooth operation are stated below:

• Duties and Obligation of NPCI

1. NPCI, as the owner and operator of the UPI platform, holds the authority over its operations and management.
2. NPCI establishes and enforces regulations, directives, and standards, outlining the roles, obligations, and liabilities of all involved parties regarding UPI. This encompasses aspects such as transaction processing, settlement procedures, dispute resolution, and setting deadlines for settlement.
3. NPCI is responsible for authorizing the involvement of Issuer Banks, PSP Banks, TPAP, and Prepaid Payment Instrument issuers (“PPIs”) within the UPI framework.
4. NPCI ensures the provision of a secure, reliable, and efficient UPI system and network, maintaining the integrity and trustworthiness of the platform.
5. NPCI furnishes members participating in UPI with essential services such as online transaction routing, processing, and settlement functionalities.
6. NPCI has the authority to conduct audits on UPI participants directly or through designated third parties, enabling the gathering of pertinent data, information, and records pertaining to their involvement in UPI.
7. NPCI grants banks participating in UPI access to a dedicated system, enabling them to perform essential tasks such as downloading reports, initiating chargebacks, and updating the status of UPI transactions.

• Duties and Obligation of PSP

1. As a member of UPI, a PSP Bank connects to the UPI platform to access UPI payment services and extend them to TPAPs, facilitating end-user customers and merchants in making and accepting UPI payments.
2. PSP Bank, whether through its own application or TPAP’s application, registers and on-boards end-user customers onto UPI, linking their bank accounts to their respective UPI IDs.
3. PSP Bank holds the responsibility of authenticating end-user customers during their registration process, whether through its own application or TPAP’s application.
4. PSP Bank engages and enrols TPAPs to make their UPI applications available to end-user customers.
5. PSP Bank must ensure that TPAPs and their systems meet adequate security standards to operate on the UPI platform.
6. PSP Bank is accountable for auditing the UPI applications and systems of TPAPs to safeguard the security and integrity of end-user customer data, including UPI transaction data and UPI application security.
7. PSP Bank is required to store all payment data, including UPI transaction data collected for facilitating UPI transactions, solely within India.
8. PSP Bank is responsible for offering all UPI customers the option to select any bank account from the available list of banks on the UPI platform for linking with their UPI ID.
9. PSP Bank is responsible to establish a grievance redressal mechanism to resolve complaints and disputes raised by end-user customers.

• Duties and Obligation of TRAP

1. As a service provider, TPAP engages in UPI transactions through PSP Bank and is accountable for adhering to all requirements set forth by PSP Bank and NPCI concerning TPAP’s involvement in UPI.
2. TPAP is responsible for ensuring that its systems meet sufficient security standards to operate effectively on the UPI platform.
3. TPAP must comply with all applicable laws, regulations, and guidelines mandated by statutory or regulatory authorities, including those issued by NPCI, pertaining to UPI and TPAP’s participation on the UPI platform.
4. TPAP is obliged to store all payment data, including UPI Transaction Data collected for facilitating UPI transactions, exclusively within India.
5. TPAP is responsible for facilitating access to data, information, and systems related to UPI for RBI, NPCI, and other designated agencies as required, and must undergo audits by RBI and NPCI when deemed necessary.
6. TPAP is tasked with providing end-user customers with a grievance redressal mechanism through its UPI application or website, along with additional channels such as email, messaging platforms, or IVR, as deemed appropriate by TPAP.

AMLEGALS REMARKS

The UPI has transformed India’s financial ecosystem since its launch by the NPCI in 2016, offering fast, secure, and easy-to-use mobile transactions. With its real-time transfers, zero fees, and widespread accessibility, UPI has become a vital part of India’s digital economy. As it gains traction globally, particularly among NRIs, UPI is setting new standards for digital payments worldwide.

The system’s success is evident in its widespread adoption, with billions of transactions processed monthly, contributing to India’s push towards a cashless economy. UPI’s integration with multiple banks and third-party apps has made it a cornerstone of India’s fintech ecosystem, driving financial inclusion and enhancing the ease of doing business.

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

For any queries or feedback, feel free to reach out to mridusha.guha@amlegals.com or liza.vanjani@amlegals.com