UPI Introduction

-

In this article, we will learn about India's Unified Payments Interface. A four-year-old payment scheme that has been accounting for 40-45% of digital payments across India. In December 2019, Google recommended the Federal Reserve to follow the model of UPI for the design of FedNow.

It is going to be a 3 part series.

Part 1 (this article): We will cover the background and basics. We will learn about the different participants and their roles in the UPI ecosystem.

Part 2: We take a deep-dive into UPI by tracing a UPI transaction from the beginning through the end.

Part 3: We will look at settlements and understand how money exchanges hands.


Background

Since its inception in 2016, UPI has grown tremendously over the last 4 years. It has enabled a whole new set of individuals to transact digitally for the first time.

There were multiple attempts towards making India a cashless society. Earlier solutions were not simple to use and relied heavily on Netbanking facilities provided by the banks. The experience was not standard. Because of all these reasons, it was mostly used only by the tech-savvy population. India being a diverse country needed a system that has a plethora of payment apps that are optimised for different cohorts.


Growth of UPI

The primary objective of UPI was to build an open payment system that is mobile-first, fast, and interoperable across different banks.

For a developing country like India, going mobile-first was almost a no brainer. Mobile Phones and Mobile Data were getting cheaper and the trend was clear.

Interoperability simply puts the user’s needs at the center. The users can opt for any payment app, link it with their bank account to engage in commerce with anyone across India.

Think about it, all of us want to use payment apps that we like, instead of being limited to a poorly designed app that’s provided by the bank where we keep our money. We should let banks do what they do best (which is managing money) and let tech companies handle building intuitive user interfaces for transacting money.

UPI was built on this principle to let private players innovate on top of public digital infrastructure.


So, What exactly is UPI?

UPI is a payment markup language and a standard for interoperable payments in India.

To make the process of transacting money simple, UPI introduced the concept of human friendly unique IDs called UPI Virtual Payment Addresses (or VPAs). The VPAs are usually of the form <unique_identifier>@<address_provider>.

The UPI VPAs are similar to email addresses. They are interoperable. A gmail user can send an email to a yahoo user.

Some simple examples UPI VPAs are alice@ybl and bob@axis. Here, ybl and axis are two banks that provide virtual payment addresses. And, alice and bob are the unique identifiers in respective address providers.



Just like how domains get resolved to IP addresses, every VPA needs to be linked to a bank account. The UPI handles get resolved to bank accounts and IFSC during the payment (we will see how).

In short, a UPI Virtual Payment Address serves as the addressing layer for a bank account.

There are mainly two types of transactions in the UPI realm.

Direct Payment

The payer (the sender) initiates the transaction. Typical examples would be, you paying a shopkeeper at the checkout by scanning a QR code or you sending money to your friends and family.

Collect Request

The payee (the receiver) initiates the transaction. A simple example is a scenario where your landlord creates a collect request asking you to pay the monthly rent.

Popular posts from this blog

SWIFT MT – SERIAL AND COVER METHOD

-
Image
  SWIFT MT – Serial and Cover Method This is one of the most important articles from SWIFT payments’ perspective and it is critical that you fully understand the concepts laid out here. Payments are cleared and settled via 2 primary methods: Through a payment market infrastructure (PMI) Through correspondent banking Through payment market infrastructure: This is the case where bank A and bank B are direct participants of this PMI aka CSM. IN General usage the concept of serial and cover does not apply here but if you put a gun to my head, I would say is very close to the serial method. Through correspondent banking: This is the case where banks open accounts with each other (Nostro/Vostro) and settle funds directly. The prerequisite here is that banks need to open accounts with each other or in other words they need to have an  accounting relationship  with the other bank. Now, let us try to understand the connection between sending/receiving SWIFT messages and the moveme...
Read more

PAYMENT ENGINES

-
Image
  Payment Engines: I am really excited about this topic as it’s my favorite and the one in which I have the most experience. In this article, we will be discussing about a piece of software called “payment engine” . They are part of the bank’s IT ecosystem and they help banks process hundreds of thousands of payments a day seamlessly. In the previous articles, we discussed the different message types and how banks send these messages to each other. Payment engines help banks to send, receive and process payments. We will discuss only credit transfers here. Direct debits can be parked for the Future. We will approach this subject  without any particular payment engine or message scheme in our minds . Once we get the bigger picture knowing specifics will be much easier. A0501 From a payment engines’ perspective there are 4 types of payments: Incoming Outgoing Book Redirect We will briefly see what these types are and then dive right into the flows. Banks processes each of these ...
Read more

SWIFT MTS – BLOCKS 1 THROUGH 5

-
Image
  SWIFT MTs – Blocks 1 Through 5 We have discussed in our previous article that there are 5 blocks in a SWIFT MT message. Now we will dive deep into each of these blocks and try to understand them in detail. Please save this page for your future reference (At least till 2025) There are some common details and we will try to understand what they are All the blocks start with “{” The Block number or block identifier will be displayed at the very beginning followed by a “:” (Separator) This will be followed by the contents of the block The block will end with a “}” Basic Header Block (Block 1 ) This block is the only mandatory block and contains general information identifying a message.  Let us now dissect the block {1:F01CITIFRPPAXXX0070970817} This can be split into different components ( Split using spaces) {  1  :  F  01  CITIFRPPAXXX  0070 970817} F  – This is application Identifier or AppID . F Indicated that it is a FIN message 01  ...
Read more