20th September 2021

First, let's reiterate why UPI is a unique product:

  1. A single app can manage all transactions + provides 2FA
  2. Unlike wallets, UPI is interoperable i.e funds can be transferred to different bank accounts (ex: SBI to HDFC).
  3. Send (push) + request (pull) transactions possible (other payment instruments only allow push transactions).
  4. Only the UPI ID of the beneficiary is required (no more remembering IFSC code and account number).

To truly appreciate UPI, you've got to understand the why prior innovations were painful. Some weren't real time transfers and a lot of them weren't 24x7 until very recently. Here are the differences between NEFT (National Electronic Fund Transfer), RTGS (Real Time Gross Settlement ), IMPS (Immediate Payment System), and UPI.👇🏾

Differences between various online payment instruments

Differences between various online payment instruments

*Batch transfer👆🏾: Banks used to group payment requests and process them together every 30 mins instead of processing transactions in real time.

Entities involved in a UPI transaction and their attributes

  1. VPA or Virtual Payment Address or UPI ID
    1. One VPA → can be linked to multiple bank accounts. For eg: 9802001010@ybl can be associated to SBI and Yes Bank (primary or default account)
    2. One bank account → can have multiple VPAs (Gpay and PhonePe will give you different VPAs for the same bank account)
    3. Bank accounts should be linked to mobile numbers for UPI transactions
  2. Payment Service Provider or PSPs: When a consumer transacts using a payment instrument, the merchant should be able to accept and process that particular instrument. This acceptance mechanism/ integration is provided by the PSPs. (We will discuss this in depth in the upcoming essays)
    1. Issuer PSPs: Bank or PSPs that creates the VPA
    2. Acquirer PSPs: Banks or PSPs that processes the VPA transactions (on behalf of merchants mostly)
  3. UPI switch: Issuer and acquirer's point of communication
  4. Payer (sender)
  5. Payee (receiver)

UPI Payment flows

  1. Push: Payer initiates the transfer to payee