22nd September 2021

Before proceeding to the different types of UPI transaction flows, we'll take a small detour to understand one of its participant - Payment Service Providers or PSPs.

Role of a PSP

Let's say you (a customer) order food on Zomato (merchant) and want to pay via PhonePe wallet (payment instrument). Zomato needs to have PhonePe as a payout option → to be able to accept and process payments done from a PhonePe wallet. This acceptance mechanism (or integration) is provided by PSPs.

In short, PSPs

  1. Manage the entire transaction from start to finish by accepting as many payment methods as possible
  2. Facilitate secure fund movement (transactions, settlements, dispute)
  3. Charge PSP fee to process these digital transactions

Different types of PSPs

The following types of entities can function as a PSP:

Different types of PSPs

Different types of PSPs

1) Payment Instrument Issuer

This type of PSP can only process its own instrument, and the merchant will need to have a direct integration with it. Eg: BNPL products like Flipkart Pay Later, PayTM cashback points, Wallets, Net-banking.

2) Acquiring Banks

Acquiring banks are used to by merchants to accept a variety of payment instruments like cards or UPI. These banks in turn coordinate with customer's bank (or issuing bank) to process transactions using Payment Gateways (or payment processors). Eg: Merchants need to integrate with Bank A to accept Rupay and Visa cards, along with Bank B to accept UPI.