UPI – A step towards Digital India

One of the hottest topics in India currently is UPI. Every other bank and payment provider is trying to get into UPI. So, what makes it so special? Will it really change the way payments are done in India? How secure is it?

Let’s have a look at what it actually is and how does it work.

What is UPI?

UPI stands for Unified Payments Interface. Developed by NPCI (National Payments Corporation of India), It facilitates inter-bank transactions real time. It utilizes IMPS (Immediate payment service) as a rail to transfer funds. IMPS provides the facility of transferring funds 24 x 7 (even on public holidays) from one bank account to another. In traditional IMPS, the user first had to enter the bank account number and the IFSC code and save payee (the person whom the money is being transferred to) details. After saving them, they could transfer the money after a specified cooling period of the bank.

UPI saves that pain and creates an excellent customer experience. You just need to enter the VPA (discussed later in the post) of the payee and transfer the money. No hassle of long account numbers and IFSC code search anymore.

How does UPI work – In a Nutshell

When a user registers for UPI, a VPA (Virtual Payment Address) is created for the customer. This VPA holds the identity of the bank account number and the bank IFSC code in the backend. So when a user transfers amount to the VPA of another user the money gets moved from his bank account to payee’s bank account.

UPI – Detailed Explanation


As mentioned above, UPI doesn’t use bank account details to transfer the money. It utilizes VPA. VPA is a unique id which maps to the bank account number and bank details of the user.

VPA is similar to an email id e.g. abhishek@icici or abhishek@axis. Therefore, it makes it very easy to remember and saves you from the effort of remembering the complicated bank account numbers. When you associate a VPA to your bank account, the same is validated using an OTP.

Therefore, you can create VPA for the account where you have the same mobile number as the one you use for registering in the UPI app. Based on the app, the number of VPAs you can create differ. E.g. You can create single VPA in BHIM app, while in apps like Phonepe you can create multiple VPAs associated with different accounts.

Players involved
  1. Player PSP (Payment Service Players)
  2. Payee PSP
  3. NPCI
  4. Remitter Bank
  5. Beneficiary Bank
  6. Merchants
  7. Bank A/C Holders

PSP can be either the bank themselves or other service providers like Google, BHIM etc.

How is the money actually transferred?


  1. The user opens the UPI app via their device can be Google Tez.
  2. The credentials to open the app are verified can be Touch Id or a PIN.
  3. The user then initiates a payment transaction.
  4. The credentials are then verified by the app. The user enters the UPI PIN to confirm the transaction.
  5. The Payer PSP then sends pay request to NPCI.
  6. NPCI then translates the request and resolves the VPA address of the payee. NPCI then sends this request to the payee PSP informing about the incoming payment.
  7. Payee PSP then either accepts/rejects the request.
  8. Payee PSP then informs NPCI about the acceptance/rejection.
  9. If the request is accepted by payee PSP, NPCI sends a debit request to the payer’s bank.
  10. Payer’s bank then validates the request.
  11. Payer’s bank completes the debit request.
  12. The bank then sends the response to NPCI.
  13. If the response is positive from payer’s bank, NPCI sends the credit request to payee’s bank.
  14. Payee’s bank credits the payee’s bank account with the requested amount.
  15. Payee’s bank then sends the response to NPCI.
  16. NPCI sends the response to payee’s PSP about the completion of the request.
  17. In parallel, NPCI also informs the payer’s PSP.
  18. Finally, the user’s device is notified of the completion.

How secure is UPI?

UPI is as secure as any other online bank transaction. The money transfer requires a 2-factor authentication.

  1. First, to login into the app the user has to create an authentication. It can be either a PIN or touch id.
  2. Second, to finally transfer the money the user has to enter their UPI pin.


UPI is a great step by our government to make the economy cash-free. With the government pushing for it, we can expect a lot more banks joining this rail. However, the major challenge would be to get the merchants on-boarded on UPI. Most merchants don’t want to show all their transactions on their bank statement and hence, prefer cash. Currently, the transactions made via UPI are free to the end customers. However, we will have to see how long it will remain the same.

My personal opinion is that UPI is quite simple to use and has a lot of advantages over traditional online transfers. Slowly as the penetration increases, UPI might lead the way towards making India digital.

More Reads

In case you are interested in reading further about UPI, please refer to the below pages.

  1. NPCI website
  2. Profitbooks
  3. LetsTalkPayments
  4. Medium
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