UPI 101 — Exploring the Native Payment Method — Part 1

Backspace Tech
5 min readAug 25, 2023
Unified Payments Interface (UPI)

You are at a cash counter waiting next in line to pay for your purchases and that’s when you realize that you don’t have your wallet with you. The only option is to put back the items, rush home, and get your wallet. Sounds like something straight out of yesteryear, doesn’t it? Why, because we are now accustomed to making mobile payments!

All thanks to UPI! The unheard term until April 2016 aka the flag bearer of India’s ongoing financial revolution. Let us explore the Godfather of the cashless payment system and oh! it might result in a series.

The Predecessors:

The aim to make India a cashless economy has been a long-standing one and to this effect, there were many initiatives like the start of internet banking in 1998, mobile banking in 2002, and e-wallets in 2004. While all these initiatives did bring a change in the way we people imagine financial services, they did not cause a major shift towards digital transactions.

People who were tech-savvy embraced these methods while others were fixated on the good old banking practices. Yet, there was hope as post-2004, there was a consistent increase in mobile wallets, for example, mchek, Paytm, Mobikwik, Tez (GooglePay), and others.

And in 2009, the National Payments Corporation of India (NPCI) was formed to integrate and unify all the payment mechanisms in India and make them uniform for all retail payments. While NPCI was diligently working towards this plan, RBI’s digital transaction survey in March 2011, uncovered the fact that non-cash transactions were limited to only six per individual even though there were over 10 million retailers who accepted card-based payments. The highlight of this study also found that over 140 million families had no access to banking in any form.

Now fast forward a bit to 2016, NPCI brought Unified Payments Interface (UPI) on April 11th, 2016. The principles of interoperability where an individual can access their different bank accounts in a single mobile application was the foundation of UPI.

As India is quite a diverse country with unique needs, UPI aimed to be the common ground. This means both public and private players can offer end users interoperability by incorporating UPI in their payment apps. On top of that, the move of demonetization, followed by the pandemic, paved the way for stronger UPI adoption across the country.

According to statistics released by NPCI, the number of banks live on UPI was just 21 when it was launched in April 2016. At present, 473 banks are live on UPI. In addition to this, 4,184.42 P2P (Peer to Peer) transactions and 5,780.19 P2M (Person to Merchant) transactions happened in July 2023 which estimates around 15,33,645.20 crore value.

So, next comes the important question: What is UPI?

Unified Payments Interface is a system that enables the linking of multiple bank accounts into a single mobile application. As UPI is a mobile-first application, it brought forth the concept of Virtual Payment Address (VPA) and they function as a unique identifier.

The format of VPA is <uniqueidentifier>@<psphandle>, for example, johndoe@okaxis is a VPA.

Alternatively, VPA can also be the individual’s mobile number, for example, 1234567897@axl.

The primary point to note here is, that one bank account can be mapped to multiple PSP handles. i.e., customers can register the same bank account across multiple UPI apps.

UPI Transaction types:

  • Peer-to-Peer (P2P) Transfer: This is the most basic type of UPI transaction, where you can send money directly from your bank account to another person’s bank account using their UPI ID, a mobile number linked to their bank account, or QR code.
  • Peer-to-Merchant (P2M) Payment: With this type of transaction, you can make payments to merchants for goods and services. Many businesses, both online and offline, accept UPI payments. This often involves scanning the merchant’s QR code to initiate the payment.
  • Bill Payments: UPI allows you to pay bills for utilities like electricity, water, gas, and more. Many billers offer the option to make payments using UPI as a quick and convenient method.
  • Recurring Payments: UPI also allows you to set up recurring payments for services with fixed amounts, such as monthly subscriptions. This automates the process and ensures timely payments.
  • Cash on Delivery (CoD) Payments: Some e-commerce platforms allow customers to make CoD payments using UPI. The customer can choose UPI as the payment method when the product is delivered.
  • Request Money: UPI apps often allow you to request money from contacts or others. This can be useful in scenarios where you need to split bills, request payments for services, or collect funds from friends or family.

In short, UPI allows instant fund transfer from one bank to another in the blink of an eye in many ways.

And UPI has now taken an interesting turn as it is increasingly been adopted by many countries like Singapore, Malaysia, UAE, France, Nepal, the UK, and many others to ease the complexities involved in cross-border transactions. Incidentally, UPI has been an inspiration for FedNow, a payment method introduced by the US Federal Reserve to facilitate real-time payments.

That’s not all and, here’s the good news, We are going to spend our coming weeks exploring this native and now world-famous payment system by uncovering its mechanism and many other nuances. Here’s a sneak peek of what’s awaiting you in-store;

Part 1: The why, how, and what of a cashless economy resulting in the inception of UPI (well, that's right above)

Part 2: How does UPI work? (The mechanism, who does what, and so on)

Part 3: What happens when a UPI payment gets stuck or a UPI dispute occurs? (A mystery waiting to be unmasked…..)

To know more about the payment ecosystem, chargeback, and dispute nuances through delightful bytes of information, follow us on LinkedIn, Twitter, Facebook, and Threads.

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Backspace Tech

Backspace Tech offers Fintech-as-a-Service to automate,simplify, and disrupt the payment industry by handling chargeback requests through a plug-and-play model.