Understanding Unified Payments Interface (UPI)

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The Unified Payments Interface (UPI) is a digital payment architecture rolled out by National Payments Corporation of India (NPCI) using advanced digital payment features with mobile phone as the main device.

According to the NPCI, “Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single mobile application (of any participating bank), merging several banking features, seamless fund routing & merchant payments into one hood.”

Why the UPI is important in the national framework?

UPI’s overall importance comes from the intense desire and effort made by the RBI and the government to create a cost effective, simple and safe digital payment system that will be usable for the large population of the country.

The RBI along with the NPCI has made commendable efforts to spread digital payments culture. According to the RBI, a digital payment platform should be simple, safe and efficient while carrying out payments.

Various criteria about an ideal payment system was brought out by the RBI in its vision for a future payment system dreaming a digital transaction economy. From this angle, a remarkable feature of the UPI is that it satisfies several criteria put forward by RBI’s payment system vision of safe, efficient, interoperable, authorized, accessible, inclusive and compliant with international standards.

Following features makes the UPI a unique payment platform.

1. Mobile as the main device: a major feature of UPI is that it converts the mobile phone at the center of digital payment transactions. We are used to Point of Sale devices, desktops or online transaction, ATMs etc. Use of personal mobile as the primary device for all payments including person to person, person to entity, and entity to person provides the UPI platform a mass appeal. Immediate money transfer through mobile device round-the-clock 24×7 and 365 days is possible with UPI.

2. Single mobile application for accessing different bank accounts (Unified). The UPI app can be downloaded and installed by entering user name and password.

3. Single Click 2 Factor Authentication – while adhering to Regulatory guidelines, the UPI has a strong feature of seamless single click payment. At the same time, the system follows a 2 Factor Authentication. Two factor authentication means besides the password or user name an additional piece of information is to be added (like OTP) by the individual to authenticate the payment. (Authentication is the activity where the payee ratifies the transaction by entering his PIN, MPIN, OTP etc. The real world equivalent of digital authentication is the signature we put in a paper).

In the case of Point of Sale (POS) equipment’s we see in the shop, the POS machine is the device for executing the payment. For deploying the POS, an operational cost is needed. But when the mobile becomes the authentication device, such costs are avoided. Under the UPI, the mobile phones with the individual is the authentication device.

“The value of UPI lies in using customer’s mobile phone as the primary device for all authentication and authorization for both “Direct Pay” (push) and “Collect Pay” (pull) transactions.”

4. Role of virtual address that hide your financial and banking details from hackers

Another unique feature as well as an improvement of UPI over the previous platforms is the use of virtual payment address to represent the individual during digital payments. A virtual address is provided to the individuals and this means that no bank details to be furnished to ratify transactions. Virtual Payment Address are like ‘aliases’ for pay and collect purposes.

Virtual Payment Address is a digital identifier that is uniquely mapped to an individual’s account using a translation service. This virtual address effectively hides financial identity of the customer.

Once the individual register for UPI by downloading and submitting user name and password and connecting to a bank account, a unique ‘virtual address’ will be provided by the Payment Service Provider. This virtual id is mapped with the customer’s mobile phone.

5. UPI is a pay (Push) and collect (pull) transaction platform

The UPI has the feature of making payment (PUSH) and pay someone (PULL) transactions using the mobile.

6. Creating National Interoperability:

In digital payment platforms, interoperability means the ability to transfer money through different sources: bank accounts, Prepaid instruments etc. The interoperability is vital to facilitate transactions in a financial world of different account types. This transfer from one type of account to an entirely different one is possible with UPI.

7. The role of Payment Service Providers (PSPs)

Another major component of the UPI platform is an entity called Payment Service Provider (PSP). Payment service provider may be a Bank, Payment Bank, PPI, or any other RBI regulated entity that is allowed to acquire customers and provide payment (credit/debit) services to individuals or entities. They use a software as a service model and form a single payment gateway for their clients.

8. Aadhaar authentication:

The marvelous feature of UPI is the aadhaar authentication. In the case of usual bank to customer digital transactions the authentication data are kept at the bank. But in the case of UPI, the UIDAI acts as the third party providing authentication proof of the client to the bank. Here, the additional merit is that the UIDAI has biometric identity of the customers. But the UPI doesn’t use biometric authentication. Biometric authentication means the customer is providing his thump impression for authenticating the payment. It may happen in future with biometric ready Smartphones.

9. Authorization: Now we are coming to an important question. Authorization means the act of final ratification to the digital payment. Who will authorize the entire transaction under UPI?

At present, bank itself authorize the digital payments. But under UPI, the role and burden of banks for authorization is keenly watched. According to the NPCI, the UIDAI provides authentication pin to the banks. Hence, banks need not heavily invest in authorization process. Authorization is made by banks but because of the highly reliable aadhaar authentication by UIDAI, banks are relieved and this in turn will reduce the cost of UPI transactions.

One should remember that the expected cost of one transaction under UPI is 45 paisa. This is very low. Such a low transaction cost became possible only because banks were not intensively involved in authorization under the UPI format. The NPCI itself makes the following observation about authorization under UPI.

“Adopting 3rd party authentication (UIDAI) and using token less payment scheme allows banks to reduce the overall issuance (card, PIN, etc.) cost while still keeping authorization and account management within its control.”

The UPI and its unified interface is a remarkable improvement over the existing payment platforms and it raises mobile payments to a higher level. “Its value lies in using customer’s mobile phone as the primary device for all authentication and authorization for both “Direct Pay” (push) and “Collect Pay” (pull) transactions.”

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