igital payments in India has transformed significantly. The Unified Payments Interface (UPI) turn up as a key innovation in morden payment ecosystem. UPI launched in 2016 by the National Payments Corporation of India (NPCI). It enables seamless and real time money transfers.

In this blog series we will go on a journey to uncover the complex world of UPI. We will break down as below

Chapter 1 : A Seamless Payment Revolution architecture and its core components, understanding the mechanisms that enable millions of transactions to happen in real time. Chapter 2 : Payment Types Peer-to-Peer Transfers and Recurring Mandates. Chapter 3: Payment Settlement the Settlement processes, and UPI’s inner workings.

What is UPI?

UPI is real time payment system which provides inter bank payments through mobile application. It allows users to add multiple bank accounts to single mobile application enabling the instant money transfers, bill payments and merchant transactions.

Architecture

1. Payment Service Provider (PSP): Apps like Google Pay, PhonePe, or Paytm that facilitate UPI transactions.
2. NPCI (National Payments Corporation of India) / UPI Switch : The entity managing UPI and routing transactions between banks via upi switch. UPI Switch is responsible for managing and facilitating digital payment systems to ensure secure and efficient transactions.
3. Banking System: Core banking systems of the remitter and beneficiary banks.

The PSP (Payment Service Provider)

A PSP is a key intermediary in the UPI ecosystem enabling seamless and secure transactions between users. PSPs provide the platform (mobile apps or web interfaces) for initiating, processing and managing UPI payments.

1. Facilitating Transactions: It act as the bridge between the payer, payee, and their respective banks for UPI payments.
2. User Management: PSP provides platforms such as Google Pay or PhonePe which facilitate easy transaction initiation and tracking. It also ensure robust user authentication through UPI PINs, device binding and encryption.
3. VPA Management: Allow users to create and manage Virtual Payment Addresses (UPI IDs).
4. Real-Time Communication: Notify users about transaction statuses (success, failure or pending) in real time.
5. Compliance and Security: PSP attach to regulatory standards (e.g., RBI, NPCI) and implement fraud detection mechanisms.
6. Integration with UPI switch: PSP establish the secure API connections to UPI switch for processing transaction requests.

Bank PSPs : SBI YONO, HDFC PayZapp Third Party PSPs : Google Pay, PhonePe, Paytm NPCI PSP : BHIM App

UPI Switch

The UPI Switch operates as the central system of the UPI ecosystem ensuring smooth communication between banks and the network. When a user makes a UPI transaction the switch identifies the relevant bank and forwards the request for processing.

Imagine it as the traffic controller of digital payments directing each transaction to the correct path and ensuring it reaches its destination securely and without delay.

1. Transaction Routing: The UPI Switch directs payment requests between the payer’s PSP / Bank and the payee’s PSP / Bank to complete the transaction.
2. Interoperability: It allows users from different banks and PSPs to interact and transact easily making UPI as unified payment system.
3. Validation and Security: It perform series of validation and security checks before doing the credit / debit transactions
4. Settlement and Reconciliation: It also tracks and logs all transactions to help banks and PSPs reconcile accounts and settle funds accurately.

The UPI Switch is critical to enabling fast, secure, and interoperable digital payments across the UPI ecosystem.

The Bank

Banks are fundamental part of the UPI ecosystem. They act as the backbone for payment processing and ensure secure and efficient fund transfers.

Banks in the UPI framework can function as both Payer Banks (remitter banks) and Payee Banks (beneficiary banks) depending on the transaction.

Banks manage user accounts linked to UPI for fund transfers, balance validation, and VPA creation. They validate transaction details, ensure real time fund settlements and reconcile data with NPCI. Robust security measures including encryption and fraud detection. Banks handle disputes, assist with chargebacks and facilitate smooth communication between PSPs and NPCI. Banks comply with RBI and NPCI guidelines ensuring accurate reporting and regulatory compliance.

The UPI Transaction Stages

A UPI transaction involves a series of steps to ensure secure and seamless money transfers between the payer and payee. Here are the key stages involved:

We have covered the basic but robust components that powers UPI payments, providing a strong foundation to explore the more technical aspects. In next Chapter we will dive into transaction flows and the evolution of recurring payments and also how UPI contributes to the recurring payment ecosystem.

Thank you for reading! Your feedback is always appreciated.

Chapter 2 : Payment Types

Chapters

Chapter 1 : A Seamless Payment Revolution architecture and its core components, understanding the mechanisms that enable millions of transactions to happen in real time. Chapter 2 : Payment Types Peer-to-Peer Transfers and Recurring Mandates. Chapter 3: Payment Settlement the Settlement processes, and UPI’s inner workings.