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Decoding Unified Payments Interface system: A step towards cutting cash in the economy

Raghuram Rajan says the new mobile payments interface will be part of the revolution in Indian banking; he and Nandan Nilekani reckon it will lead to better outcomes in transactions over the next few years.

Written by Shaji Vikraman |
September 5, 2016 1:26:38 am
unified payments interface, RBI, Raghuram Rajan, Indian banks, unified payments interface launch, upi, unified payments interface npci, unified payments interface features, immediate payment service, retail payment, mobile payment, cashless payments, india news Raghuram Rajan with NPCI Chairman Balachandran M and Advisor Nandan Nilekani at the launch of UPI. (Source: NPCI site)

So, what is the Unique Payments Interface or UPI?

UPI is an online payments solution which will facilitate the transfer of funds instantly between person and person (or peer to peer) using a smartphone. UPI can be used both to send and receive funds. The system was launched this April by the then RBI Governor Raghuram Rajan, and it is now operational. The National Payments Corporation of India (NPCI), the umbrella organisation for all retail payments systems in India, which was set up with the guidance and support of the RBI and Indian Banks’ Association (IBA), is pushing the solution.

And how does UPI work? How is it different from other modes of electronic payment?

Popular online payment services currently, the National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS), or Real-time Gross Settlement (RTGS) require a user or customer to register on the bank’s web site, add a beneficiary, and share details of bank accounts. In UPI, a user just needs to download the UPI app — offered by several banks — from the Google Play Store on an android phone, register details, and create a virtual address. This can be your mobile number or any unique mail address. After that, you can send or receive funds up to Rs 1 lakh to or from another person or establishment after a request from a person on the other leg of the transaction who too has a unique virtual address or ID. This is done instantly, with the bank authenticating it.

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This is how it works: For instance, your local shopkeeper can send a request to pull funds for the purchases you have made after sending a request on your unique virtual address. You can confirm the payment by saying OK and the payment will be carried out instantly after being validated at the back end by the bank. And you can receive cash through this system in the same way.

The difference between UPI and payment modes such as NEFT and IMPS is that bank account details are not shared in the transaction, and transactions can be made 24×7 all year round. NEFT transactions do not happen on holidays and during non-banking hours, there are limitations in funds transfer; in IMPS, account details and details like the 11-digit Indian Financial System (IFS) Code, which indicates a bank’s branch code, have to be entered.

The other advantage is that it is possible to have multiple unique virtual addresses and use multiple bank accounts, and without necessarily having to go through your own bank for a variety of transactions. For the shopkeeper or other large establishments, it also means not having to run the transaction through an electronic machine such as a card reader.

Who offers this payments solution now?

For now, only banks — 29 of whom have signed up. Biggies such as State Bank of India and HDFC Bank are yet to come on board, but are expected to join soon. Restricting the service to just banks could be because in the initial stages, the central bank and NPCI would want to observe how the system works, and to gain a measure of comfort before opening it up to other players too. Some see this as a move to protect banks — which have been impacted by mobile wallets and other payment modes, and which are faced with the imminent entry of more payment banks licensed by the RBI. Besides, the NPCI has been promoted by banks, who may have an interest in keeping other players out for now.

How cost effective is this solution in comparison to other payment solutions?

Banks are allowed to charge for each transaction, but they haven’t started doing so yet. These are initial days and the 29 banks that have signed up are likely to take a while to get into the groove. The volume of transactions too is bound to take time to develop, as the popularity and sales of smartphones increase.

So what is the broader objective of launching UPI?

The UPI fits in well with the move to migrate towards a cashless economy in the medium and long term. By bringing person to person payments for even very small amounts online, it would be possible to reduce the amount of cash in the system, create a trail of all transactions, lower tax evasion and boost revenues. As Finance Minister Arun Jaitley said last week, tax rates, including on the GST, could be lower if tax evasion was lower. Bankers say that mapping this financial behaviour could also help them analyse and firm up approvals for credit to customers. And with the growing use of smartphones in India and the number of mobile phone subscribers — a billion — a large number of transactions are expected to be carried out through phones or electronically. This is already reflected in the rising number of transactions through the electronic mode rather than by cheques.

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