Decoded: What is UPI and how does it work?

UPI, or Unified Payments Interface, is a revolutionary technology framework used for mobile payments in India. It was launched in 2016.

You might already have heard about it, or you could even be using it for easier payments. But you would surely want to understand what UPI is and how it works. So let’s dig deeper. 

Think of UPI as the back-end technology infrastructure on which all banks, financial institutions and users transact money. At its core, it’s a software code and a set of guidelines and protocols maintained by the National Payments Corp of India. 

Over this network, banks and fintech companies have created consumer-facing applications that we use today. Think of services like Google Pay, Paytm and PhonePe. There are at least a dozen more such apps. Banks, on their part too, offer UPI payments on their mobile applications.

How it works

Users create a special ID called UPI ID on one of these applications. Every UPI ID is linked to the user’s phone number and bank account. The sign-up flow for a merchant is identical.

When transacting, a user looks up another user or merchant - to send money - through their mobile number or UPI ID. Once the details are in, the transaction takes place.

Note here that the money travels on the back end from the sender’s bank account to the Payment app’s current account and then finally to the bank account of the recipient.

Oh, and did we tell you – UPI transactions are free! 

The ease of setting up and use has been the biggest reason for UPI adoption. Currently, 249 banks are live on UPI, enabling over 3.5 billion transactions every month! Funds transacted over UPI are already more than those transacted through debit and credit cards.