The Unified Payments Interface- UPI
The Unified Payments Interface- UPI
Subject: Economy
Section: Monetary Policy
Context:
More than 40% of all retail digital payments (non-cash and non-paper payments) in India happen through UPI now.
Concept:
- The UPI was launched in 2016 and is operated by the National Payments Corporation of India (NPCI)
- It is an advanced version of Immediate Payment Service (IMPS)- round–the-clock funds transfer service to make cashless payments faster, easier and smoother.
- 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.
- UPI based payments function broadly through three steps.
- First, one’s bank account is mapped to a Virtual Payment Address (VPA).
- Secondly, a Payment Service Provider (typically a bank) takes care of the to-and-fro transactions to this VPA (and hence to the underlying bank account) and
- Finally, the UPI software coordinates the fund movement from a customer’s VPA to a target VPA and completes the transaction.
- UPI transaction is different from paying with a debit card or credit card as it does not involve a Merchant Discount Rate (MDR). For UPI transactions, there is no MDR (like in the case of the Indian government’s Rupay card)
- UPI accepts transactions as small as one rupee
- Smartphones being the only device needed to complete a transaction makes the process as simple as it can get, instead of using devices like the Point-of-Sale card-swiping machines.
- The security of a UPI transaction is tied to the user’s authentication with the mobile phone — there is a mobile personal identification number (MPIN) for the UPI application and there is one more layer of security when the bank’s online transaction PIN is to be keyed in as part of every UPI transaction.
- The top UPI apps today include PhonePe, Paytm, Google Pay, Amazon Pay and BHIM, the latter being the Government offering.
| A VPA eliminates the risk of mentioning account details in every transaction. It can be created in a couple of minutes using a UPI app. The only prerequisite is that your bank account be linked to a mobile number. The MDR is the cost paid by a merchant to a bank for accepting payment from their customers via digital means. The merchant discount rate is expressed in percentage of the transaction amount. Presently, it is applicable for online transactions and QR-based transactions. The amount that the merchant pays for every transaction gets distributed among three stakeholders–the bank that enables the transaction, the vendor that installs the point of sale (PoS) machine and the card network provider such as Visa, MasterCard, RuPay. National Payments Corporation of India NPCI, an umbrella organisation for operating retail payments and settlement systems in India, is an initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007. It is a “Not for Profit” Company under the provisions of Section 25 of Companies Act 1956 (now Section 8 of Companies Act 2013), with an intention to provide infrastructure to the entire Banking system in India for physical as well as electronic payment and settlement systems. |