Perhaps for the first time in the world, a government body has led a Visa/MasterCard/Swift-free retail payments system that uses bank accounts directly. For many years, banks have imagined solutions that could make online buyers use the source of funds directly by paying via bank accounts (e-checks, ACH+ and the latest being host card emulation*, etc.). National Payment Corp of India, which was established in 2009, has launched a solution called Unified Payment Interface (UPI) which acts as the gateway for the cashless society in India. This article aims at giving in-depth insights and analysis about UPI technology. More than 19 banks are on board for UPI and many more are yet to join. Using UPI, people can send money using virtual IDs. Banks are integrating UPI to existing apps and users have loads of advantages like making payments without creating beneficiaries in bank accounts; receivers initiating the transactions; and single-click & two-factor authentication.
What is UPI?
UPI is an open-source platform designed for the mobile age that helps with easy integration of various payment platforms. UPI is powered by a single payment API and a set of supporting APIs. Here are the core features of UPI:
— It acts as primary device for all payments including person-to-person, person-to-entity and vice versa. The technology features the use of mobile to "pay" someone (push) as well as "collect" from someone (pull). The payment is facilitated only by providing an address.This doesn’t require other credentials on third-party applications or websites.
— Aadhar number, mobile number, card number and account number is used in a unified way. UPI is fully interoperable across all payment system players without having silos and closed systems. All payment system players can use a set of APIs for any-to-any push and pull payments.
UPI allows USSD, smartphone, Internet banking, and other channel integration onto a common layer at NPCI. This common layer uses existing systems such as IMPS, AEPS, etc. to orchestrate these transactions and ensure settlement across accounts. Usage of existing systems ensures reliability of payment transactions across various channels and also takes full advantage of all the investments so far. This unified layer offers next-generation, peer-to-peer immediate payment just by using a personal phone. The striking feature is that third-party API integration can collect payments from a “specified address.” This avoids the need to share account details on third-party websites. Within this solution, payment authentication and authorization are always done using personal phones. Since this layer offers a unified interface, any-to-any (Aadhaar number, mobile, account, virtual addresses) payments would be done using a standard set of APIs.
If a user wants to pay someone, he need not add him or her as a beneficiary and there is no need for an IFSC code, account number, etc. The UPI app does away with all this. All one needs is the receiver's unique ID. Open the UPI app, select the amount to be paid, add the unique ID of the beneficiary and select “send.” The app will ask for a mobile PIN to authenticate the payment and the transaction is initiated.
Here are the use cases of UPI:
— Send money to relatives — Collecting money from friends — Buying on e-commerce sites — Buying railway tickets on IRCTC’s application — Bill payments and insurance premium collections
“If you go to a shop or use a taxi service, the shopkeeper or the taxi driver can collect money through UPI. All you have to do is give your virtual address instead of bank account number or mobile number,” said AP Hota, MD & CEO of NPCI.
He also said that the interface is the most sophisticated platform in the world and that it will lead to a higher adoption of mobile payments in India.
UPI Process: Step by Step Analysis
- User initiates the transaction through his PSP application through his device
- Payer provides authorization credentials at his device.
- The payer device initiates the pay request to the payer’s PSP system.
- Payer PSP validates the payer details and validates the first-factor authentication.
- Payer PSP sends the pay request to NPCI.
- NPCI resolves the payee address in the following two ways: a. If the address has global identifiers (mobile number, aadhaar number or account number), then the payee address is resolved by NPCI’s central mapper. b. If the address has virtual addresses offered by the payee’s PSP, then NPCI will send the request to Payee’s PSP for address translation.
- In the case of 6b, the payee PSP accepts or rejects the request based on the rules set at his end.
- In the case of 6b, on accepting the pay request, payee PSP populates the payee details and responds to NPCI.
- NPCI sends the debit request to the debit account provider.
- Account provider authenticates the payer based on the credential provided.
- Account provider debits the payer account.
- Account provider sends debit response to NPCI.
- NPCI sends the credit request to the credit account provider.
- Account provider credits the account based on the payee details.
- Account provider sends credit response to NPCI.
- NPCI sends pay response to payee PSP.
- NPCI sends pay response to payer PSP.
- Payer PSP notifies payer.
Value Proposition of UPI:
Simple Authentication Process: NPCI offers centralized MPIN management options via USSD that allows banking customers with registered mobile to easily set and change MPINs without having any explicit issuance mechanisms.
Simplified Issuance Infrastructure: Usage of virtual addresses and payment addresses in conjunction with mobile as the "what you have" factor helps banks to create tokenless infrastructure, thereby reducing the costs.
Simplified Acquiring Infrastructure: Considering the fact that India has nearly a billion phones and 150 million smartphones (expected to be at 500 million in next 4–5 years), massive scale can be achieved if effective use of mobile is made compared to creating costly physical acquiring infrastructure.
Flexibility for users: Customers get the ability to make payments securely to their friends, relatives, pay to merchants, pay bills, etc. In addition, innovations such as reminders, using multiple accounts via single mobile applications, using special purpose virtual addresses, etc. allow users to enjoy a superior experience.
Creating National Interoperability: A unified interoperable interface allows all players to innovate and provide superior customer experience and still provide a secure, standard-based, interoperable payment scheme.
The proliferation of smartphones, the availability of an online verifiable identity, universal access to banking and the introduction of biometric sensors in phones provide India a unique opportunity to UPI take the lead in electronic payments and provide customers with enhanced security and unparalleled ease of use.
Watch this interesting CNBC interview with Shikha Sharma, MD & CEO of Axis at the launch of UPI.
*Note: While HCE was deployed by Polish Banks on a large scale in Poland, it has not taken off elsewhere in the world.