UPI transaction flow

UPI transaction flow

Unified Payments Interface (UPI) is a real-time payment system that facilitates instant money transfers between two bank accounts via mobile devices in India. It was developed by the National Payments Corporation of India (NPCI) and works seamlessly across multiple banks and platforms.

Here's a detailed end-to-end explanation of how a UPI transaction works, including the roles and responsibilities of all entities involved.

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Entities Involved in UPI Transactions:

1. Customer (Payer):

   • The individual who initiates the payment using a UPI-enabled app like Google Pay, PhonePe, or any other UPI-compliant app.

2. Payee (Recipient):

   • The individual or merchant receiving the payment in their bank account.

3. UPI-Enabled App:

   • The mobile application that the customer uses to initiate and authorize the UPI transaction. Examples include Google Pay, PhonePe, Paytm, etc.

4. Bank:

   • Payer’s Bank (Remitter Bank): The bank where the customer holds their account and from which funds are debited.
   • Payee’s Bank (Beneficiary Bank): The bank where the recipient holds their account and to which funds are credited.

5. NPCI (National Payments Corporation of India):

   • The central entity that manages and operates the UPI platform. It facilitates the communication between banks and ensures transaction routing and settlement.

6. PSP (Payment Service Provider):

   • A bank that provides UPI services to apps or platforms (such as Google Pay or PhonePe). PSPs connect apps to the UPI network. Some banks also act as PSPs and provide UPI services via their own banking apps.

7. RBI (Reserve Bank of India):

   • India’s central banking institution that oversees financial systems, including NPCI. The RBI ensures regulatory compliance and security in UPI transactions.

8. Unique VPA (Virtual Payment Address):

   • A unique identifier (such as abc@bank) used by the payer or payee to make or receive payments without needing to share bank account details.

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UPI Transaction Flow (Step-by-Step):

1. Transaction Initiation:

• Customer selects payee:

  • The payer opens the UPI-enabled app and selects the payee (using their mobile number, UPI ID, or QR code).
  • The payer enters the amount to be transferred and selects the payment method (linked bank account).

• App triggers UPI request:

  • The UPI-enabled app (Google Pay, PhonePe, etc.) sends a payment initiation request to the Payment Service Provider (PSP) associated with the payer’s bank.

2. Authentication and Authorization:

• Customer authentication:

  • The payer enters their UPI PIN in the app to authenticate the transaction.
  • The UPI PIN is verified by the Payer’s Bank (Remitter Bank). The bank does not store the PIN but verifies it securely.

• Authorization request to NPCI:

  • Once the payer's bank verifies the UPI PIN, the transaction request is sent to NPCI, which checks the transaction for security, fraud detection, and other compliance factors.
  • NPCI routes the transaction to the Payee’s Bank (Beneficiary Bank).

3. Transaction Processing and Routing:

• NPCI processes and routes the request:

  • NPCI acts as the central switching entity. It receives the debit request from the payer's bank and forwards it to the payee's bank in real time.

• Bank account validation:

  • The Payee’s Bank validates the payee’s UPI ID and checks if the payee’s account is active and capable of receiving funds.

• Transaction clearance:

  • Once the payee’s bank validates the account, it confirms the transaction to NPCI.

4. Transaction Settlement:

• Debiting the payer’s account:

  • Upon receiving confirmation from NPCI, the payer’s bank debits the specified amount from the payer’s bank account.

• Crediting the payee’s account:

  • Simultaneously, the payee’s bank credits the payee’s account with the transferred amount.
  • Both banks then send confirmation responses to NPCI.

5. Final Notification:

• Notification to payer and payee:

  • Once NPCI confirms the transaction is successful, the payer’s and payee’s UPI apps are updated with the transaction status (success or failure).
  • Both the payer and payee receive confirmation messages from their respective UPI apps or banks.

• Transaction complete:

  • The entire transaction typically completes in real-time (within seconds).

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Example of a Transaction Flow:

Let’s say a customer wants to pay ₹500 to a merchant for a product purchase via UPI. Here’s how it works:

1. Customer opens Google Pay and selects the merchant’s UPI ID (merchant@upi) or scans a QR code.
2. Customer enters ₹500 and inputs their UPI PIN for authentication.
3. The Google Pay app sends the transaction request to its Payment Service Provider (e.g., HDFC Bank, which is the customer’s PSP).
4. HDFC Bank verifies the UPI PIN and sends the request to NPCI.
5. NPCI forwards the transaction request to the merchant’s bank (e.g., SBI Bank, which holds the merchant’s account).
6. The merchant’s bank validates the UPI ID, approves the transaction, and informs NPCI.
7. HDFC Bank debits ₹500 from the customer’s account, and SBI credits ₹500 to the merchant’s account.
8. Both Google Pay and the merchant’s app notify the customer and merchant of the successful transaction.

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Key Roles and Functionalities of Entities:

• Customer: Initiates the transaction via the UPI app.
• Payee (Recipient): Receives the payment in their account.
• UPI App: Acts as the interface through which the transaction is initiated and completed.
• PSP (Payment Service Provider): Connects the UPI app to the NPCI and the banks, facilitating communication.
• Payer’s Bank: Debits the payer’s account and verifies UPI credentials.
• Payee’s Bank: Credits the payee’s account after verifying the UPI details.
• NPCI: Switches and routes the transaction, acting as the central authority overseeing the entire UPI system.
• RBI: Ensures regulatory oversight and compliance of UPI operations.

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Dependencies:

• Internet Connectivity: A reliable internet connection is required for the UPI app to function and complete transactions.
• Banks' System Availability: The banks involved must have their systems available and operational to process the payment requests.
• NPCI UPI Network: NPCI’s UPI network must be functional to route and process transactions in real time.

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Conclusion:

A UPI transaction is a real-time, seamless process involving multiple entities working together to facilitate instant payments. Each entity plays a crucial role, from the customer and the UPI-enabled app to the banks and NPCI, to ensure security, authentication, and transaction success.

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