What is UPI and How does it work: The complete Guide

unified payment system- UPI
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UPI stands for Unified Payments Interface. It has been introduced by the Government of India as part of their push towards a cashless economy. Further, it has been designed to enable peer to peer to peer (P2P) interbank as well as intrabank financial transactions in real time. The system is run by the National Payments Corporation of India (NPCI) and is regulated by Reserve Bank of India (RBI) along with Indian Banks Association (IBA).

UPI has been introduced right after demonetization, which resulted in the 500 and 1000 rupee notes becoming invalid. Since cash flow came to a halt after demonetization, digital wallets and UPI have gained substantial market share, with UPI handling around 8000 crore rupees of transaction volume per day.

How does it work?

UPI transfers money via IMPS (Immediate Payments Service). It is, in fact, a layer of functionality over IMPS. Under UPI, a unique ID linked to your bank account is created. It is a unique identifier that the system uses to identify you. Since IMPS is a 24×7 service with an immediate settlement, UPI works 24×7, even when banks may not be operational.

The interface allows account holders to send and receive money from their smartphones using their registered phone numbers or the virtual payments address (the unique identity we talked about earlier) without the need to enter account details. For the future or UPI 2.0, as it has been touted, we would be able to transfer money and validate transactions via our Aadhar details too.

All major banks have rolled out UPI service for their account holders, and all of them have their own applications for the service. In addition 3rd party applications like Google TEZ, PhonePe and BHIM are also present. Up to 1lakh rupees can be transferred per transaction.


Unlike cards, it utilizes your phone’s lock screen as the 1st tier of security. Also, you have to set an MPIN to use the service. You have to enter this PIN every time you make a transaction. To create an MPIN, your account details first have to be validated (explained later). This is called single click Two-factor authentication. Furthermore, the transactions themselves are end to end encrypted.

How to configure UPI?

I will talk about setting up Google Tez since it allows you to use UPI with multiple banks. The procedure is more or less similar for other applications.

1 Install Tez from the PlayStore/Appstore.

2 Select your preferred language.

3 Enter your mobile number for verification and choose the Google account to be associated with Tez.

4 Enter the OTP received.

5 Next, choose a to set a Google PIN exclusive for this app or choose to use the existing screen lock.

The initial setup is now complete. In order to send and receive money, you have to link your bank account with Tez. To do this, follow the following steps –

1 On Tez home screen, select add bank account.

2 Choose your bank from the list.



3 Enter the last 6 digits of your debit card and expiry date to verify your account.

4 You will receive an OTP on your registered mobile number. Enter it.



5 Next, you are required to create a UPI PIN. You need to enter this PIN everytime you want to make a transaction.

6 Once the UPI PIN is created, you have finished setting up Tez.

7 To pay, click on the rupee icon. Then, enter the mobile number or virtual address of the person to whom you have to transfer money. Next, enter the amount to be paid, and the payment would be debited from your account.



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