The introduction of ground-breaking banking solution through the launch of the Unified Payments Interface ("UPI") by National Payments Corporation of India ("NPCI"), has provided an impetus to India's move to incentivize digital payments with the vision to transform India into a digitally empowered economy and reduce dependence on cash transactions. NPCI is the umbrella body for all payment systems in India, which makes digital transactions as effortless as sending a text message.

UPI makes cutting-edge changes by supporting real time transfer of money (although limited to 1 lakhs rupees) between accounts across banks using smartphones by use of just one single interface besides creating interoperability and superior customer experience. Embracing the smartphone boom in India and the inclination of customers to move to digital mobile-based solutions, UPI addresses the challenges and limitations of the existing payment systems, wherein customers are required to disclose sensitive financial details like bank account details, IFSC code, credit/debit card details and sensitive PIN numbers while initiating transactions and juggle between different mobile banking applications with their different user IDs and passwords.

One of the most innovative features of UPI, which makes it a game changer among the existing payment systems such as mobile wallet, NEFT (national electronic fund transfer), RTGS (real time gross settlement), is the introduction of a 'virtual payment address', which eliminates the need to provide sensitive information like a bank account details, debit/credit card details and CVV numbers. Also, unlike a mobile wallet, a customer is not required to set aside funds upfront in the mobile wallet setup with the service provider and all transfers under the UPI are made from the bank account linked with your virtual payment address. A virtual payment address is an identifier that will be mapped to a customers bank account, enabling the bank providing the UPI services to process transactions through the bank account linked with the respective virtual payment address.

Another key feature of UPI, which aims at capturing the small scale merchants, is that it provides such merchants and local shopkeepers, the option to accept non-cash payments without having to bear the infrastructure costs related to acceptance of card payments and costs linked with charges payable to Banks or commission payable to mobile providers for each transaction. Currently, the UPI services are being offered by the banks free of any charge, however it is expected that with the growth in the user base, the banks may impose a nominal charge for availing the UPI services.

In terms of data security, UPI provides for a single click two-factor authorization, which implies that with one click, the transaction is authenticated at 2 levels, compliant with the existing regulatory guidelines issued by the Reserve Bank of India ("RBI"), without disclosing banking or personal information. As UPI primarily works based on an individual's 'virtual payment address', one can send and receive payments solely based on their 'virtual payment address' without providing any additional details. For example if you need to make a payment to a merchant for purchases made at a store, you will need to provide him only your 'virtual payment address', the merchant will then enter your 'virtual payment address' into his UPI app, the UPI app will send an authentication messages to the 'virtual payment address' linked to your mobile device, once your receive and acknowledge the message by entering your password will the transaction be completed and the amount payable to the merchant will be debited from your bank account.

Prior to the launch of UPI, mobile wallets were the most sought-after product in the digital-payment system in India, which also attracted significant amounts of venture capital funding. However, with the introduction of UPI, which is currently being offered only by banks, digital wallet service providers are likely to hit a major roadblock and witness a decline in their growth trajectory. UPI is likely to significantly reduce the need for mobile wallets by providing a single, seamless and interoperable platform where unlike wallets (where customer cannot transact with someone who is not using the same mobile wallet) money can be transferred across banks to merchants, friends or family, instantly a single click. Some digital wallet service providers are already working on collaborating and partnering with banks to provide the UPI services to create a non-conflicting business model and to co-exist with UPI.

UPI acts as an aggregator of all accounts held by a customer enabling such customers to make transactions from multiple accounts owned by them, from one single mobile application or web interface and a customer is free to choose to use any bank's UPI application. Consequently, a customer can own multiple virtual payment addresses wherein each virtual payment address can be linked to a specific account and organise payments or collections, the way it suits them. Moreover, special instructions like setting an upper limit for payments on certain handles, and restriction of merchants or outlets at which a certain handle can be used, and standing payment instructions make the whole process very useful to customers. 

The banks offering UPI services are required to be authorised by the RBI to provide mobile banking services. It is significant to note that even though the RBI has not issued any specific guidelines on the provision of UPI services, the transactions undertaken through use of UPI are required to be compliant with the guidelines issued by RBI including but not limited to, customer registration process and KYC guidelines.

UPI fits well in the move to migrate towards a cashless economy in the long term by making provisions for payments for even very small amounts digitally, which would in turn help reduce the amount of cash in the system and create a trail of all transactions. Though UPI is still at a nascent stage, it seems to be a win-win for all stakeholders and once UPI turns fully operational, it would act as a seamless facilitator for online payments in India.

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