How Does UPI Work? – Everything You need to Know!

how upi works

UPI stands for Unified Payments Interface and is getting popular day by day and with reason. It has brought us closer to a digitalized cashless economy and with this new payment method, our smartphones can act as virtual debit cards through which you can send or accept money within minutes. You don’t even need a wallet anymore if you can just set up UPI on your device. So let us see what UPI really is how does it work. I have made an attempt below to clear all the doubts you may have regarding this as best as I can.

1. What Exactly is UPI?

You can think of UPI as something like an email ID of sorts which you can use to transfer money even though it is not that simple. It will be unique for each and every account and is used by your bank to make payments and is built over the Immediate Payments Interface Service (IMPS) infrastructure. It provides additional benefits to the IMPS by providing for a P2P full functionality, simplifies merchant payments, allows you to use a single app for money transfer and also facilitates single click two-factor authentication.

how upi works

When you set up a UPI, you will also be prompted to create a UPI-PIN which is a 4-6 digit code you create or set during the first time registration with your UPI app. You will need this to authorize all bank transactions. And make sure that you don’t share it with anyone ALl the payments are instant an 24/7 regardless of the bank’s working hours.

2. How does UPI work?

As of now, making payments online is a pain and you need a lot of information like account type, IFSC code etc and sometimes that payments take a lot of time to be processed and is unreliable. But with UPI, you don’t have any of these problems. You only need to set up your UPI using the UPI option from any of the reliable apps. After you have set it up, you can make transactions very easily with just your mobile number or the virtual payment address of your account.

digital Transactions with UPI

To initiate a transaction, you can use two types of address – global or local. The global address includes your Aadhaar, bank account number and mobile number while the local address is a virtual one which is given to you by the bank and looks like ‘name@bankname’. This virtual address will allow you to send and receive money from multiple banks and prepaid payment issuers. This means that you don’t have to rely on multiple apps to send and receive money.

You just have to give your virtual address to the other person and he can send and request money from it. Once you authenticate the transaction by entering your UPI-PIN, the transaction will be completed and you don’t need to share your bank details. UPI will help you to simplify online payments as you don’t have to use a digital wallet anymore for quick payments. It can be used for a variety of online services like in Zomato, Food Panda, online grocery shops, Amazon and so many more.

You can pay through UPI when you shop by choosing the ‘UPI as payment’ option an entering your virtual address. Once entered, you will receive a  collect request on your BHIM app. Enter your UPI-PIN here and your payment will be complete, simple as that. You can link several bank accounts to the same virtual address depending on the functionalities being made available by the respective PSPs.

How to set up a UPI?


You must have a saving or current bank account which is linked to a registered mobile number and also an Android or iOS smartphone which contains the active SIM with this number. The account should also have a debit card associated with it. Download your preferred UPI app. Even though the process may vary a bit based on the app, you will have to go through the following steps.

  • Set a preference for language
  • Selection of SIM if your phone supports dual SIM
  • Permission to manage messaging, Phonebook, calls and gallery
  • Setting the PIN to open the app

When you first set up your UPI, the app will ask you to set the UPI ID of your choice. This is similar to the Email address setting. After that, the UPI sends an SMS to the server and based on this, the system detects your mobile number which is used to find the bank accounts linked to the number.

After registration, you have to link your bank account to the app. For this, select the bank from the list of banks. If you have multiple bank accounts associated with the same number, you can add all of them but you will have to default one account which will be used for transactions. This can be changed any time with just a single tap.

Now, you have to generate your UPI PIN which is a 4 digit PIN which is required whenever you pay to someone. You can generate the PIN from the app itself. For this, you need to enter your debit card information. All of the steps until now need to be done only when you first set up the UPI and is a one time process.

3. How secure is UPI?

UPI is very secure with two-factor authentication and highly encrypted formats with over 8000 crore INR worth of transactions every day which is expected to increase exponentially in the coming years. When you sign up for a UPI app, your phone sends a push SMS for verification purposes to ensure that nobody can copy the OTP from other devices. Thus, the push SMS binds your phone number and needs to be redone as you change your device.

It also adds an extra layer of security by asking you to create an additional pin for your transactions. Every transaction needs this pin for authorization which means that even if your device is lost or stolen your pin will be needed to make transactions and the money in your bank accounts are safe though it is recommended that you block the UPI service on your stolen phone number just to stay on the safer side.

The important selling point of the UPI platform is that your money does not leave your account before your transaction is complete as there is no intermediate step where a third party receives access to your money and the transactions are made directly between two bank accounts. It is heard that, as a platform created by the NPCI, UPI will have further security integrations in the future. Making UPI Aadhar/UIDAI ready is reported to be in the pipeline for the next version of UPI and if that does happen, UPI will get an added layer of biometric security too as it will have integrations with the Aadhar’s biometric database.

What can you do with UPI?

You can perform the following banking tasks through the UPI apps.

  • Send/Pay Money using a virtual address, A/c number and IFSC code, mobile number and MMID or Aadhar number.
  • Request money from another person.
  • Check your account balance and transaction history.
  • Add multiple bank accounts.
  • Change/ Set MPIN.
  • Get notifications related to your bank account.
  • Account Management.

UPI app also gives you the facility to split the bill among many people which is useful when many people want to pay to a single person. It also gives you the option of a one-time mandate in which you can schedule a payment for the future. You can set a maximum limit for the transfer and the biller itself can draw the amount without your further permission which is a very useful feature in case of regular payments such as bills and rent.

Which are the best UPI apps?

Below is a list of the best UPI apps as of now:

  • Bharat Interface For Money (BHIM)
  • Google Pay (Tez)
  • Paytm
  • Phone Pe
  • SBI Pay

If you want a secure and simple way to transact money online without using wallets or without all the complications of the standard transaction facilities, then UPI is definitely the right way to go as it makes cashless payments smoother, faster and efficient for millions of people in India.


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