Difference Between Digital Wallets and UPI

India’s digital payment landscape underwent a major transformation in 2016, when the government banned Rs 500 and Rs 1,000 currency notes to curb black money and promote cashless transactions. The move is a catalyst for the rapid adoption of digital wallets, UPI and other electronic payment methods.

The transition to digital payments began with the introduction of mobile wallets such as Paytm and Mobikwik, which enables users to digitally store funds. But the real game changer is UPI, launched in 2016 by the National Payment Corporation of India (NPCI). It simplifies peer-to-peer (P2P) and merchant transactions without wallet balance.

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According to the Reserve Bank of India’s Payment System Report (December 2024), the unified payment interface (UPI) has become India’s favorite payment channel, processing more than $16 billion in transactions per month. UPI revolutionizes digital payments by integrating multiple bank accounts into a single mobile interface, making transactions seamless and accessible to everyone.

Over the years, UPI has introduced key enhancements such as UPI Lite for small transactions, UPI Lite X for offline payments, and UPI123 payments are available for feature phone users. In addition, RBI strengthens cross-border payments by connecting UPI with the international fast payment system. It is worth noting that India’s UPI has been fused with Singapore’s payments and now accepts QR-based UPI payments in Bhutan, France, Mauritius, Nepal, Singapore, Sri Lanka and the UAE.

Although both are digital payment methods, UPI and digital wallets work differently. This article explores UPI vs. Digital Wallets: Definitions, Key Differences, and how they work.

What is a digital wallet?

Digital wallets, also known as electronic hand wallets or mobile wallets, are virtual storage systems that enable users to store funds digitally and securely in online and offline transactions. These wallets can be linked to a bank account, debit card or directly charged. Popular digital wallets in India include Paytm Wallet, Phonepe Wallet, Amazon Pay and Google Pay Wallet.

How does a digital wallet work?

• Users add money to their wallet from a bank account, debit card or credit card.
• The stored balance can be used to pay merchants, recharge their phones, or pay utility bills.
• Some wallets offer cashbacks, discounts and loyalty rewards.

Types of digital wallets:

Closed wallet: issued by a specific company to conduct transactions within its ecosystem (e.g., Amazon payment).

Semi-closed wallet: These money can be used in multiple merchants, but cash withdrawals are not allowed (e.g. Paytm, Phonepe Wallet).

Open wallet: Contact the bank to allow cash withdrawals (e.g. SBI Buddy, HDFC Payzapp).

What is UPI?

The UPI complete form is a unified payment interface. UPI is a real-time payment system developed by NPCI, allowing users to transfer funds immediately between bank accounts. Unlike digital wallets, UPI does not require users to store money in a separate account. It allows users to link multiple bank accounts to a single mobile app and use UPI ID or QR code for instant transactions 24/7.

How does UPI work?

Users link their KYC-verified bank account to a UPI-app-enabled app (such as Google Pay, Phonepe, Paytm, or Bhim). Transactions are done using a virtual payment address (VPA), mobile phone number or QR code.

UPI supports peer-to-peer (P2P) and merchant payments without wallet top-up.

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Key Differences between Digital Wallet and UPI

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The following table highlights the key differences between digital wallets and UPIs:

feature	Digital wallet	UPI
Currency storage	Ask users to increase money to their wallets	Direct link to a bank account, no preload required
Transaction Type	Work like a prepaid account	As a direct transfer from bank to bank
Merchant Payment	Mainly used for small transactions and online shopping	From street vendors to large businesses, almost all businessmen accept it
Transaction restrictions	See more : Optical Illusion Brain Test: If you have Eagle Eyes Find the word Band among Bang in 15 Secs RBI limits wallet balance (Rs 10,000 for non-KYC, Rs 1 lakh for full YC wallet)	UPI limit is Rs 10,000 per transaction (varies in departments and services)
Safety	Transactions are guaranteed in the wallet application	UPI transactions require PIN verification for each transfer
KYC requirements	Basic wallets work without KYC; higher limits required full kyc	No KYC is required to use UPI, users link their KYC-verified bank account
Cash back and rewards	Cash backs, discounts and offers are usually provided	Limited rewards, but some banks offer incentives

in conclusion

As the government pushes towards a cashless economy, UPI has gained widespread adoption due to its ease of use and zero preload requirements. However, digital wallets are still related to online purchases and merchant transactions.

UPI plays a key role in India’s digital payments revolution, increasing its contribution to total digital transactions from 34% in 2019 to 83% in 2024, with a CAGR of 74% over five years. To further improve accessibility, the UPI transaction limit initially limited to Rs 10,000 has been increased to Rs 20,000 in areas such as capital markets, insurance and loan repayment, while IPO subscriptions, retail direct direct schemes and IPO subscriptions for essential services such as healthcare and education, retail price subscriptions for Rs 5,000 in retail price subscriptions.

With continued upgrades to UPI 2.0, UPI Lite and extended cross-border capabilities, UPI remains at the forefront of India’s digital payment ecosystem, ensuring multi-million dollars in seamless, secure and inclusive financial transactions.

Source: https://dinhtienhoang.edu.vn
Category: Optical Illusion