What is the role of TPAPs in the payment space?

In the payment space, third-party service providers are primarily in the form of TPAPs, Payment gateways, and Payment aggregators. Presently, around 200 crore UPI transactions are undertaken each month out of which a sizeable share are originated through the Third Party Application Providers (TPAPs). In the financial space, third-party apps are often connected to a banking application to provide a variety of services.TPAPs are the Application Programming Interface (API) designed in UPI exclusively for banks. The Application Programming Interface (API) is a software intermediary that can be either standalone applications or applications that add functionality to an existing parent program/system. This app is used for dual jobs; it delivers a user response to a system and sends the system’s response back to a user.

A third-party app sends a request to the linked banking application for permission to access the user’s bank details, which is further relayed by the banking application to the customer to authenticate the request. In TPAPs services, only a banking entity can directly interact with the UPI switch. However, non-banking third party application provider can participate by partnering with a banking entity which is already on UPI platform, and developing their own APIs referred to as third-party apps. The third-party payment apps provider (TPAP) is responsible for expanding and transforming the range of payment services available to the customers on account of its technology. As in the case of the single bank model, the TPAPs provide only a customer interface, while the transactions continue to be processed through the underlying Payment Service Provider Bank. Therefore, the role of these non-banking entities is more in the nature of facilitator for transactions as the entire operational and financial liability of transactions originated through third-party app lies on the bank. Hence, the TPAPs are the best examples of banking entities and non-banking entities’ partnerships which emphasize the importance of fintech in the payments’ ecosphere.

TPAP has to store all the payments data including UPI Transaction Data collected by TPAP for the purpose of facilitating UPI transactions, only in India. TPAP is responsible to comply with all applicable laws, rules, regulations, and guidelines, etc. prescribed by any statutory or regulatory authority in relation to UPI and TPAP’s participation on the UPI platform including all circulars and guidelines issued by NPCI in this regard. This architecture balances regulatory safety and innovation as it combines the safety and trust of banking institutions with the informality and convenience offered by non-banking entities.

At present, a multi-bank model has been introduced in the system for large TPAPs which allow them to tie up with multiple banks to act as “Payment Service Provider (PSP). Payment Service Provider Bank (PSP) means entities that are allowed to issue virtual addresses to the Users and provide payment (credit/debit) services to individuals or entities which are regulated by the Reserve Bank of India, in accordance with the Payments and Settlement Systems Act, 2007.PSP Bank is responsible to give all UPI customers an option to choose any bank account from the list of Banks available on UPI platform for linking with the customer’s UPI ID. PSP Bank has to store all the payments data including UPI Transaction Data collected for the purpose of facilitating UPI transactions, only in India. PSP Bank is also responsible for authentication of the end-user customer at the time of registration of such customer, either through its own app or TPAP’s app.PSP Bank has to ensure that TPAP and its systems are adequately secure to function on the UPI platform. Further, PSP Bank is responsible to put in place a grievance redressal mechanism for resolving complaints and disputes raised by the end-user customer.