What Is A Mobile Wallet And How Does It Work?

I am very sure that every person with a smartphone is aware and capable of having a digital or e-wallet in his/her phone. Digital wallets are one of the greatest examples of how technology-enhanced our lives and saved our time. We are all familiar with e-wallet apps like Google Pay, BHIM, Paytm, PhonePe, Venmo and many more. We need to understand that there are different classifications of mobile payments and these payments are building m-commerce industry. Some of these mobile payments are in-app mobile wallets (Google Pay, Apple Pay, BHIM etc.), Mobile POS (point-of-sale), P2P payments etc. In this article, I want to discuss the working of in-app mobile wallets in India.


A person with a bank account and smartphone can set a digital wallet by downloading a mobile wallet app (for example Google Pay for Android, Apple Pay for iOS). Make sure that your mobile number is linked to your bank account. Then enter your credit/debit card details into the app (linking your mobile wallet to your bank account) and go through verification steps and you have a wallet in your phone!

Most of the digital wallets used by commoners are account-based wallets which store all your bank account-related data in a secure part of your phone memory. All the digital wallet apps must adhere to all conditions and fulfil all the regulations established by every nation’s banking authority. In India, these norms are established by Reserve Bank of India (RBI).


There are many technologies involved while processing a transaction using a mobile payment app. Mostly digital wallets use internet connection to process the payments. NFC (near field communication) is also a technology used in some in-app digital wallets which use nfc tags on the phone to process transactions. NFC technology in mobile wallets has helped the mobile payment apps to replace payments with credit/debit cards, smart cards etc. QR codes have also helped many small business owners to give customers a choice of payment methods. Both NFC tags and QR codes have enabled contact-less payments.

Funding Mechanism In Mobile Wallet:

Funding mechanism in most in-app wallets is account-based. When a person creates an in-app wallet in his/her phone, the wallet is linked with his/her savings account. Any transaction done through the wallet is reflected in the savings account balance.

Something awesome in India:

  • Unified Payment Interface (UPI) enables users to transfer money to other users and businesses in real-time directly from their bank accounts. It allows multiple banks to converge in a single app.
  • UPI was developed by National Payments Corporation of India (NPCI). It was launched in 2016 and it is managed by RBI and IBA (Indian Banks Association).
  • All the in-app wallets like Google Pay, PhonePe, Paytm and any other must support UPI platform to complete a transaction in India.
  • UPI follows IMPS (Immediate Payment Service) i.e. instant transfer of funds happens in real-time.
  • UPI has emerged to be the most successful technological developments in Indian Banking, processing $10 billion worth of mobile transactions as in 2018.
  • UPI is secure because it uses two factor authentication and single click payment. UPI doesn’t cost any interchange fee from one bank to another bank, unlike the traditional card payments.  

 There are similar systems like UPI in other parts of the world. For example, ‘Swish’ is an interface created in 2012, to collaborate all the major banks in Sweden, which led to 66% population using digital wallets for most transactions in 2017.


These are the main participants in UPI ecosystem:

  1. Payer (who is paying) PSP
  2. Payee (who is receiving) PSP
  3. Beneficiary Bank (payee’s bank)
  4. Remitter Bank (payer’s bank)
  5. NPCI (National Payments Corporation of India)
  6. Bank account holders (Payer and Payee)
  7. Merchants

PSP means Payment Service Player i.e. they provide the interface for payment to the users. Actually, PSPs should be provided by the bank a/c of payer or payee. As NPCI has granted permission for third-party apps, now many banks are collaborating with in-app wallets like Google Pay, PhonePe etc. to act on their behalf.

  • Mostly, Payer PSP and Payee PSP are the apps used as in-app wallets by the payer and the payee. These PSPs are necessary for authentication and authorization actions.
  • Beneficiary Bank is the bank that represents the payee or has his/her bank account. Remitter Bank represents the payer.


  • The payee enters the payer’s VPA (Virtual Payment Address) so as to transfer the money. UPI provides every user VPA to protect the user’s privacy and security. VPA is of the form “[email protected]”. For example, ‘[email protected]’ is VPA of a guy named Shiva, if Shiva is an account holder in SBI.
  • UPI is the mediator that routes the money from payer to the payee. If there isn’t enough money in the payer’s account or if there is a problem with payee’s a/c (like it has been blocked by the bank), then the transaction is failed. If the above possibilities didn’t occur then UPI executes RequestPay API.
  • After executing RequestPay API, funds are transferred from payer’s a/c to payee’s account in the books of NPCI.

Then Bank Account Holders (Payer and Payee) are involved. They will get a message saying that amount has been credited to or debited from their account.

Merchants are involved in Consumer to Merchant Payments. For example: online shopping payments, ticket booking payments etc.

We have to confront the fascinating fact, that all of these above steps of the transaction are completed in less than a minute.


I must admit that I learned a lot during the research for this article. The use of in-app wallets is so easy and secure that we all do not even think about the difficult banking procedures and execution of highly secure interfaces involved behind-the-scenes. Mobile transactions wouldn’t have been so easy and secure in India without NPCI’s initiative for UPI and hard work of all the engineers who built UPI. The real win of UPI was the trust it gained from common people which eliminated the fear of mobile payments in India.

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