While the NPCI and online merchants are enthusiastic about this innovation, as it facilitates quicker payments, the UPI apps are potentially anxious about any possible threat to their dominance in the realm of mobile payments.
In a blog last month, PhonePe’s co-founder and Chief Technology Officer (CTO), Rahul Chari, pointed out that the adoption of this novel Unified Payments Interface (UPI) innovation might pose challenges.
The product, known as UPI Plugin or merchant SDK (software development kit), empowers online merchants to integrate a virtual payment address for collecting funds without relying on a separate payments app. This capability enables them to offer faster, more seamless payments, eliminating the need for customers to engage with a third-party app.
As an illustration, let’s consider a scenario where a customer is using the Swiggy app and selects UPI as the payment method. In this case, the customer is redirected to a UPI app like Google Pay or PhonePe through a notification prompt. After completing the payment in the UPI app, the customer is brought back to Swiggy to finalize the order. However, this additional step often leads to payment failures due to various factors.
The UPI Plugin introduces a different approach wherein the payment is conducted directly within the Swiggy app, eliminating the need to navigate to a specific UPI app. Leading payment gateway and processing companies such as Paytm, Razorpay, and Juspay have provided their merchants with the option to implement this SDK, with the expectation of enhancing success rates by up to 15 per cent.
Nevertheless, PhonePe’s Rahul Chari offered a contrasting perspective. He remarked, “The UPI Plugin model doesn’t offer significant technical advantages to enhance success rates. Instead, it transfers the responsibility currently held by payment apps to the sponsor bank and the merchant application. This model introduces added complexity and places more responsibilities on merchants, diverting their attention from their core business.” He conveyed this viewpoint in his blog post, suggesting that the product presents certain challenges.
The Significance of UPI Plugin
Chari’s blog arrives at a point in time when a few apps and merchants are poised to launch within the upcoming quarters.
This development could potentially pose a challenge to UPI frontrunner PhonePe and the second-ranking contender, Google Pay. These platforms presently facilitate the majority of merchant UPI payments. If a significant number of customers choose not to utilize these UPI apps for completing their UPI payments, it could erode their dominant market presence. PhonePe and Google Pay currently hold 47% and 33% of the UPI market share, respectively.
“If major players like Swiggy, Zomato, Flipkart, Myntra, and Dream11 shift towards in-line or in-app payments, it could severely impact the positions of Google Pay and PhonePe. This shift might substantially alter their market share. There’s a valid reason for them to be concerned,” explains a senior executive who collaborates closely with the National Payments Corporation of India (NPCI), the organization behind UPI.
Indeed, this product has long been the fervent request of numerous stakeholders within the ecosystem, including merchants, payment processors, and banks. Presently, approximately 57 per cent of all UPI payments are attributed to merchant transactions. Within this category, half of these transactions transpire online, signifying that PhonePe and Google Pay could potentially experience a substantial reduction in their transaction volume if a considerable number of merchants embrace this product.
In reality, close to 60 per cent of all online transactions rely on UPI as the chosen method, and this figure is projected to rise to 75 per cent within the forthcoming years. Therefore, the triumph of the UPI Plugin holds significance in ensuring that a substantial proportion of online payments, three-quarters to be precise, have an enhanced probability of being successfully executed.
Third-party application providers (TPAPs) primarily generate revenue by facilitating merchant transactions, which underscores the significance of retaining merchants within their own ecosystem for PhonePe and Google Pay. The introduction of this innovation might pose a challenge to these platforms, particularly as they seek to capitalize on monetizing their user base.
PhonePe, Google Pay, and NPCI refrained from providing comments when approached.
Stringent Entry Barriers
Before the advent of the UPI Plugin, merchants had a limited avenue to incorporate UPI payments into their platforms (websites or apps), which was to become a Third-Party App Provider (TPAP) akin to Google Pay or PhonePe. Even notable enterprises such as Tata New and Amazon have followed this approach.
In theory, any startup or merchant could establish itself as a TPAP app similar to PhonePe or Google Pay. However, this process entails numerous approvals from NPCI, entailing paperwork, regulatory compliance, and certifications, all of which might extend beyond a year in duration. These certifications encompass various facets like system maintenance, risk management, customer support, and dispute resolution.
A financially well-backed prominent merchant such as Flipkart or a payment application like Cred has the capacity to endure a waiting period spanning more than a year. Nonetheless, smaller startups cannot afford such a lengthy timeline, especially if their business models heavily rely on UPI. This prolonged process hampers their ability to swiftly experiment or pivot during their initial stages, and they also lack the necessary engineering capacity,” explains a founder associated with a payments company.
Challenges in Implementation
One of the factors contributing to the hesitancy of certain large merchants stems from the requirement to align with a single bank to establish a merchant UPI account. This circumstance could lead to an over-reliance on a single bank, potentially rendering the platform overly dependent. Furthermore, dealing with bank support can occasionally be problematic, and the availability of multiple banks via various payment apps helps mitigate this risk.
Within his post, Chari outlined several challenges, including the struggle merchants face in keeping up with the rapid introduction of features like UPI Lite, Rupay Credit Cards, and EMIs on UPI. He also highlighted the difficulties tied to stabilization, compliance, maintenance, risk management, customer support, dispute resolution, and data localization as notable challenges for merchants.
Nevertheless, for this strategy to be successful, NPCI requires participation from entities such as payment gateway firms and merchants to endorse it. The executive in proximity to NPCI remarked, “There’s no logical reason for them to abstain from this. However, it does entail an allocation of effort, time, and financial resources from their end.