While the UPI applications are likely concerned about any potential threat to their hegemony on the mobile payments network, NPCI and online merchants are enthusiastic about the new innovation, which facilitates speedier payments.
Rahul Chari, co-founder and CTO of PhonePe, wrote in a blog post last month that adopting a new Unified Payments Interface (UPI) innovation would be difficult.
Online retailers can add a virtual payment address to receive payments without a payments app thanks to a product called UPI Plugin or merchant SDK (software development kit). This enables them to provide quicker, more seamless payments without requiring users to access a third-party app.
For instance, if a consumer uses the Swiggy app and chooses UPI payment, a notice prompt directs them to a UPI app like Google Pay or PhonePe. It returns the customer to Swiggy where the order is fulfilled when the payment has been made. Nevertheless, this extra step causes payment failures for a variety of reasons.
Due to the UPI Plugin, the payment may be made from within the Swiggy app rather than via a separate UPI app. With the goal of increasing success rates by up to 15%, payment gateway and processing companies Paytm, Razorpay, and Juspay have given their merchants the opportunity to enable the SDK.
But Chari from PhonePe saw things differently. The UPI Plugin paradigm doesn’t provide any appreciable technological advantages to raise success rates. Instead, it transfers to the sponsor bank and the merchant application the responsibility that currently rests with payment apps. In the blog post, he alludes to the product’s difficulties by saying that it “introduces more complexity and places more stress on the merchants rather than helping them focus on their primary business.”
The value of the UPI Plugin
A few apps and merchants are anticipated to launch in the upcoming quarters, which coincides with the publication of Chari’s blog.
The majority of these merchant UPI payments currently are enabled by UPI leaders PhonePe and Google Pay, which could be harmed by this. It’s possible that many users won’t use these UPI apps to complete UPI payments, which could reduce their market share. In terms of market share for UPI, PhonePe and Google Pay each own 47% and 33%, respectively.
It will be a major blow for Google Pay and PhonePe if big retailers like Swiggy, Zomato, Flipkart, Myntra, and Dream 11 switch to in-line or in-app payments. This might significantly increase their market share. They have every right to be terrified, according to a top executive who closely collaborates with National Payments Corporation of India (NPCI), the company that manages UPI.
In fact, the majority of ecosystem participants, including retailers, payment processors, and banks, have long demanded this offering. Nowadays, merchant transactions make up about 57% of all UPI payments. Indicating that PhonePe and Google Pay may lose a significant chunk of their transactions if many businesses adopt this solution, half of those merchant transactions are online.
In reality, UPI is used in about 60% of all online transactions, and in the next years, that percentage is predicted to rise to 75%. In order to increase the likelihood that three-quarters of all online payments will be successful, it is crucial that UPI Plugin succeed.
Because third-party application providers (TPAP) primarily profit from facilitating merchant transactions, it is crucial for PhonePe and Google Pay to lock merchants into their ecosystem. Even if these apps want to monetize their user base, the innovation could harm them.
When Moneycontrol contacted PhonePe, Google Pay, and NPCI, they did not respond with any comments.
high hurdles to entry
Before UPI Plugin, becoming a TPAP like Google Pay or PhonePe was one of the ways that businesses could integrate UPI payments within their platform (website or app). Even big retailers like Amazon and Tata Neu have followed suit.
Technically, any business or startup may develop a TPAP app similar to PhonePe or Google Pay. But, it needs numerous NPCI clearances, which might take over a year to complete and involve paperwork, compliance, and certificates. The certificates often cover a variety of topics, including upkeep, risk management, customer service, and dispute resolution.
“A huge retailer with significant cash, such as Flipkart or a payment app like Cred, might postpone the process for more than a year. If their business models rely on UPI, smaller businesses cannot wait a year, which stifles any quick experiments or pivots in their early phases. Also, they lack the engineering bandwidth, according to the founder of a payments startup.
According to the founder, TPAP apps have developed into a “secret club of elites.” To make matters worse, UPI’s peer-to-peer (or p2p) money transfer system, which is built on the network effect, has recently prevented the emergence of new participants.
The previous TPAP SDK, which was intended for usage by merchants, underwent transformation to become the merchant SDK. The product was intended to perform almost what UPI Plugin promises to do now, but it was more difficult and required more bank and NPCI approvals, which is why it didn’t catch on.
As of right now, PhonePe’s Chari is speculating that UPI Plugin may suffer the same fate, more so due to operational difficulties.
The duopoly of UPI and NPCI
PhonePe and Google Pay control over 80% of the UPI payments, hence NPCI wants new UPI competitors to emerge, thrive, and take market share from them. However, this strategy does not appear to be succeeding.
The NPCI established a guideline prior to the introduction of WhatsApp Pay UPI, which stated that no single TPAP provider should hold more than 30% of the market share on the UPI platform by January 2023. The players having a percentage higher than 30% would need to lower it below the cutoff. With more than 500 million users, it was feared that WhatsApp will supplant UPI.
Moreover, Google Pay and PhonePe would have suffered as a result.
However, the strategies to reduce market share would have caused a significant disruption in the speed and simplicity of UPI transactions. As a result, NPCI last year extended the deadline by an additional two years, until December 31, 2024.
Even Paytm’s market share, which remains consistent at roughly 13 percent of UPI transactions, hasn’t altered much over the past two years among the top three firms in the ecosystem. Even with the addition of WhatsApp and Cred, nothing has changed. In the past year or so, Amazon’s market share has decreased by nearly 60% to about 0.6 percent.
Hence, NPCI desperately wanted TPAP SDK to take off in order to avoid the humiliation of extending the market share limit date by yet another year or two. It did not occur, and it has since developed a more basic version of the merchant SDK.
A fintech startup claims that the TPAP SDK “did not minimise the compliance risks on merchants and it was almost comparable to what a TPAP app needed to perform.” The founder continued, “Despite UPI as a platform being so powerful and profitable, we don’t see as many merchants. One reason for this is the lack of enthusiasm or ambition to go through such tough compliance challenges.
As a result, NPCI and banks developed the UPI Plugin, which could accomplish several goals at once.
Adoption difficulties
Because they will have to work with just one bank to open a merchant UPI account, some big retailers are reluctant for this reason. This can make the platform overly reliant on just one bank. Having access to different banks via various payment applications reduces the risk even though bank help might occasionally be difficult.
In his essay, Chari discussed various difficulties, such as retailers’ inability to keep up with the rate at which new products like UPI Lite, Rupay Credit Cards, and EMIs on UPI are being added. The problems for retailers, he continued, include stabilisation, compliance, maintenance, risk management, customer service, dispute management, and data localization.
Some of the larger merchants are awaiting the drafting of language for agreements with banks and PGs as well as legal certainty. For the first time, every integration requires certification from NPCI and is still laborious.
Larger participants must take into account the indemnity clause and the length of legal contracts. Since the product is still quite new, many major retailers want to wait until more details become clear. According to the aforementioned fintech company founder, “sometimes their partner banks or PG firms cannot move as quickly as the merchants desire them to.
Due to the fact that this is for online retailers, NPCI is reportedly second-guessing its decision to permit the scan-and-pay technique. “Who specifically argued against it is unclear. This is irritating and a move in the wrong direction, according to one of the insiders from the payments company.
Clearly motivated by dread, Chari’s blog was written. Both NPCI and PhonePe will benefit if this naturally changes their market share, according to the founder of a company that processes payments. In fact, PhonePe recently introduced its own, commission-free payment gateway, and it may very well integrate the UPI Plugin on its site.
To make this work, though, NPCI will require the support of players like PG companies and retailers. “Nothing prevents them from doing so. Nonetheless, they must put up effort, commit time, and spend money “NPCI executive close to them says.