Last month, PhonePe co-founder and chief technology officer (CTO) Rahul Chari penned a blog saying that adoption of a new Unified Payments Interface (UPI) innovation could be a challenge.
The product, called UPI Plugin or merchant SDK (software development kit), enables online merchants to add a virtual payment address to collect money without a payments app. This helps them enable faster, seamless payments without customers needing to go to a third party app.
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For instance, if a customer is using the Swiggy app and opts for UPI payment, it takes the customer to a UPI app such as Google Pay or PhonePe, through a notification prompt. Once the payment is done, it takes the customer back to Swiggy, where the order is completed. However, this additional step results in payment failures due to multiple reasons.
The UPI Plugin means that the payment happens within the Swiggy app itself without going to a specific UPI app. Payment gateway and processing firms Paytm, Razorpay and Juspay have enabled their merchants with the option of enabling the SDK with the hope of improving success rates by up to 15 percent.
However, PhonePe’s Chari had a different perspective. “The UPI Plugin model does not offer any significant technical benefit to improve success rates. It instead shifts the onus that exists on payment apps today to the sponsor bank and the merchant application. This model introduces more complexity and puts more burden on the merchants rather than helping them focus on their core business,” he says in the blog, implying that the product has some challenges.
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The importance of UPI Plugin
The blog from Chari comes at a time when a few apps and merchants are expected to go live in the next couple of quarters.
This could probably hurt UPI leader PhonePe and No. 2 Google Pay, which enable most of such merchant UPI payments today. The probability of a lot of customers not going to these UPI apps to complete UPI payments could take away their dominant market share. PhonePe and Google Pay command 47% and 33% market share, respectively, in UPI.
“If large merchants like Swiggy, Zomato, Flipkart, Myntra and Dream 11 moves to in-line or in-app payments it will be a huge setback to Google Pay and PhonePe. This could help bring their market share substantially. They have every reason to be scared,” says a senior executive who works closely with National Payments Corporation of India (NPCI), which runs UPI.
In fact, this product has been the longstanding demand of most ecosystem players, such as merchants, payment processors and banks. Today, around 57 percent of all UPI payments are merchant transactions. Half of those merchant transactions are online, indicating that PhonePe and Google Pay could lose substantial portion of their transactions if a large number of merchants adopt this product.
In fact, almost 60 percent of all online transactions are made using UPI and that is expected to go up to 75 percent in the next couple of years. Hence, the success of UPI Plugin is important to ensure that three-quarters of all online payments have a higher chance of success.
Third party application providers (TPAP) make money mostly by enabling merchant transactions and hence locking merchants into their ecosystem is important for PhonePe and Google Pay. The innovation could hurt them even as these apps are looking to monetise their user base.
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PhonePe, Google Pay and NPCI did not offer any comments when Moneycontrol reached out.
High entry barriers
Before UPI Plugin, one of the ways in which merchants could integrate UPI payments within their platform (website or app) was to become a TPAP like Google Pay or PhonePe. Even large merchants such as Tata Neu and Amazon have done the same.
Technically any startup or merchant can become a TPAP app like a PhonePe or Google Pay. However, it requires multiple approvals from NPCI, involving paperwork, compliance and certifications, all of which could take more than a year. The certifications are usually for multiple issues such as maintenance, risk management, customer support and dispute management.
“A large merchant with a sizable funding like a Flipkart or a payment app like Cred can wait for more than a year. Smaller startups cannot wait for a year if their business models depend on UPI, and that stifles any quick experiments or pivots in their early stages. They also don’t have the engineering bandwidth,” says a founder with a payments company.
The founder adds that TPAP apps have become a “private club of elites”. To make matters worse, UPI’s person-to-person money transfer or (peer to peer/p2p in technical terms) based on network effect and this has also closed doors on newer players from emerging of late.
The merchant SDK is an evolution from the erstwhile TPAP SDK, which did not find acceptance among merchants, who were its intended users. The product was supposed to almost do what UPI Plugin proposes to do now, but was more complicated and needed multiple approvals from NPCI and banks, and hence failed to take off.
What PhonePe’s Chari is suggesting now is that UPI Plugin will meet the same fate, more so owing to operational issues.
NPCI’s dichotomy and UPI duopoly
While NPCI wants more UPI players to emerge, succeed and take market share from the two large existing players — PhonePe and Google Pay control over 80% of the UPI payments — it does not seem to be working.
Before the launch of WhatsApp Pay UPI, NPCI came up with a rule that said that no single TPAP player should have more than 30% market share on the UPI platform by January 2023. The players with more than 30 percent would have to reduce this below the threshold. The fear was that WhatsApp, with over 500 million users, would dominate UPI.
This would also have impacted PhonePe badly and Google Pay to some extent.
However, the measures to bring down market share would have meant a serious disruption in the speed and ease of UPI transactions, so last year, NPCI extended the deadline by another two years to December 31, 2024.
Over the last couple of years, the market share of the top three players in the ecosystem has barely changed — even Paytm’s share is stable at around 13 percent of UPI transactions. It has not changed even with the entry of WhatsApp and Cred. Amazon has seen its market share decline by over 60% in the last year or so to around 0.6 percent.
Hence to save itself from the embarrassment of extending the market share capping deadline by another year or so again, NPCI badly wanted TPAP SDK to take off. That did not happen, and it has come up with a stripped down version of the merchant SDK now.
“TPAP SDK did not reduce the compliance risks on merchants and it was almost similar to what a TPAP app needed to do,” says a fintech founder. The lack of interest or initiative to go through such stringent compliance issues is one of the reasons why we don’t see as many merchants despite UPI as a platform being so powerful and successful, the founder added.
Hence NPCI and banks came up with UPI Plugin, which could achieve multiple objectives at one go.
Adoption challenges
One of the reasons why some large merchants hesitate is because they will be forced to tie up with a single bank to create a merchant UPI account. This could result in the platform being too dependent on one bank. Sometimes, the support from banks could also be challenging and having the option of multiple banks through multiple payment apps hedges the risk.
In his post, Chari mentioned some challenges, such as merchants not being able to keep up with the speed of adding products such as UPI Lite, Rupay Credit Cards and EMIs on UPI. He added that stabilisation, compliance, maintenance, risk management, customer support, dispute management and data localisation are challenges for merchants.
Some of the larger merchants are waiting for legal clarity and the clauses to be put in for agreements with banks and PGs. For the first time, the integration is still cumbersome and NPCI has to certify every integration.
“Legal contracts take time and the larger players need to factor in the indemnity clause. The product is still fairly new and a lot of large merchants tend to wait for clarity to emerge. Sometimes their partner banks or PG firms cannot move as fast as the merchants wish them to,” says the fintech startup founder quoted above.
According to a couple of sources, since this is for online merchants, NPCI is having second thoughts about allowing the scan-and-pay method. “It is not clear who advocated against it. This is frustrating and a step in the wrong direction,” says one of the payments firm sources.
“The blog (by Chari) clearly came out of fear. If this adjusts their market share in a natural way, it is good for NPCI as well as PhonePe,” says the founder of a payment processing firm. In fact, recently, PhonePe launched its own payment gateway with zero commission, and it may very well integrate the UPI Plugin on its platform.
However, for this to work, NPCI need players like PG firms and merchants to promote this. “There is no reason why they would not. But there is an effort, time and monetary investment from their side,” says the executive close to NPCI.
