In the realm of digital payments, innovation is a double-edged sword. While it can pave the way for revolutionary advancements, it can also disrupt the status quo and unsettle market leaders. Such is the case with the new Unified Payments Interface (UPI) innovation known as the UPI Plugin, which is causing ripples in the digital payment ecosystem and raising concerns for giants like PhonePe and Google Pay.
The brainchild of payment gateway and processing firms like Paytm, Razorpay, and Juspay, the UPI Plugin, also referred to as the merchant SDK (software development kit), has the potential to reshape the way online merchants handle payments. By allowing these merchants to integrate a virtual payment address directly into their platforms, the UPI Plugin eliminates the need for customers to navigate to third-party payment apps. This streamlines the payment process, making it faster and more seamless.
Traditionally, when a customer chooses UPI payment on an app like Swiggy, they are redirected to a UPI app like Google Pay or PhonePe to complete the transaction. The extra step, however, often leads to payment failures due to various reasons. The UPI Plugin tackles this issue by keeping the entire payment process within the merchant’s app, thus reducing the chances of payment failure.
The Challenge Faced by Incumbents
While the UPI Plugin is being hailed as a game-changer by many, PhonePe’s co-founder and CTO, Rahul Chari, expressed reservations in a recent blog post. Chari argued that the UPI Plugin model does not offer significant technical benefits to improve success rates. Instead, it shifts the responsibility from payment apps to sponsor banks and merchant applications. Chari’s perspective highlights potential challenges associated with the innovation.
The introduction of the UPI Plugin comes at a crucial time when several apps and merchants are preparing to go live with this technology in the coming months. This shift has the potential to disrupt the stronghold that PhonePe and Google Pay have on the market. These two platforms currently command a combined 80% of the UPI market share, with PhonePe at 47% and Google Pay at 33%.
The fear is that if larger merchants like Swiggy, Zomato, Flipkart, Myntra, and Dream11 transition to in-line or in-app payments using the UPI Plugin, it could substantially erode the market share of PhonePe and Google Pay. This could reshape the dynamics of the UPI ecosystem and foster competition.
The Significance of UPI Plugin Adoption
The UPI Plugin addresses a long-standing demand from ecosystem players, including merchants, payment processors, and banks. Around 57% of all UPI payments are merchant transactions, half of which are conducted online. This means that if a substantial number of merchants adopt the UPI Plugin, it could have a significant impact on the transaction volumes of PhonePe and Google Pay.
Furthermore, online transactions currently account for nearly 60% of all transactions and are expected to increase to 75% in the coming years. The success of the UPI Plugin is vital to ensuring that this surge in online payments translates into higher success rates.
Navigating Entry Barriers and Uncertainties
Before the emergence of the UPI Plugin, merchants could integrate UPI payments by becoming third-party application providers (TPAP) like Google Pay or PhonePe. However, the process involves multiple approvals from the National Payments Corporation of India (NPCI), which can take more than a year due to compliance, certifications, and paperwork.
Smaller startups faced hurdles due to the stringent requirements and extended timeline, hindering their ability to experiment and innovate quickly. This led to the TPAP landscape becoming a club of elite players. The UPI Plugin aims to address this issue by offering a more streamlined solution for merchant integration.
NPCI’s Dilemma and the Duopoly
The NPCI desires to foster a more diverse UPI ecosystem with additional players taking on the dominance of PhonePe and Google Pay. However, attempts to reduce the market share of these platforms have had limited success. The initial rule that no single TPAP should have more than 30% market share was extended by two years due to potential disruption.
The UPI Plugin emerged as a potential solution to NPCI’s dilemma. It offers a simplified way for merchants to integrate UPI payments, enabling more players to participate and diversify the ecosystem.
Challenges and Outlook
Despite its potential, the UPI Plugin faces certain challenges, including merchants’ ability to adapt to new products, compliance concerns, risk management, and customer support. Large merchants are cautious due to legal uncertainties and operational complexities.
The success of the UPI Plugin hinges on merchant adoption, and platforms like PhonePe and Google Pay must adapt and strategize to remain competitive. As the UPI ecosystem evolves, it remains to be seen whether the UPI Plugin will be a disruptive force that reshapes the landscape or an innovation that fades into obscurity due to operational complexities and challenges. Only time will reveal the true impact of this groundbreaking technology on the digital payments industry.
