The adoption of UPI (Unified Payment Interface) has surged over the past five years, driven by the widespread use of smartphones and the availability of high-speed internet across India. Players like PhonePe, Paytm, and Google are vigorously competing to establish a significant foothold within India’s digital payment market. Amid this techno-financial battleground, a game-changing innovation has emerged – the UPI Plugin or merchant SDK (software development kit). This innovation is akin to installing a turbocharger in a high-performance car, enhancing the sense of convenience and speed for customers.
In the UPI payments arena, numerous players have rolled out their own variations of the Merchant UPI Plugin in the last few months. This has sparked a vibrant debate among prominent tech leaders in India’s digital payment landscape. The focal point of this discourse revolves around the potential pros and cons associated with integrating this plugin into their respective UPI platforms.
Before delving into the advantages and disadvantages, let’s begin by understanding what exactly the UPI Plugin or Merchant SDK is.
What Is UPI Plugin Or Merchant SDK?
The UPI Plugin or merchant SDK is a pioneering product designed to revolutionize the UPI payment landscape for online merchants. This ingenious solution empowers merchants to seamlessly incorporate a virtual payment address, streamlining the collection of funds without the need for an external UPI payments app. This innovation paves the way for faster and more seamless transactions, sparing customers the need to navigate to external platforms, such as Google Pay or Phone Pay.
For instance, consider a scenario where a Swiggy user opts for UPI payment. Traditionally, this choice redirects the user to a UPI app like Google Pay or PhonePe, initiated by a notification prompt. After payment, the customer returns to Swiggy to conclude their order. Unfortunately, this additional step occasionally results in payment failures attributed to various factors, besides taking additional time to place an order.
Upon the integration of the Merchant UPI Plugin, transactions take place seamlessly within the Swiggy app itself, eliminating the need to navigate to a specific UPI app. In other words, integrating Merchant SDK will allow customers to make in-app purchases effortlessly.
Challenges for Merchants
Notably, key players in the payment arena, such as Paytm, Razorpay, and Juspay, have empowered their merchants by integrating the SDK. This move aims to enhance success rates by a potential 15 per cent, promising a more favourable payment landscape.
However, PhonePe’s co-founder and CTO, Rahul Chari, introduces a thought-provoking counterpoint. In a blog post, he sheds light on the potential hurdles surrounding a cutting-edge innovation known as the Merchant UPI Plugin. Chari questions the extent of the UPI Plugin’s technical advantages in boosting success rates. He argues that, rather than offering significant technical enhancements, this approach shifts the responsibility from payment apps to the sponsor bank and the merchant application. This could introduce added complexity and place a greater burden on merchants, potentially diverting their attention away from their core business objectives.
Chari’s perspective raises intriguing questions about the potential challenges associated with this innovation, reminding us that every technological leap brings with it a nuanced set of considerations and trade-offs.
Another significant challenge that might encounter by merchants in the adoption of the UPI Plugin revolves around their ability to keep up with the rapid introduction of new UPI-related features and functionalities that NPCI develops. This includes elements like UPI Lite, Rupay Credit Cards on UPI, and EMIs on Rupeay CC via UPI, all requiring seamless integration into their operations. The intricate process involves not only integrating these innovations but also ensuring operational stability, regulatory compliance, risk management, customer support, dispute resolution, and adherence to data localization rules.
Furthermore, the hesitation among major merchants to embrace the UPI Plugin can be attributed to several factors. One prominent concern is the potential requirement to align with a single bank for the creation of a merchant UPI account. This exclusivity could lead to an overreliance on a single bank, introducing a degree of vulnerability. Additionally, the support provided by banks can be inconsistent and problematic, further motivating merchants to seek the flexibility of multiple banks facilitated through various payment apps as a risk mitigation strategy.
Some of the bigger merchants want clearer legal terms and agreements with banks and payment gateways before they fully commit. The process of integrating the UPI Plugin is still complex and needs approval from the National Payments Corporation of India (NPCI).
Interestingly, there’s a debate about whether online merchants should be allowed to use the scan-and-pay method in UPI. Some think this might not be a good idea and could be a step in the wrong direction.
PhonePe has launched its own payment gateway without charging any commission. They might also add the UPI Plugin to their platform. But this needs cooperation from payment gateway firms and merchants. It’s not a simple task and needs time, effort, and money.
Here the question arises: How might the new innovation impacts digital payment giants like Google, PhonePe, and others who haven’t yet integrated this UPI plugin into their platforms?
PhonePe, Google Pay Lose Market Share
Imagine a scenario where major players in the merchant sector, such as Swiggy, Zomato, Flipkart, Myntra, and Dream 11, transition towards in-line or in-app payments. In this hypothetical situation, if PhonePe and Google Pay do not integrate this new UPI plugin into their platforms, there’s a high probability that a substantial number of customers might opt out of using these UPI apps for their payment transactions.
The resultant shift in consumer behaviour holds power to challenge the prevailing dominance of Google Pay and PhonePe, which presently boast market shares of 47% and 33%, respectively, within the UPI domain. As a result, both of these UPI payment giants might experience a substantial decline in their customer base and market share.
Therefore, “They have every reason to be concerned,” states a senior executive closely associated with the National Payments Corporation of India (NPCI), the overseeing body of UPI.
As the digital payment landscape continues to evolve, it’s intriguing to consider whether the UPI Plugin will be able to overcome these obstacles and pave the way for a more accessible and seamless payment ecosystem for merchants of all sizes.
The Importance of UPI Plugin
On the flip side, embracing the UPI Plugin offers a plethora of advantages. The new UPI innovation has long been coveted by various stakeholders in the ecosystem, including merchants, payment processors, and banks. Presently, merchant transactions account for approximately 57% of all UPI payments. This scenario suggests that PhonePe and Google Pay could potentially lose a significant portion of their transaction volume if a substantial number of merchants opt for this new solution.
Interestingly, nearly 60% of all online transactions currently rely on UPI, which is projected to ascend to a staggering 75% in the forthcoming years. Consequently, the success of the UPI Plugin becomes pivotal in ensuring that a substantial majority of online payments stand a heightened chance of success. It’s worth noting that third-party application providers (TPAP) primarily generate revenue by facilitating merchant transactions, emphasizing the significance of locking merchants into their respective ecosystems for companies like PhonePe and Google Pay.
A Potential Hurdle: Entry Barrier
Prior to the emergence of the UPI Plugin, one of the methods through which merchants could seamlessly integrate UPI payments into their platforms, whether it be websites or apps, was by becoming a Third-Party Application Provider (TPAP), akin to Google Pay or PhonePe. This approach was even adopted by major players like Tata Neo and Amazon, among others.
In a technical sense, any startup or merchant has the potential to become a TPAP app like PhonePe or Google Pay. However, this path required navigating through a series of rigorous steps, including obtaining multiple approvals from the National Payments Corporation of India (NPCI). These approvals involved various facets such as compliance, certifications, and paperwork, a process that could extend over a year’s time. The certifications encompassed diverse aspects like risk management, customer support, dispute resolution, and maintenance.
The reality is that while larger merchants with substantial funding, such as Flipkart, or established payment apps like Cred, could afford to wait for the extensive approval process, smaller startups faced more significant challenges. Their business models often hinged on UPI integration, and a year-long wait could stifle quick experiments or necessary pivots during their early stages. Additionally, smaller startups may lack the necessary engineering resources to navigate this complex and time-consuming process, as pointed out by a founder within the payments industry.
In essence, TPAP apps have become somewhat of an exclusive “private club of elites.” Furthermore, the nature of UPI’s person-to-person money transfer, based on the network effect, has inadvertently restricted the entry of newer players into the market.
The birth of the merchant SDK marks an evolution from the previous TPAP SDK, which failed to gain traction among its intended user base – merchants. The earlier product aimed to achieve a similar objective to what the UPI Plugin proposes today. However, due to its inherent complexity and the need for multiple approvals from both NPCI and banks, the TPAP SDK struggled to gain momentum and was unsuccessful in taking off.
The success of the UPI Plugin depends on everything working together – payment gateway providers, merchants, and regulators. While it offers great benefits, making it work well requires a joint effort to overcome challenges and make digital payments smoother for everyone.
