UPI plugin leaves PhonePe, Google Pay worried about dominance

A new UPI innovation has PhonePe and Google Pay worried

Unified Payments Interface (UPI) is a revolutionary payment system that allows users to transfer money instantly using a virtual payment address (VPA) without the need for bank account details or card information. UPI was launched by the National Payments Corporation of India (NPCI) in 2017 and has since become one of the most popular and widely used digital payment methods in India. According to NPCI data, UPI recorded 456 crore worth of transactions at INR 8.26 lakh crore ($111.2 billion) in December 2021, registering a year-on-year growth of 110%.

However, a new UPI innovation has emerged that could potentially challenge the dominance of the leading UPI apps such as PhonePe and Google Pay. The innovation, called UPI Plugin or merchant SDK (software development kit), enables online merchants to add a VPA to collect money without a payments app. This means that the payment happens within the merchant's app itself without going to a specific UPI app. For example, 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 eliminates this step and makes the payment process faster and smoother.

The UPI Plugin is being offered by payment gateway and processing firms such as Paytm, Razorpay and Juspay, who have enabled their merchants with the option of integrating the SDK with their apps. The firms claim that the UPI Plugin can improve the success rates of payments by up to 15%. Some of the merchants who have adopted the UPI Plugin include Zomato, Ola, BigBasket, Grofers, Dunzo and PharmEasy.

While NPCI and online merchants are gung ho about the new innovation, which enables faster payments, the UPI apps are probably worried about any potential challenge to their market share and revenue. PhonePe and Google Pay are the two dominant players in the UPI ecosystem, with 46% and 34.6% market share respectively in June 2021. These apps earn money by charging a fee to merchants for facilitating payments through their platforms. If more merchants switch to the UPI Plugin, they could lose out on a significant source of income.

PhonePe co-founder and chief technology officer (CTO) Rahul Chari expressed his concerns about the adoption of the UPI Plugin in a blog post in July 2021. He wrote that while he appreciated NPCI's efforts to innovate and improve UPI, he felt that the UPI Plugin could pose some challenges such as security risks, user experience issues, interoperability problems and regulatory compliance difficulties⁶. He also argued that the UPI Plugin could create an uneven playing field for different players in the UPI ecosystem and hamper its growth potential.

However, NPCI has defended its decision to introduce the UPI Plugin and said that it is in line with its vision of making UPI more accessible and inclusive for all users and merchants. NPCI said that it has ensured that the UPI Plugin adheres to all the security standards and guidelines of UPI and that it does not compromise on user choice or convenience. NPCI also said that it has issued guidelines capping the share of transactions handled by any third-party application providers (TPAPs) at 30% each to prevent market concentration or dominance.

The UPI Plugin is still in its early stages of adoption and it remains to be seen how it will impact the dynamics of the UPI ecosystem in the long run. It is possible that some users may prefer to stick to their preferred UPI apps for convenience or loyalty reasons, while others may opt for the UPI Plugin for faster payments or better offers from merchants. It is also likely that PhonePe and Google Pay will try to retain their customers by offering more features, benefits and incentives. Ultimately, the success of the UPI Plugin will depend on how well it can deliver on its promise of improving payment success rates and enhancing user experience.

UPI is undoubtedly one of India's finest innovations in fintech that has transformed the way people pay and get paid. It is also a testament to India's digital prowess and potential. As UPI evolves and innovates further, it will create more opportunities and challenges for all stakeholders involved. The key will be to ensure that UPI remains secure, interoperable, inclusive and user-friendly for everyone.

Source: 

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(5) Protecting UPI, a jewel among Indian fintech innovations. https://www.niti.gov.in/protecting-upi-jewel-among-indian-fintech-innovations.
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