Is the New UPI Plugin Innovation Raising Concerns for PhonePe and Google Pay?

A recent blog post by Rahul Chari, Co-founder and CTO of PhonePe, sheds light on the challenges faced by a new Unified Payments Interface (UPI) innovation, the UPI Plugin. This innovation aims to simplify online payments for merchants by enabling them to receive payments through a virtual payment address without the need for a separate payments app. Despite its potential benefits, adoption hurdles and concerns have emerged within the digital payments ecosystem.

The UPI Plugin, also known as merchant SDK (software development kit), offers online retailers the ability to streamline payments within their platform. This means customers can complete UPI payments without being redirected to third-party apps like Google Pay or PhonePe. The aim is to enhance success rates and provide a seamless payment experience.

Rahul Chari expresses reservations about the UPI Plugin's feasibility and advantages. He argues that this approach shifts the responsibility from payment apps to sponsor banks and merchant applications, potentially introducing complexity and burden for merchants. The additional step of involving sponsor banks could contribute to payment failures.

The potential adoption of the UPI Plugin by major players like Swiggy, Zomato, Flipkart, Myntra, and Dream11 could have implications for UPI leaders like PhonePe and Google Pay. These companies currently facilitate the majority of merchant UPI payments. If significant businesses opt for in-line or in-app payments, PhonePe and Google Pay might see a reduction in their market share. Presently, PhonePe and Google Pay own 47% and 33% of the UPI market share, respectively.

Currently, merchant transactions account for around 57% of all UPI payments, with an increasing trend in online transactions. The UPI Plugin aims to address this segment and improve success rates. The success of this innovation is critical as UPI transactions constitute approximately 60% of all online transactions, with expectations of reaching 75% in the near future.

Before the UPI Plugin, businesses could integrate UPI payments via third-party application providers (TPAP) like Google Pay and PhonePe. However, the complex process of obtaining NPCI clearances and approvals often hindered small businesses and startups. The UPI Plugin was intended to simplify this process, but concerns about compliance and operational challenges have been raised.

PhonePe and Google Pay's dominance in the UPI landscape prompted NPCI to set market share limits. The extension of the deadline to reduce market share above 30% highlights the complexities in balancing growth and competition. Despite efforts to encourage new UPI providers, the duopoly remains prominent.

The success of the UPI Plugin rests on addressing operational issues and gaining merchant acceptance. While major players hesitate due to concerns about relying on a single bank, the potential benefits of a streamlined payment process cannot be ignored. With the digital payments landscape evolving rapidly, finding a balance between innovation and practicality is key.

The UPI Plugin introduces an innovative approach to online payments, aiming to enhance success rates and simplify the payment process for merchants. However, challenges related to adoption, compliance, and operational complexities must be carefully addressed. As the digital payments landscape continues to evolve, striking a balance between convenience and practicality will be crucial in shaping the future of UPI-based transactions.