The Playmakers of UPI

Whenever I try to explain the work I have been doing at Razorpay, a common question I get asked is “Can I download Razorpay’s app from Play Store” or “Is Razorpay similar to PhonePe”. PhonePe is B2C company, whereas Razorpay is B2B company so a common man is more likely to use PhonePe’s services directly than Razorpay’s. So today I’d like to clear all the confusion and throw some light on all the playmakers of UPI in India.

All UPI transactions can be classified into 2 categories — Peer-to-peer (P2P) and Peer-to-merchant(P2M). P2P transaction is the one where one person pays to another person using some third-part application(TPAP) such as PhonePe or Gpay. P2M transaction is the one where a person pays to a merchant in return of the goods or services provided by the merchant.

Let’s look from a customer’s perspective first since it is the more familiar experience.

UPI for customers

Consider a person named Virat, who has an account in HDFC bank, uses PhonePe as a TPAP. PhonePe is TPAP and provides UPI compliant app to the end-user customer to facilitate UPI payments via sponsor Payment Service Provider(PSP) banks. PhonePe has partnered with Yes, Axis and ICICI banks as PSP. These are the acquiring PSP responsible for assigning and managing customer UPI IDs or Virtual Payment Address(VPA) eg virat@ybl.

Banks, generally outsource the tech to companies such as Juspay, Sarvatra. These companies are known as UPI Switch — payment processing entity that connects with NPCI to processes UPI transactions.

1. Acquiring Switch — powers the Payee & Payer PSP side which is primarily involved in either the customer / merchant acquisition.
2. Issuing Switch — the switch that sits at the remitter or beneficiary side of the bank and responsible for the credit & debit leg of the transaction.

Currently, PhonePe and Gpay collectively have captured around 85% of the market share in customer TPAPs. Any customer who is making a payment to a merchant(like MakeMyTrip, Zomato,etc) has to switch his app to Gpay/PhonePe , complete the transaction and come back to the merchant app. This leads to a greater customer drop off for the merchants on the checkout. Also, PhonePe & Gpay could take advantage of this monopoly and start charging these merchants for processing their payments. Here is where Razorpay comes to eliminate these challenges and empower these merchants who are looking to become TPAPs themselves.

https://finshots.in/infographic/upi-market-share-in-india/

UPI for Merchants

Now, shifting our focus on the merchant side. So why do merchants need payment aggregators(PA) like Razorpay ?

1. PAs provide a single unified solution for merchants to accept payments from their customers via any payment method — UPI, Cards, netbanking, etc.
2. PAs take care of the merchant onboarding — KYC and other legal compliances enforced by banks for merchants to accept payments.
3. PAs handle the reconciliation and settlement of funds from the bank to merchant.
4. PAs provide multiple gateway support. So for example, if ICICI bank goes down, PAs have integration with other banks which ensures that merchant business is unaffected.
5. PAs provide value-added services like fraud detection, recurring billing, subscription management, and marketing tools.
6. Merchants can focus on their core business rather than worrying about the payment processing.

Looking at the complete picture :

Now, Razorpay is trying to go 1 step deeper into the ecosystem by developing an in-house UPI Switch.

How will this benefit Razorpay ?

1. Currently, external Switchs/gateways account for ~4% of the failures and nearly 20 hours of unplanned downtime every month from these gateways. With it’s own UPI Switch, a 4–5% boost in success rate will be experienced by merchants using Razorpay.
2. Razorpay is currently dependent of these gateways for Go-Live of any new feature. With it’s own UPI Switch, 10x faster go-to market for any feature. Because of it’s reputation and agility to develop new features, NPCI partners with Razorpay to test new features before going live in the market.
3. Earn a larger share of the merchant discount rate(MDR) from the merchants — the fees charged to merchants for providing services to accept payments.
4. Complete control of the UPI ecosystem. New products can be built on top of Razorpay’s UPI Switch , eg a product for merchants to enable in-app payments from it’s customers.