PhonePe’s Profit Puzzle: Why UPI Dominance Isn’t Enough

In the run-up to its $1.2-1.5 Bn public listing early next year, PhonePe is busy resolving its biggest challenge: wafer-thin margins in its core payments business and the need to build a strong bottomline and a safety net of profits. 

The Walmart-owned fintech major, which commands more than 46% of the UPI market, is eyeing a listing at a $12-15 Bn valuation — a whopping 9-23x revenue multiple — in the IPO. More details will be clear when PhonePe’s IPO filing is approved after its confidential filing earlier today. 

The company’s attempts at addressing the overdependence on UPI are clearly visible in its FY25 numbers. It reported a 40.4% on-year surge in revenue to INR 7,114 Cr, but the contribution from the payments business was reduced to 88.5% from 95% in FY24. 

The payments biz grew nearly 23% to INR 6,299 Cr, but revenue from non-payments businesses saw the biggest increase, soaring over 200% to touch INR 600 Cr from around INR 200 Cr in FY24. This includes digital lending, payment gateway and aggregator business, insurance broking and other non-core verticals that make up the PhonePe super app experience. 

The Sameer Nigam-led company’s net losses declined 13.4% in FY25 to INR 1,727.4 Cr from INR 1,996.1 Cr a year back. PhonePe’s lead in the UPI payments app space has not exactly translated into profits. It reported an EBITDA loss of INR 413.6 Cr in FY25, down 54% from FY24, even as EBITDA margin improved to -6% in FY25 from -18% the previous year.  

And, that’s where the paradox lies. UPI can’t steer PhonePe towards profitability just yet. The zero merchant discount rate or MDR is one factor, but recent speedbumps for UPI and payments businesses have tempered growth rates. 

A flurry of GST notices pushed vendors to turn to cash in multiple cities and stop accepting UPI. The long-term impact of this is yet to be ascertained. The other setback was the slapped a blanket ban on real-money gaming last month, driving UPI transactions down 23% and 26% in volume and value terms from July. 

PhonePe, which plans to go public much ahead of its sister company Flipkart, has begun mapping out alternative revenue channels to jack up the margins. 

So the crucial question is whether these revenue streams can grow fast enough for PhonePe to justify the valuation it’s looking to get from the IPO? Let’s dive in:

The UPI Engine Has Speed Limits

After years of being the champion of India’s fintech ecosystem, UPI has earned a worrisome reputation. Many fear that there’s too much dependency on the payments channel and even an MDR might not exactly change its paradoxical nature.  

As per NPCI data, UPI payments have grown 17.7% in monthly volume terms since January 2025, but recorded a modest 5.8% growth in terms of total value of transactions. There was even a marginal dip in PhonePe’s UPI market share from 47.22% in June 2025 to 46.64% in July 2025.

For PhonePe, the 23% on-year growth rate of the payments vertical was substantially lower than the 77% surge it saw in FY24. There’s some evidence that the competition in the space has cramped companies further. 

While UPI will continue to grow in light of recent changes such as increased payments limits, the segment is a major headache for companies chasing profitability. The fact is that the over-reliance on UPI and payments, particularly merchants-centric services, has not moved the needle on PhonePe’s profitability. 

PhonePe eclipsed Paytm, its closest competitor, in terms of revenue, but just a cursory comparison between the revenue distribution of the two shows just how skewed PhonePe’s revenue tower is. In FY25, Paytm brought in 58% of its total INR 6,900 Cr revenue from payments, whereas in PhonePe’s case this is more than 88%.  

In contrast to PhonePe, Paytm clawed back to profits at the end of FY25 and continued this momentum in FY26.  

For PhonePe, the core payments business includes interchange fees charged from merchants, subscription from devices and bill payments. 

Industry sources suggest that merchant subscriptions for soundboxes are a key lever of profitability in the payments business as much as 80-90% of margins, either through interchange fees (on wallet transactions), subscription top-ups, commissions on tools like QR codes and soundboxes.

Besides this, PhonePe has non-payments revenue streams linked to merchant payments such as merchant loans, bill payments and insurance.  

The soundbox is one segment where PhonePe needs to pump up the volume. An apples-to-apples comparison with Paytm is not possible at this stage given the lack of comparable disclosures. Paytm claims to have a total reach of 4.4 Cr merchants compared to PhonePe’s claim of ”4 Cr+ merchants”, but how many of these are merchants paying a monthly or annual subscription fee is unknown. 

“The impact on payment margins, subscription devices have also been closely tied to lending to merchants based on their daily transaction volume or value, which is stored in these devices and this acts as a key differentiator,” a senior executive at a rival digital payments app said, requesting anonymity since they were not authorised to speak to the media. 

The payments business thrives in a high-volume, low-margin UPI ecosystem, but regulatory constraints such as zero MDR on UPI transactions and competition from Paytm and Google Pay limit PhonePe’s profit potential.

There’s also the potential of a transaction share limit which has come up time and again, which could further dent PhonePe’s payments revenue. 

The company’s three-pillar strategy of predictable revenue growth, diversification, and bottomline improvements aims to address this.

Going Non-Core: Fruits Of Diversification

PhonePe’s efforts to hedge against regulatory uncertainty linked to UPI payments started bearing fruit in FY25, with the financial service businesses, including insurance and lending, leading the way. 

This vertical’s revenue more than doubled to INR 557 Cr from INR 207 Cr. The contribution from financial services to the overall revenue pie too doubled to 8%. 

Rival Paytm has a strong financial services arm, which made up 25% of its FY25 revenue, despite the RBI cracking the regulatory whip on the company. 

PhonePe’s ecommerce and other ventures like stockbroking, mutual fund distribution, and marketplace platform service revenues stood at INR 57 Cr, a mere 1% of its FY25 topline. The company charges commissions from mutual funds, insurance providers and lenders under the financial services business. 

But Paytm has the lead in terms of lending by several leagues. In July 2024, PhonePe claimed to be disbursing INR 300 Cr loans every month, while Paytm disbursed more than INR 2,508 Cr in merchant loans alone for the April-June 2024 quarter, and over INR 5,000 Cr in loans disbursed overall. 

A more direct comparison of these two fintech giants would only be possible once we get disclosures from PhonePe in the coming months.  

Merchant Lending: Stalemate Is On

Merchant lending continues to be PhonePe’s most promising-yet-challenging diversification bet. With a network of over 4 Cr merchants and rich UPI transaction data pool, the company is well-positioned for credit underwriting. 

PhonePe’s progress in India’s increasingly crowded merchant lending space can be hindered by competitive products from Paytm, BharatPe, Jio Financial Services, a host of lending apps, banks and various NBFCs. 

BharatPe CEO Nalin Negi had in a conversation with Inc42 earlier this year broke down an industry-wide phenomenon on how low-risk and high-quality credit and good NBFC partnerships were rewriting digital lending scripts in India with the overall industry poised to gain as regulations become clearer. “This will benefit the whole ecosystem as a whole if the underwriting policies are good,” he said.

PhonePe’s relatively late entry, after it acquired the NBFC licence in 2023, had left it at a slight disadvantage, but this is changing quickly. PhonePe will also benefit from the inherent margin accretion of running an NBFC and directly lending through that entity. 

The Bengaluru-based has also launched secured loans against mutual funds to venture into high-value lending.  

But despite its data and NBFC advantage, PhonePe needs to convert transaction insights and high customer engagement into robust credit and lending models and efficient acquisition funnels. 

Listing Paradox: IPO Pressure And Profit Targets 

Naturally, like all IPO-bound companies, PhonePe is under pressure to show that it has a clear path to profits and is making meaningful improvements at an EBITDA level at the very least. 

Scaling up the lending business is one clear way, but the fintech giant has some interesting synergies with other in-house businesses. 

There’s the Indus Appstore which is positioned as a homegrown rival to Google Play. Then there’s Pincode, a merchant-centric quick commerce platform that is gradually building up steam. And finally there’s Share.Market, which PhonePe will be looking at as a high-engagement opportunity for its core payments user base.  

As PhonePe prepares for its IPO, at a potential valuation of $12-15 Bn, investors will scrutinise the company’s ability to grow each of these verticals and how they bring revenue synergies. 

For instance, PhonePe will need to demonstrate its ability to tie in merchants payments with Pincode and its digital payments business with its app store. The synergies between the payments user base and investment platform Share.Market are evident. 

PhonePe’s FY25 revenue pace which allowed it to overtake Paytm is a favourable factor, but its slower diversification exposes it to UPI policy risks. 

Paytm showed resilience even as it grappled with revenue volatility after the RBI cracked the regulatory whip on the company. However, the sale of Paytm Insider to Eternal for INR 2,400 Cr (close to $280 Mn) and selling stake in Japanese venture PayPay for $279 Mn helped a great deal in Paytm’s turn towards profitability. 

PhonePe needs to accelerate non-payments scale to match Paytm’s maturity in financial services, while Paytm has to rework its strategy towards revenue growth. “This competition will largely shape the investor sentiment as PhonePe enters the public market,” said an industry observer.

The FY25 adjusted profit is a positive signal for PhonePe, but Paytm has gone one step beyond with net profits. So meaningful revenue growth in lending, investment tech and ecommerce, valuation risks loom large on the IPO-bound payments aggregator. 

For now, PhonePe’s payments clout is both its strength as well as its weakness. Can the fintech giant step out of this shadow? 

[Edited By Kumar Chatterjee & Nikhil Subramaniam]