PhonePe vs Paytm: How do apps like PhonePe and Paytm earn money when UPI is free?

UPI has become a popular payment method. People use UPI-based apps like PhonePe and Paytm even for small payments. A recent report by the Finance Ministry stated that UPI transactions have become the most preferred payment method, accounting for 57% of payments.

According to a Bernstein report, UPI accounts for approximately 90% of total cashless payment volume and over 70% of value. However, the question arises: if most UPI transactions have a zero merchant discount rate (MDR), how do payment platforms make money?

Where are payment platforms getting funding?
The report states that cashless payments now account for approximately 50% of total spending in India. However, there are no fees when making UPI transactions. Since 2020, there has been a zero MDR on UPI transactions. Furthermore, the report states that peer-to-peer (P2P) transactions, while a significant portion of total volume, represent less than 10% of revenue. These transactions result in a small fixed fee shared between banks and app companies, approximately 0.30-0.4 basis points of transaction value.

Net Revenue Pool of ₹15,000 Crore
According to Bernstein, the revenue model for platforms like Paytm and PhonePe has significantly improved in recent years. An estimated net revenue pool of approximately ₹15,000 crore is projected for FY25, stemming from a gross revenue pool of approximately ₹250,000 crore. The gross figure of ₹250,000 crore represents the total amount earned from payments. After subtracting processing costs such as technology and banking fees, the net revenue of approximately ₹15,000 crore remains. Simply put, even without lending or financial distribution, payments alone are generating significant scale.

75% of Revenue from Merchants
The most important finding of the report is that merchants are the major source of revenue. Although consumer transactions are high, merchant payments contribute approximately 75% of total revenue.

Which sectors are driving revenue growth?
Credit Card Processing - Credit card spending is growing by more than 20% annually. Credit card transactions attract higher fees than typical UPI debit transactions. Therefore, when customers use credit cards, platforms earn more.

Bill Payments - The Bharat Bill Payment System (BBPS) processed transactions worth more than ₹10 trillion in FY25, an increase of approximately 80% from the previous year. Compared to typical UPI transfers, platforms earn up to 8-10 basis points on bill payments.
POS machines and Soundboxes - Devices like POS machines and Soundboxes have also become a steady source of revenue. They earn merchants' rent. They generated approximately ₹2,000 crore in revenue in FY25.

How are margins growing?
According to Bernstein, overall net payment margins are approximately 56 basis points of transaction value. Platforms with a strong merchant mix earn up to 815 basis points. This is why some platforms generate higher revenues despite processing lower transaction values.

Credit mix will further increase profits.
Net revenues are expected to grow at approximately 20% annually over the next five years, reaching ₹38,500 crore by FY30. Currently, credit-based payments account for approximately 20% of total cashless payment value. This could reach at least 25% by FY30. A 5% increase in credit share could boost industry margins by approximately 0.7 basis points. UPI-based RuPay credit cards are also growing rapidly. They currently account for approximately 40% of total credit card transaction volume and about 8% of value.

Real earnings from credit
Despite significant investments of approximately ₹15,000 crore, revenue per user remains low. Payment platforms earn less than ₹300 per customer annually, with profits of less than ₹150. For comparison, SBI Cards and Payment Services earn approximately ₹2,000 in pre-tax profits per active card.

Disclaimer: This content has been sourced and edited from TV9. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.