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PhonePe takes its diversification to Dalal Street
For most users, PhonePe remains a payments app. It is where bills are paid, QR codes are scanned, and money is moved between bank accounts at no visible cost.
But this perception does not reflect the business PhonePe is taking to the market.
As the Walmart-backed fintech prepares for a public listing, its UDRHP filed last month outlines a company that is expanding beyond payments, using UPI primarily as a distribution layer rather than a revenue engine.
In FY25, PhonePe reported revenue from operations of ₹7,114 crore, up 40% year-on-year. More notably, growth is increasingly being driven by businesses that sit on top of payments: merchant services, lending, insurance distribution, and newer platform bets, rather than UPI itself.
Payments: scale without pricing power
PhonePe processed over 9.8 billion transactions in December 2025 and continues to command around 46% of India's UPI transaction volume. Yet, UPI remains a low-margin system. Person-to-person (P2P) transfers, small merchant payments, and basic bill pay generate little direct revenue.The company appears to accept this structural constraint. Payments are positioned as a means of building habitual usage, trust, and data rather than profit. In effect, UPI is PhonePe's customer acquisition and engagement layer.
Within “consumer payments”, however, revenue does exist. PhonePe earns transaction-processing and service-distribution fees from mobile recharges, bill payments across more than 30 categories, travel and transit ticketing, and digital gold and silver. These fees are paid by partners (such as telecom companies, Bharat Connect, and online travel agencies) either as a percentage of transaction value or as fixed fees. The company also receives a share of digital incentives on certain low-value merchant UPI transactions and levies convenience fees on select services.
At scale, these relatively small fees contribute to a stable base, but they are not the primary drivers of profitability.
Merchant services: steadier economics
Merchant services form a more conventional revenue stream. PhonePe monetises its large offline merchant base through smart speaker QR devices, EDC machines, billing and point-of-sale (POS) software, and payment gateway services.These offerings generate revenue through hardware rentals, subscriptions, and transaction-linked fees. Compared to consumer UPI, merchant services offer clearer pricing structures and lower regulatory uncertainty, particularly among small businesses that rely on PhonePe as a core operating tool.
While not the fastest-growing segment, merchant services provide predictable cash flows and strengthen PhonePe's role in everyday commerce.
Financial services: growth, but with caveats
The growth in PhonePe's revenue mix is coming from financial services distribution, specifically, lending and insurance.In FY25, revenue from lending and insurance distribution rose to ₹452 crore, accounting for 11.55% of total revenue, up from 6.76% the previous year. In absolute terms, this segment more than doubled year over year, making it central to PhonePe's diversification strategy.
PhonePe operates as a lending service provider, not a lender. It connects consumers and merchants to banks and NBFCs, manages onboarding and repayments, and earns commissions on disbursed loans. The model is asset-light and scalable, but it also means PhonePe does not capture the full economics of lending.
Insurance distribution follows a similar structure. PhonePe distributes health, life, and general insurance products and earns commissions without taking underwriting risk. The company reports issuing close to four million policies annually, focusing on low-penetration categories such as motor and health insurance.
However, the DRHP reports lending and insurance together rather than as separate verticals, a sign that lending performance may be masking slower progress in insurance distribution. If insurance were scaling independently, it would likely be disclosed more prominently ahead of an IPO.
Wealth and platform bets
PhonePe has also expanded into wealth management through Share.Market, offering mutual funds and stock trading. With around 1.2 million accounts, the platform operates in a highly competitive space dominated by established brokers. Conversion from PhonePe's core user base remains limited, raising questions about the effectiveness of cross-selling.Beyond financial services, the company operates Indus Appstore, an Indian Android app marketplace that allows third-party payment gateways and supports multiple Indian languages, and Pincode, a B2B commerce enablement platform. Neither contributes substantially to current revenue yet. In essence, both are long-term bets rather than near-term growth drivers.
One advantage PhonePe clearly retains is operating leverage. With more than 300 million monthly active users, new services can be launched with relatively low incremental marketing costs. This leverage is most pronounced in Tier 2 and Tier 3 markets, where PhonePe has deep merchant penetration and where credit, insurance, and investment products remain underpenetrated. These regions represent both the company's largest user base and its biggest monetisation opportunity.
Likely risks
One structural limitation lies in PhonePe's attempts to obtain an NBFC licence. Applications submitted since 2021 have either been rejected or stalled. Without this licence, PhonePe remains dependent on partner banks and NBFCs, which capture most of the lending margins.This does not invalidate the company's distribution model, but it caps profitability unless regulatory approvals change.
Additionally, UPI pricing is controlled. Lending commissions are governed by RBI norms. Insurance payouts and commissions fall under IRDAI oversight. Any tightening of these frameworks could quickly compress margins.
The proposed NPCI rule to cap any single app's UPI market share at 30%, currently deferred until December 2026, adds another layer of uncertainty. With nearly half the market already, PhonePe has limited room to grow on payments alone. Slower growth in payments would weaken engagement and, by extension, cross-selling potential.
Past examples, such as RBI's tightened rules on credit card rent payments processed through payment gateways and aggregators, illustrate how high-margin streams can be affected by regulatory changes.
Takeaways
PhonePe's IPO is not a bet on UPI growth. That phase is mature. Instead, it is a bet on whether a dominant payments platform can translate scale into sustainable, regulated financial-services revenue.In FY25, PhonePe reported adjusted EBITDA of ₹1,477 crore and adjusted profit after tax of ₹630 crore. Non-payment revenues grew rapidly, but they still account for a minority of the total.
For public-market investors, the outlook is straightforward: if PhonePe can continue scaling higher-margin businesses without weakening the payments engine that feeds them, its second act could prove even more durable than the first.
Source: EconomicTimes
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