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PhonePe’s calls are paying off – Banking & Finance News

PhonePe’s calls are paying off – Banking & Finance News

In a world of fragile Fintechs, PhonePe’s has been a stand-out story. As it closes in on ten years of its existence, revenues have crossed Rs 5,000 crore. These have come largely from payments transactions, a business which most believed, could at best be a loss-leader. Not only are revenues flowing in, they are doing so with much less incentivising than in the initial years; the cash backs —used to win over customers—are now down to just Rs 15 crore from approximately Rs 950 crore in FY19. And net of Employee stock ownership plan (ESOP) costs, profits in FY24 were Rs 197 crore. Business has been especially brisk for use-cases such as money transfers, mobile recharges and bill payments. 

But given how margins in the payments business are wafer thin, PhonePe has explored half a dozen new revenue streams. The idea is to cross-sell financial products –loans,-insurance, mutual funds and wealth products —to its 550 million users. Its early days and as Kartik Raghupathy, Head, IR and Strategy, says the payments will continue to remain its core and will remain a large portion of the business in terms of contribution to top line and bottom line. 

At the same time, the company, Raghupathy says, is building a meaningful financial services distribution business. “These are the two, I would say that are shaping up well,” he says. 

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The share of financial services, in the total revenues of Rs 5,046 crore in FY24, is low because most products were launched in 2023. But Raghupathy is confident they will contribute “materially to the top line and the bottom line in the next few years”.

To be sure, lending and insurance products can deliver better margins than payments transactions and PhonePe is working with several use cases to make money. Ansuman Deb at ICICI Securities believes PhonePe’s sheer scale in payments differentiates it from peers. It enables better operating leverage in financial services which operates via several independent segments “but cohesively build solid earnings prospects”.

But, even as it plays for scale, PhonePe is clear it will not build a balance sheet. “We are distributors by DNA,” says Raghupathy. The decision not to build a loan book is probably a good one, say experts, given how the Fintech lending experience has been somewhat mixed. Fewer than a handful of Fintech lenders have been able to stay afloat. 

At LendingKart, for instance, credit costs have gone up to 3.5% of average managed assets, compared to 2.3% the previous year driving down stand-alone net profits in FY24.

But while the potential to source small borrowers is huge, sustaining the growth will not be easy. For one, the growth will depend on the appetite of the lenders to disburse unsecured loans to individuals and micro and nano enterprises at a time when the regulator is becoming strict. 

“Lending has the best revenue potential but the banks and NBFCs must have risk appetite,” says an industry insider. Also, while banks may not be nifty enough to start owning the borrowers, NBFCs may be smarter, points out an industry executive. Again, business could slow down once data privacy laws kick in and the outreaches and consents increase. 

“It’s unlikely though that many customers will mature,” says the CEO of a Fintech. So, not having any skin in the game can also hurt. But, the wealth piece—Share.market– can be scaled up since the addressable opportunity is big even if

margins may be thinning. The rise of Groww and Upstox, experts say, proves there is room for challengers. 

There is of course, the possibility that the government subsidies—-paid in lieu of the zero MDR on UPI and which contribute 10% to revenues– may stop though that is unlikely. 

As Vivek Mandhata, managing director & partner at Boston Consulting Group, observes, Fintechs are making big investments, driving innovation and building the rails for more borrowers to access formal credit. Experts also point to the strong technology platforms that companies like PhonePe and others have built. Raghupathy believes that to achieve leadership in payments one needs to offer a seamless, reliable, experience, adding that to handle immense scale efficiently is a differentiator. It is probably one of PhonePe’s moats. 

The company has decided to own the data services, rather than outsource them and has invested heavily. Spends on the servers, according to PhonePe’s Chief Financial Officer (CFO) Adarsh Nahata, account for 50% of the firm’s capex. 

Given how the Reserve Bank of India (RBI) is becoming stricter with fintechs, it is critical they play by the rules. There are enough instances of businesses coming apart overnight because the regulator doesn’t find the modus operandi kosher. Mandhata highlights the fact that the stronger fintech players have, in the last few years, focused on governance. “They are all making sure they stay on the right side of the regulator,” he said, adding compliance is now taken very seriously. 

PhonePe prides itself on the fact that it has had no run–ins with the regulator. “I would say corporate governance is one of our moats,” says Raghupathy.  PhonePe has been fortunate that National Payment Corporation of India (NPCI) is allowing it to enjoy a 50% market share in the UPI space. While a growing market would see an increase in the user base even with a cap, it’s nonetheless a concern. For the moment, PhonePe seems to be justifying the billion dollar tab for coming home.


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