Now UPI has become a popular method for payment. People also use UPI based apps like Phone Pay and Paytm to make small payments. A recent report by the Finance Ministry states that UPI transactions have now become the most preferred method of payment and it is responsible for 57% of payments.
According to a report by Bernstein, UPI accounts for about 90% of the total cashless payment volume and more than 70% of the value. Still, a question arises that if most UPI transactions have zero merchant discount rate (MDR), then where do the payment platforms earn money from?
Where is the payment platform getting funding from?
The report says that cashless payment has now become almost 50% of the total expenditure of the people in India. But when you do UPI transaction, you do not have to pay any fee. There is zero MDR on UPI transactions from 2020. Additionally, the report shows that peer-to-peer (P2P) transactions make up the majority of total volume, but account for less than 10% of revenue. These transactions generate a small fixed fee shared between the banks and app companies, which is approximately 0.30.4 basis points of the transaction value.
Net revenue pool of Rs 15,000 crore
According to Bernstein, the earning model for platforms like Paytm and PhonePe has improved significantly in recent years. FY25 sees an estimated net revenue pool of around Rs 15,000 crore, which comes out of a gross revenue pool of around Rs 2,50,000 crore. The gross figure of Rs 2,50,000 crore means the total money earned from payments. After deducting processing costs like technology and banking fees, the net income remains about Rs 15,000 crore. Simply put, payments alone are creating significant scale, even without lending or financial distribution.
75% of revenue comes from traders
The most important thing of the report is that traders are the major source of income. Although the number of consumer transactions is high, merchant payments contribute about 75% of total earnings.
Earnings are increasing from which sectors?
- Credit Card Processing- Credit card spending is increasing by more than 20% every year. Credit card transactions attract higher fees than normal UPI debit transactions. Therefore, when customers use credit cards, platforms earn more.
- Bill Payments- Bharat Bill Payment System (BBPS) processed transactions worth more than Rs 10 trillion in FY25, an increase of almost 80% from the previous year. Compared to ordinary UPI transfers, platforms earn up to 8-10 basis points on bill payments.
- POS Machine and Soundbox- Devices like POS machines and soundboxes have also become stable sources of income. They earn money from merchants in the form of rent. They generated an income of around Rs 2,000 crore in FY25.
How are margins growing?
According to Bernstein, the overall net payment margin is approximately 56 basis points of transaction value. Platforms with a strong merchant mix earn up to 815 basis points. This is the reason why some platforms generate more revenue despite processing less transaction value.
Credit mix will further increase benefits
Net revenue can grow at the rate of about 20% annually in the next 5 years and reach Rs 38,500 crore by FY30. At present, credit based payments constitute about 20% of the total cashless payment value. By FY30 it could be at least 25%. A 5% increase in credit share can improve industry margins by about 0.7 basis points. RuPay credit cards based on UPI are also growing rapidly. Currently they account for about 40% of the total credit card transaction volume and about 8% of the value.
Real income comes from credit
Even after a huge investment of around Rs 15,000 crore, the earning per user is low. Payment platforms earn less than Rs 300 annually from a customer and the profit margin remains less than Rs 150. For comparison, SBI Cards and Payment Services makes around Rs 2,000 profit before tax on its active cards.
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