Why PhonePe is thriving

Written by Kapronasia || September 26 2023

There is usually good reason to be skeptical these days about a loss-making fintech with a sky-high valuation, but India’s PhonePe – valued at US$12 billion – could be an exception to the rule. The company has fought its way to the top of the subcontinent’s massive UPI payments rail, edging out Google Pay and Paytm, is gradually building out a comprehensive digital financial services ecosystem and continues to raise eyewatering sums from investors at a time when the easy money no longer flows.

PhonePe’s CEO and founder Sameer Nigam said in late August that the company expects to achieve operational profit by 2025, adding that by that time its payment, advertising, banking and insurance units would all break even. He made a crucial point in a speech at the launch of PhonePe’s stock trading platform: "We don't have to spend much on the marketing side there. I think at the group level, we have enough capital to deploy on Pincode and Share.Market; let them grow while we still hit EBITDA positive by 2025. I think it's doable," Nigam said.

If Nigam is confident that PhonePe can eschew a heavy subsidy outlay even as it launches new products in a highly competitive market landscape, then the strategy to build out the company’s suite of services starts to make a lot more sense.

Heavyweight backers

Raising money is not nearly as easy it used to be for fintechs, but PhonePe has been almost immune to the funding downturn, which has allowed to continue growing steadily in suboptimal market conditions.

To be sure, it helps to have Walmart, and its $441.7 billion in market capitalization, as your chief backer. “It is not crazy to think that both those businesses could be $100 billion businesses in the future,” Walmart Chief Financial Officer John David Rainey said of Flipkart and PhonePe at an investors’ conference in June.

Talk about a vote of confidence.

Meanwhile, the money keeps rolling in. In the first half of 2023, PhonePe raised $100 million from General Atlantic, $200 million from Walmart and US$100 million from Ribbit Capital, TVS Capital Funds (TCF) and Tiger Global.

UPI success

When it comes to PhonePe’s core payments business, low margins aside, the company is doing well. One cannot say it dominates UPI, but it has become the market leader with a 50% market share, edging past Google Pay. Given that there are almost 7 billion UPI transactions per month, it is no surprise that PhonePe’s total payments volume has exceeded US$1 trillion.

At the same time, PhonePe is benefiting from regulatory missteps. Several years ago, the National Payments Corporation of India (NPCI), the regulatory body that oversees UPI, said it would impose impose a monthly cap of 30% of transaction volume on third-party payment providers. Yet it never explained how it would enforce the rule, which would require denying services to the end customer. Most recently, NPCI extended the deadline for compliance with the monthly cap until December 31, 2024. It may ultimately put the rule on ice to avoid disrupting the UPI ecosystem.

At the same time, PhonePe is embedding itself ever deeper into the UPI ecosystem. It recently became the first payments fintech to link two lakh NPCI’s RuPay credit cards to UPI. PhonePe also aims to piggyback on UPI’s global expansion, where it sees an opportunity to move into the huge forex market.

In February, PhonePe said it would extend support for UPI international payments in the UAE, Singapore, Mauritius, Nepal and Bhutan. “Users will be able to make payments in the foreign currency directly from their Indian bank — just like they do with international debit cards,” PhonePe said in a statement.

Bright prospects

There are several other reasons to be sanguine about PhonePe. First, in March, the company announced that it had received an in-principle approval for its payment aggregator (PA) license from the RBI. This approval will allow the company to scale its payment solutions and enable digital inclusion for more Indian SMEs.

Second, PhonePe just launched an app store in India that will compete with Google Play. PhonePe will not charge developers any listing fee for the first year but plans to eventually move to a "nominal" cost. Further, PhonePe may undercut the U.S. tech giant as it does not plan to charge a commission for in-app purchases compared to the 15% to 30% Google usually takes.Indian companies have long wanted more choice when it comes to an Android app store: PhonePe aims to offer that to them. 

Third, while India’s Inc42 has declared that “PhonePe wants to be Paytm,” we would amend that statement to “PhonePe wants to pursue a business model similar to Paytm’s – but without the brutal cash burn. To be sure, PhonePe is no stranger to massive losses – it lost US$1 billion in FY2022 – but the company has also learned from the mistakes of others. It has witnessed Paytm go public before reaching profitability in order to give investors the exit they had been pushing for – and pay a price in the stock market before eventually getting on the right track.

With that in mind, PhonePe is correct to put off its IPO until at least EBITDA profitability if not outright positive net income. Having been founded in 2015, if it reaches its target of EBITDA profitability in FY2025, PhonePe will have done in a decade what Paytm has yet to accomplish in 13.