PhonePe In 2025: Escaping The UPI Paradox To Chase Profits
If scale were the sole metric of success, PhonePe’s 2025 would be an open-and-shut case of everything going just according to plan.
Commanding a staggering 46% of India’s UPI market, the Bengaluru-based fintech not only held its ground against arch-rivals Google Pay and Paytm but widened the gap, processing billions of transactions month after month. Yet, in the zero-MDR landscape of Indian payments, ubiquity does not automatically translate to solvency.
For years, a single question has loomed over the company: can this colossus of digital payments transform its user base into a profitable engine?
While PhonePe remains the undisputed king of the ecosystem, 2025 served as a critical litmus test. With a public listing on the horizon, the mandate was clear: the company needed its financial services engines to finally fire. After all, lending, insurance, and broking offer the kind of margins that razor-thin payment structures simply cannot match.
Did PhonePe finally outgrow its revenue diversification challenges in 2025?
The year offered both optimism and reality checks. Revenue rose by nearly 40% while losses narrowed to INR 1,172 Cr in FY25, signalling operational discipline and a more mature cost structure. Yet, the most significant shift was arguably outside the traditional payments stack.
Non-payment revenue streams, including insurance, lending, wealth, and small-business solutions, grew 208% year-on-year. Even if these segments are still nowhere near the size of the UPI business, they represent an essential direction of travel for a company preparing for a potential $1.5 Bn IPO in 2026.
The strategic narrative of PhonePe is clearly evolving.
What started as a pure-play payments engine is now positioning itself as a full-stack ecosystem, powered by new partnerships, new verticals, and a renewed push for monetisation beyond UPI transactions. Whether this shift is deep enough, mature enough, and profitable enough is the central question that will shape PhonePe’s next decade.
For much of its existence, PhonePe has benefited, and suffered, from the architecture of UPI. On one hand, UPI’s extraordinary user adoption created unprecedented scale. On the other, the absence of merchant discount rate (MDR) on most transactions limited PhonePe’s ability to monetise that scale. This paradox defined much of its 2025 strategy.
This isn’t to say the payments business is not a cash-flow positive vertical. Payments contributed 85% of total revenues for the fintech in FY25 and were profitable, according to management commentary. The payments thesis remains simple: charge commissions and value-added service fees from merchants and enterprises on the billions of transactions (more than 9 Bn in October 2025 alone) that the platform processes every month.
However, sources indicate that cofounder and CEO Sameer Nigam and his team remain wary of an impending UPI market share cap of 30% by the NPCI. This regulation, which might finally come into effect in 2026 after several postponements, would inevitably impact the fintech platform.
To break out of this cycle, PhonePe has increased its focus on margin-rich financial services, though the strategy here has been one of cautious execution.
“PhonePe has always been a cautious player in fintech. Unlike Paytm, they took conservative bets on lending, especially when digital lending post-pandemic was still in a regulatory grey zone. This cost them merchant partnerships which Paytm took advantage of, but the same applied to the timing of their listing; they did not rush it,” said sources familiar with the company’s strategy.
This measured approach helped PhonePe avoid the RBI’s crackdown on risky small-ticket unsecured lending, which almost destabilised Paytm.
On the flip side, PhonePe is finding it hard to navigate current challenges, given that Paytm is an established player in the B2B fintech space and multiple players are eyeing the merchant lending pie. Nevertheless, sources suggest they can list comfortably given their immense size within the payments ecosystem, their market share, and superior technology.
Sources close to the leadership say that PhonePe accelerated its partnerships with banks and NBFCs in 2025, but the company is not keen on pure-play lending, acting instead as a lending service provider (LSP).
“There has been a strong focus on the activation of on-field agents for efficient collection services and the prevention of fraud to grow the lending vertical alongside robust partnerships,” they added.
The lending portfolio saw steady growth in the past year, with the platform offering personal loans, home loans, and auto loans. For FY25, the lending vertical contributed 8% to the overall revenue share, representing a significant improvement from previous years.
According to sources aware of developments, the management aims to capture value from the very users who trust it with daily payments. This means pushing users down the funnel from UPI payments towards products that can deliver higher customer lifetime value.
In this regard, the vast amount of user transaction data at PhonePe’s disposal, due to its strong UPI position, is a key differentiator. The fintech aims to effectively leverage this for loan distribution while strictly controlling the NPA ratio.
Notably, while peers acquired stakes in banks (Slice, BharatPe) or acquired NBFCs (Navi, CRED, Paytm) to earn higher margins, PhonePe steered away from this path. In fact, it surrendered its Account Aggregator-NBFC licence to the RBI in February 2025. This suggests that the leadership is strictly focused on loan distribution rather than balance-sheet risk.
However, the vertical still faces structural limitations. Marketplace commissions offer lower margins compared to direct lending, and customer retention remains difficult in a hyper-competitive space. To counter this, PhonePe announced key partnerships in 2025 with SMFG India Credit for collateral-free merchant loans, DSP Finance for loans against mutual funds, and forayed into co-branded credit cards with SBI and HDFC.
Few areas in fintech are as critical to long-term profitability as merchant payments. Small businesses, kirana stores, and local retailers have traditionally formed the backbone of digital transaction growth. Beyond mere payments, merchants rely on POS devices, inventory tools, analytics dashboards, GST services, and small-ticket loans.
This is the segment where Paytm has historically held a competitive advantage, and where PhonePe, despite its enormous QR presence, has struggled to monetise effectively.
Strategic resets in 2025 offered promise. PhonePe partnered with SIDBI to bring millions of informal businesses under credit cover via faster e-KYC registration, issuing Udyam Assist Certificates, and providing access to the merchant payments stack.
These reforms could drive much-needed merchant engagement and unlock margin-heavy lending potential. But competing with the host of players, including newly listed Pine Labs, will be an expensive proposition.
For an IPO-ready fintech, the B2B gap is notable, especially considering that Pine Labs, which is entirely B2B focussed listed at a healthy premium this year.
To bridge it, PhonePe must accelerate adoption, perhaps through incentives or ecommerce integrations. If successful, merchant payments could become a high-margin pillar, but 2025’s progress appears incremental rather than transformative. Until PhonePe cracks this code, its revenue mix will remain skewed toward the low-margin consumer payments line.
The year gone by also saw PhonePe focus on expanding its insurance portfolio to drive accessibility and affordability. This aligns with the push into non-payment revenue, with PhonePe reportedly issuing 4 million insurance policies annually since 2023.
Product launches this year targeted underserved segments such as new vehicle owners and event-specific risks, leveraging the app’s 640+ million users for seamless onboarding. These initiatives aim to capture a larger slice of India’s low-penetration insurance market while competing with Policybazaar, Acko, and Paytm.
In the investment tech and wealthtech space, PhonePe relied on an improved user experience for its broking app Share.market.
Although the app saw a decline in active users by mid-2025, largely due to sectoral headwinds hitting the discount broking industry, the firm continued to leverage its tech stack to launch analytics tools. From a mutual fund analysis tool (branded CRISP) to investor education, PhonePe experimented with wealthtech to test user behaviour and cross-sell lending products.
At the moment, PhonePe appears likely to go slow on heavy investments into wealthtech given high customer acquisition costs. However, mutual fund distribution remains a massive opportunity, as proven by market leaders like Groww, Angel One or Zerodha.
No review of 2025 would be complete without touching on AI.
For PhonePe, partnerships were again the name of the game, as the fintech giant looked to build on its in-house tech stack with third-party tools. A tie-up with OpenAI in November integrates ChatGPT for personalised services like travel planning and financial queries. This is an industry-first move cementing PhonePe’s status as a tech-first platform.
But AI is rapidly changing the face of fintech. As banks turn to AI models and LLMs for the next phase of digital banking, platforms such as PhonePe also have to adapt. Will the Sameer Nigam-led startup look to invest in AI in 2026 and release proprietary models or IP that will cater to its specific needs?
In early 2024, PhonePe cofounder and CTO Rahul Chari said that while there is a lot of buzz around generative AI (GenAI), people often confuse AI with GenAI.
“PhonePe has been working with AI, especially with the subset of machine learning (ML). Machine learning models mostly learn from our sample data sets towards some sort of prediction with some sort of confidence. So the scope of what it can do is limited, but it is sharp,” Chari said at the time.
He added that ML models are bread and butter for PhonePe’s tech stack and given PhonePe’s scale, its AI systems can assess billions of parameters involved in everyday transactions.
“For risk and fraud detection we do around north of 330 Mn daily transactions. Even if you cover just a small percentage of these for fraud detection, that is significantly huge,” he added.
As PhonePe eyes a potential $1.5 Bn IPO in 2026, AI will be a key value unlocker.
While the developments of 2025 — from the trimming of losses to protecting market share to building out new verticals — signal preparedness, PhonePe has plenty of room to streamline further.
PhonePe’s 2025 encapsulates a fintech maturation story. It is leveraging UPI scale to experiment with diversification while addressing monetisation gaps through strategic resets.
If non-payment businesses scale fast enough and merchant tools gain traction, PhonePe could emerge with a robust moat, justifying its IPO ambitions. However, the path demands flawless execution.
Ultimately, 2025 was a year of promise, setting the stage for PhonePe to transition from a payments leader to a comprehensive financial powerhouse.
[Edited By Nikhil Subramaniam]
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