How will UPI based payments app make money?

I have come across multiple articles highlighting how after abolition of PSP fees for UPI transactions, there will be no way for UPI apps like Google Pay, PhonePe etc, to make money. I tried to do some thinking on this subject and will try to present my thought process here.

The purpose with which UPI was launched was to offer merchants a convenient way to accept and process payments, meaning every merchant with a decent technology team will be able to become a PSP and accept payments from customers. This meant that instead of going to a CCAvenue or Billdesk or TechProcess or Atom, merchant will be able to become a PSP to accept payment through UPI. Under traditional arrangement merchant would be paying a fee to the payment gateway (since we are talking UPI, the equivalent payment mode for this in traditional way would be Netbanking) to the tunes of around 1.4% thus becoming a PSP would be a cheaper and preferred way for merchants.

If we look at it from above perspective the motive of UPI P2M was never to offer new business models to players like PhonePe instead it was intended for Amazon to accept payments at cheaper rate with more convenience by launching Amazon Pay as a native payment mode. Many players in the industry like MakeMyTrip, Swiggy, Cleartrip etc are using UPI with the intent of giving a native payment experience.

If we talk specific of Google Pay, Google’s primary source of revenue is ads. So far google was able to track efficiency of an ad up to the point of click. With a native payment mode, google can actually track right up to fulfillment step. This was one of the reasons Google has been trying to launch a payment app for many years now. UPI offers them a cheap and efficient way to do that thus making their job much easier. Even if they don’t make a single penny from processing payments, they gain a lot by way of gathering valuable information, which can generate significantly higher returns in the form of helping them enhance the efficiency of their ads.

Let’s talk BharatPe now. I think they will face the biggest heat of this decision even to the extent of making their entire current business model unviable and force them to think of alternate sources of revenue. Most of their merchant base is smaller businesses and their business is completely dependent on UPI P2M. In my opinion, one of the key sources of revenue for them will be providing access to various online/offline products dedicated for SMBs to their merchant base and generate commission income in the process. In the long run they will have to create additional products and services for their target client base and charge them for those.

PayTM is another big player, who will be hit with a double edged sword in the form of WhatsApp Pay for P2P and zero fee for P2M. However based on their recent move they have already made peace with zero P2M fee and seems like they know what they are doing.

Last big player in this bandwagon is PhonePe. What would be the fee being paid by Flipkart and its other group entities for processing NetBanking payments? If that entire volume shifts to UPI, that would be the extent of saving PhonePe would be generating for Flipkart group. Would this make PhonePe a multi-billion dollar entity it has been projected to be? The simple answer is, no. They would not have become that multi-billion dollar entity relying only on UPI P2M revenue anyway. They already have shown their ambition of becoming a financial services conglomerate in the lines of PayTM and continuing to acquire users and merchants on their platform and processing transactions for them is in their interest, even at the cost of burning cash.

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