Whalesbook
Record Growth Amid Shifting Subsidies
The Unified Payments Interface (UPI) is expected to handle around 240 billion transactions in fiscal year 2026. This represents a significant 30% rise from FY25's 185 billion transactions, itself up from 131 billion in FY24. Daily transaction volumes have also climbed, averaging 657 million this fiscal year, compared to 506 million last year, with some days recently exceeding 800 million. This expansion is occurring even as government financial support is reduced. The Rs 2,200 crore subsidy for FY26 has yet to be disbursed. Furthermore, total subsidy allocations for digital payments in FY26 have been cut to Rs 427 crore, a sharp 78% decrease from the Rs 2,000 crore provided in the previous year. This reduced subsidy is a concern for fintech companies that have relied on these incentives, particularly for promoting merchant payments.
Ecosystem Dominance and Profitability Concerns
UPI has become the leading force in India's digital payments, accounting for about 84.8% of retail digital payment volumes in the first half of FY25, outpacing systems like IMPS and NEFT. While digital payments grow globally, with India as a key driver in the Asia-Pacific, many fintech firms struggle with profitability. The widespread use of zero-fee services, fueled by past subsidies and aggressive customer acquisition, has led to very small profit margins. Only an estimated 15-20% of Indian fintechs are currently profitable, facing high operational and customer acquisition costs. For instance, PhonePe's revenue grew to Rs 7,114.85 crore in FY25, but its losses also widened. Paytm (One97 Communications) shows a highly negative price-to-earnings ratio, indicating significant profitability worries.
Government Stands Firm on Free UPI
Regulatory adjustments are being made to ease operations. The RBI recently clarified that peer-to-peer merchant transactions don't need to follow Payment Aggregator rules, making compliance easier for small merchants. Transaction limits are also being revised, allowing NPCI to set flexible caps up to ₹2 lakh based on payment type and merchant category. However, the Finance Ministry has repeatedly stated that UPI transactions will remain free of Merchant Discount Rate (MDR) charges. It has dismissed reports about reintroducing fees for large merchants as "false, baseless, and misleading." This position directly contradicts industry requests for a 0.3% MDR on UPI for merchants with turnovers exceeding Rs 40 lakh, a fee that was waived in 2020.
The Sustainability Hurdle for Fintechs
The core challenge for the UPI ecosystem is its sustainability without ongoing, large government subsidies. While NPCI's goal of one billion daily transactions by FY27 is ambitious, achieving it profitably is uncertain. Fintechs view a potential 0.3% fee on large merchants as vital for long-term revenue, but this faces opposition from merchants and a firm rejection from the government. This puts payment providers in a difficult spot, as their revenue relies on transactions, but UPI's free model limits this. Major players like Paytm are struggling, shown by their negative price-to-earnings ratios and large net losses. PhonePe, despite strong revenue growth, also faces widening losses. It is preparing for an IPO, aiming for a valuation lower than its last private funding round, likely due to competition and ongoing profit margin issues. Historically, reliance on government incentives masked the real costs of running digital payment systems. Their sharp decrease means the industry must find ways to make money.
Future Outlook
NPCI still aims for one billion daily transactions, a goal the Finance Minister believes is achievable in 2-3 years. But the focus is now on achieving this growth sustainably, not just increasing volume. Fintech success will depend more on diversifying revenue beyond transaction fees, such as through financial services, lending, and selling insurance, similar to PhonePe's strategy. The industry faces a crucial point where clear regulations on revenue models like MDR, smart cost management, and new services will decide its future.