PhonePe’s Paradox: The Year India’s Payments Giant Tried to Outgrow Its Own Shadow

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PhonePe’s Paradox: The Year India’s Payments Giant Tried to Outgrow Its Own Shadow

If scale alone settled the question of who wins in Indian fintech, PhonePe’s 2025 would have been a coronation. Month after month, the Bengaluru-based giant processed billions of UPI transactions, ending the year with a commanding 46% share of India’s digital payments rail. In a country where UPI has become as routine as breathing, PhonePe isn’t just an app — it’s infrastructure.

But scale has a way of seducing us into lazy conclusions. Because in the zero-MDR world of Indian payments, dominance doesn’t automatically equal durability. And as PhonePe prepares for a potential $1.5 billion IPO in 2026, the company finds itself at a crossroads familiar to every payments-led fintech: what happens when the growth curve no longer hides the thinness of the margins underneath?

If 2025 revealed anything, it is that PhonePe is trying — methodically, if not dramatically — to escape that paradox.

The headline numbers offered early signs of maturation. Revenue grew nearly 40%, losses narrowed to INR 1,172 crore, and the company finally began tightening its cost structure. But the more interesting story was unfolding outside UPI.

PhonePe’s non-payment revenue — lending, insurance, wealth, merchant tools — grew 208% year-on-year.

Is the base still small? Yes. Is the direction of travel unmistakable? Also yes.

For years, the fintech’s critics argued that its enormous UPI user base remained just that — a base, not a business. But 2025 marked the first meaningful step toward converting mass usage into repeatable, monetizable financial behavior.

The irony, of course, is that payments themselves are not loss-making. PhonePe insists that its payments division is cash-flow positive and still accounts for 85% of revenue. But that revenue is inherently limited by UPI’s architecture. Without merchant discount rate, you can’t extract SaaS-like margins; you can only extract efficiencies.

And efficiencies don’t get you IPO-ready.

The Pivot to Credit — Carefully, Cautiously

PhonePe’s founders have always operated with one eye on regulatory winds, and 2025 vindicated that instinct. While rivals rushed into small-ticket unsecured loans post-pandemic, PhonePe held back. When the RBI cracked down on the sector last year, Paytm and several digital lenders stumbled. PhonePe… didn’t.

The company doubled down on being a lending service provider (LSP) — not a balance-sheet lender. No NBFC experiments, no risky books, no regulatory hangovers later. In fact, it went the opposite way, surrendering its Account Aggregator–NBFC licence in early 2025.

But being cautious has consequences.

Paytm established deeper merchant credit relationships. CRED and Navi built NBFC engines that unlocked higher spreads. Slice and BharatPe bought stakes in banks.

PhonePe’s answer was slower but measured: bank-led partnerships.

• SMFG India Credit for collateral-free merchant loans.

• DSP Finance for loans against mutual funds.

• Co-branded credit cards with SBI and HDFC.

By FY25, lending contributed roughly 8% of revenue. Not a breakout year, but the clearest signal yet that PhonePe is nudging users down a funnel: from daily payments → to intent → to financial products with actual margins.

The moat, if it forms, will come from one thing only: risk-model accuracy at massive scale. And PhonePe does have that. CTO Rahul Chari wasn’t exaggerating when he said their ML models assess billions of behavioural data points each day — the invisible plumbing behind fraud detection and underwriting.

Still, the big question remains: can a pure LSP model deliver margins strong enough to impress an IPO audience? Not yet. But the groundwork is being laid.

The Merchant Conundrum

Merchant payments are the great untold story of Indian fintech — the place where long-term profitability is supposed to come from. And here, PhonePe’s 2025 was… mixed.

Yes, QR penetration is enormous. Yes, small businesses trust PhonePe for everyday collections. But trust is not the same as monetisation.

Paytm understood early that real margins live in B2B hardware, POS devices, reconciliation tools, inventory dashboards, and credit. Pine Labs — the newly listed B2B pure-play — proved the point by landing a market premium for solving precisely this segment.

PhonePe’s merchant stack, by comparison, still feels underpowered.

Its partnership with SIDBI to bring informal businesses into the formal fold — via faster e-KYC and Udyam Assist — is smart and necessary. But necessary is not sufficient. Merchant monetisation is still incremental, not transformative.

Until PhonePe cracks merchant services, its revenue will remain skewed toward low-margin consumer payments.

And IPO investors read skew as risk.

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Insurance and Wealth: The Slow Burns

PhonePe’s insurance business may end up being its stealth weapon. It already issues millions of policies each year and in 2025 leaned harder into underserved niches — new vehicles, micro-covers, event-linked risks. Insurance remains one of India’s great underpenetrated stories; distribution is king, and PhonePe has distribution in spades.

Wealthtech, meanwhile, delivered a bumpier year. Share.market, the company’s broking platform, saw active users dip mid-2025. High customer acquisition costs and brutal competition from Groww, Angel One, and Zerodha make this a long play, not a quick win.

But mutual fund distribution — low CAC, predictable flows — is beginning to look attractive. Expect PhonePe to invest there, not in expensive broking wars.

AI: The Quiet Moat

2025 was also the year AI hype finally met fintech reality. Phones may get smarter; underwriting must.

PhonePe’s November partnership with OpenAI — integrating ChatGPT into travel, recommendation, and financial queries — may sound cosmetic. But beneath it lies something deeper: a company slowly preparing to defend its platform with machine intelligence rather than human-heavy ops.

More importantly, PhonePe’s core AI story remains ML, not GenAI: fraud detection, real-time behavioural scoring, and anomaly detection across hundreds of millions of daily transactions. No Indian fintech sits on a richer real-time signals layer.

If PhonePe can turn those signals into better credit decisioning and personalized product flows, it unlocks the kind of defensible moat Paytm once promised but struggled to scale.

So What Did 2025 Really Prove?

It proved this much: PhonePe is no longer just a payments giant. It is a fintech in transition — methodical, cautious, sometimes frustratingly slow, but undeniably maturing.

2025 showed that:

• it can grow revenue without ballooning costs,

• diversify without regulatory blowback,

• build partnerships instead of balance-sheet risk,

• and defend market share without chasing vanity metrics.

But the year also exposed unresolved questions:

• Can merchant monetisation scale fast enough?

• Can lending margins deepen under an LSP-only model?

• Can wealth and insurance become engines, not add-ons?

• Can AI turn its data advantage into a defensible moat?

The IPO audience isn’t looking for scale anymore — they’re looking for repeatable, high-margin behaviour.

The Road to 2026

PhonePe walks into 2026 with credibility, distribution, and a story investors want to believe. But belief is fragile. It needs proof.

If non-payment verticals accelerate, if merchant tools find product-market fit, if AI deepens unit economics — PhonePe won’t just list. It will list as India’s most complete consumer fintech platform, with the kind of moat that’s hard to replicate.

2025 didn’t settle the debate. But it set the stage. PhonePe spent the decade becoming India’s payments backbone. Its next decade will be defined by a harder challenge:
turning that backbone into a business that can stand on its own.

Interested in learning more about fintech? Check out our previous coverage here:

• Sea Group’s Surprising Q2 and the Next Battleground for E-Commerce

• The Reverse Flip: Why Indian Startups Are Coming Home from Silicon Valley

• The decline of P2P lending in India: What went wrong?

• Juspay: The Indian Fintech Powerhouse That Plays to Its Own Tune

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