Upcoming IPO: PhonePe relinquishes ₹1,500 crore revenue to strengthen its fintech business before going public

PhonePe, preparing for one of the most anticipated initial public offerings (IPO) in India’s fintech sector, is at a pivotal point in its business strategy. The company, a clear front-runner in the Unified Payments Interface (UPI) ecosystem with approximately 47% market share over 58 consecutive months, is undertaking a strategic “pre-IPO reset.” This involves stepping back from certain high-revenue segments to establish a more sustainable and long-term business model.

PhonePe’s Market Position and Revenue Model

While PhonePe dominates UPI transactions, UPI itself does not generate revenue through Merchant Discount Rates (MDR), making it more of a foundational platform rather than a direct source of profit. PhonePe’s core revenue streams come from converting its user base of over 650 million registered accounts into consumers of high-margin financial products.

According to the company’s revised Draft Red Herring Prospectus (DRHP), PhonePe’s operational revenue grew 40% year-over-year, reaching ₹7,114 crore in the financial year 2025. For the six months ending September 30, 2025, revenues stood at ₹3,918 crore with an adjusted EBITDA of ₹254 crore. As of March 31, 2025, the company maintained bank balances and investments exceeding ₹6,300 crore.

Regulatory Challenges and Revenue Segment Exit

PhonePe encountered significant regulatory challenges prompting the suspension of two major revenue segments: credit card-based rent payments and real money gaming (RMG).

In September 2025, PhonePe discontinued its credit card rent payment service due to the Reserve Bank of India’s (RBI) tougher regulations under the payment aggregator framework. These rules addressed concerns about credit card funds being directed to personal, non-merchant accounts. This decision materially affected the company, as the rent payment segment accounted for around ₹1,262 crore in revenue in FY25, approximately 9% of gross margins.

Simultaneously, the passage of the Promotion and Regulation of Online Gaming Act, 2025, combined with increased Goods and Services Tax (GST) charges, caused revenues from RMG-related activities—mainly advertising and payment gateway services—to drop sharply from ₹245 crore in FY25 to ₹71 crore in the first half of FY26.

Together, these segment exits resulted in an estimated ₹1,500 crore reduction in annual revenue.

Strategic Shift towards Sustainable Growth

Rather than viewing these changes negatively, PhonePe is leveraging them as part of a strategic shift focused on a data-driven growth model referred to as a “flywheel.”

Diversifying Revenue Streams

  • Merchant services: Multiple income streams including transaction fees from UPI, cards, wallets, and net banking.
  • Merchant hardware sales: Offering SmartSpeakers and card machines.
  • Enhanced payment solutions: Providing faster payment settlements and reconciliation tools.
  • Advertising: Monetizing merchant promotions within the app targeted to relevant or nearby users.

Although each revenue source may appear modest individually, the scale of PhonePe’s operations results in steady, recurring revenue.

Lending and Financial Services Expansion

PhonePe is expanding its role as a Lending Service Provider by utilizing transaction data from 4.7 crore merchants and hundreds of millions of users to identify creditworthy borrowers for banks and non-banking financial companies (NBFCs). This commission-based approach is high-margin and requires less capital investment.

The company is also intensifying its focus on insurance and wealth management through platforms like Share.Market. This strategy aims to increase PhonePe’s share of the Indian middle-class wallet by transitioning users from simple payment transactions to wealth-building and insurance products.

Digital Ecosystem Development

Another long-term initiative is the Indus Appstore, envisioned as an alternative to global app stores, aimed at owning a digital ecosystem to capture advertising revenue directly from app developers.

Regulatory Compliance and Investor Appeal

By exiting the rent and RMG segments, PhonePe demonstrates a clear preference for regulatory compliance and stability over rapid but uncertain growth. Adhering to RBI’s stricter payment aggregator guidelines and distancing itself from the volatile RMG sector strengthens the company’s appeal to institutional investors.

The upcoming IPO is structured as a 100% Offer for Sale (OFS), indicating confidence in the company’s internal cash reserves—exceeding ₹1,100 crore—and improving cash flows to support this strategic transition.

Future Outlook and Risks

Looking ahead, risks such as the 30% market share cap imposed on UPI providers remain, but PhonePe’s agile adjustments to its revenue model suggest management is prepared to evolve beyond payments into a comprehensive financial services platform.

This pivot marks PhonePe’s evolution into a diversified, data-driven, full-stack fintech entity, positioning it strongly for growth and resilience in India’s competitive financial ecosystem.

Key Takeaways

  • PhonePe holds approximately 47% share in UPI transactions but UPI does not directly generate revenue through MDR.
  • The company discontinued credit card rent payments and real money gaming services due to regulatory challenges, causing an estimated ₹1,500 crore revenue reduction.
  • PhonePe is shifting focus to multiple sustainable revenue streams, including merchant services, lending, insurance, wealth management, and the Indus Appstore.
  • Regulatory compliance is prioritized to enhance investor confidence ahead of a 100% Offer for Sale IPO.
  • The company aims to become a diversified, data-driven fintech platform prepared for future growth despite market risks.

Disclaimer: This summary is for informational purposes only. The opinions and forecasts are those of individual analysts or brokers and do not represent Mint’s views. Investors should consult certified financial advisors before making investment decisions.