The Fintech Showdown Before PhonePe’s IPO

As PhonePe inches closer to one of the most highly anticipated IPOs in India this year, the spotlight on the digital payments duopoly is getting sharper. And with this, greater emphasis is also falling on the collective push in the industry for diversification.

While PhonePe is yet to disclose a listing timeline, its updated DRHP filing in January has reignited conversations around scale, sustainability and profitability. As of now, there are expectations that PhonePe’s public issue will open FY27 with a bang and an April timeline is being mooted. 

With public market investors turning more selective on fintech listings, scrutiny around business quality, not just growth, is intensifying.

At the centre of this debate are two of India’s largest fintech players: PhonePe and Paytm.

Analysts at Emkay Global recently pointed out that while PhonePe commands unmatched scale in India’s payments ecosystem, there are structural questions around monetisation depth, evolving revenue streams, and the pace of profitability.

The comparison with Paytm is inevitable.

A recent report by Bernstein noted that merchant payments are emerging as the most attractive layer in India’s digital payments stack, with Paytm demonstrating stronger revenue intensity and improving profitability metrics in this segment.

The brokerage added that while consumer scale provides long-term optionality, the path to monetisation is clearer on the merchant side. Cross-selling loans to merchants offers underwriting advantages due to direct visibility into transaction flows, making the segment structurally more attractive.

On its latest earnings call, Paytm founder and CEO Vijay Shekhar Sharma doubled down on the company’s merchant-first strategy, highlighting improved monetisation through platform fees, EMI partnerships and device-led offline expansion. According to Sharma, deeper cross-sell of financial services to merchants remains core to Paytm’s next phase of growth.

The Monetisation Playbook Of Fintech Duo

Meanwhile, PhonePe appears to be steadily recalibrating its revenue mix. In H1 FY26, consumer payments contributed 56% to revenue from operations, down from 69% in the same period last year. Merchant payments, on the other hand, increased its contribution to 30.78% from 23.48% a year earlier, which indicates a growing focus on higher monetisation segments.

Currently, PhonePe monetises its platform through a mix of consumer payments, merchant payments, device subscriptions, government incentives and infrastructure-linked grants.

On the consumer side, the company earns transaction processing fees across a wide range of use cases including person-to-person transfers, mobile recharges, bill payments, digital gold and silver purchases, travel ticketing, transit bookings, QR scan-and-pay transactions and online payments across partner platforms such as banks, telecom operators and Bharat Connect (formerly BBPS).

While core UPI peer-to-peer payments operate in a largely zero-MDR framework, PhonePe generates revenue by levying platform and convenience fees on select services. Categories such as travel bookings, certain bill payments and other value-added transactions allow the company to charge users transaction-linked fees.

Merchant payments, however, are emerging as an increasingly important monetisation lever. In this segment, PhonePe earns transaction processing fees from both online and offline merchants, typically calculated as a percentage of total payment value.

It has also increased the contribution of revenue from financial services including lending and other financial products to 12% in H1 FY26, up from 7% in the same period a year ago.

For Paytm, the company’s largest revenue engine remains payment services, where revenue rose 21% YoY to ₹1,284 Cr. Within this, net payment revenue grew 25% to ₹613 Cr thanks to improving payment processing margins driven by higher credit card and EMI-led transactions.

Recurring subscription income from 14.4 Mn merchant devices and subscriptions, up 2.7 Mn YoY, continues to strengthen the annuity base of the payments business., the company said in its Q3 earnings release.

The second growth pillar, distribution of financial services, saw revenue climb 34% year-on-year to ₹672 Cr, reflecting higher merchant loan distribution, expansion of consumer credit products, and growing traction in equity broking and margin trading. The number of key financial services customers increased from 0.59 Mn to 0.71 Mn YoY.

Profitability Poles Apart

If there is one factor that now decisively separates India’s large fintech platforms, it is not revenue scale but the quality of profitability beneath it. While revenues between Paytm and PhonePe are broadly comparable in recent periods, their earnings profiles tell a sharply different story.

Paytm reported yet another profitable quarter in Q3 FY26, posting a consolidated net profit of  ₹225 Cr as against a loss of  ₹208 Cr in the year-ago quarter. The company also reported an EBITDA of  ₹156 Cr and a margin of 7%, against an EBITDA loss of  ₹223 Cr in the year-ago period.

On the other hand, PhonePe’s net loss increased over 20% to  ₹1,444.4 Cr in H1 FY26 from  ₹1,203.2 Cr in the same period of the prior year, as margins contracted.

The company’s loss would have been even higher if not for an exceptional gain of ₹434.5 Cr due to its divestment of a 5% stake in geotech company MapmyIndia during the period under review.

However, Emkay noted, the difference becomes pronounced once full cost structures are reflected at the EBIT level. In H1 FY26, PhonePe reported EBITDA before ESOP expenses of ₹250 Cr, close to Paytm’s ₹280 Cr in the same period.

PhonePe’s ESOP expenses for H1 FY26 stood at ₹1,810 Cr, compared with just ₹65 Cr for Paytm, the brokerage added. Depreciation and amortisation expenses were ₹570 Cr for PhonePe versus ₹300 Cr for Paytm. These elevated non-cash and capital charges materially widened the profitability gap. As a result, PhonePe reported an EBIT loss of ₹2,120 Cr in H1 FY26, substantially higher than Paytm’s ₹90 Cr EBIT loss during the same period.

Bernstein also attributed much of the divergence to elevated ESOP expenses at the competing platform. It noted that Paytm’s ESOP expense stands at just 1.6% of its overall H1 FY26 revenue, underscoring stronger cost discipline relative to peers.

While PhonePe will list on the public market, investors will look for contribution margin trends, cost discipline, and the sustainability of incentives, especially in a segment where regulatory shifts can impact revenue mix quickly.

The comparison, then, isn’t about who is bigger on UPI. It’s about who can demonstrate a structurally profitable model as digital payments mature.

The Next Fintech Race

India’s digital payments story is entering its second decade but the nature of competition has shifted. The first wave was about scale: onboarding users, driving UPI volumes, winning transaction share. The next wave is about extracting financial depth from that scale. UPI continues to expand across the ecosystem, yet the real value creation is no longer in processing transactions. It is in monetising the infrastructure built around them: merchant networks, credit rails, wealth distribution and embedded finance.

The evolution is visible in how large platforms are reshaping their revenue mix. Payments may anchor engagement, but financial services are increasingly driving margin expansion. Lending distribution, insurance, broking and wealth products carry structurally higher take rates than zero-MDR consumer UPI.

At the same time, broking, margin trading, insurance and advertising are becoming incremental monetisation levers layered on top of payments. Consumer UPI is largely non-monetised. Person-to-person payments drive stickiness, not margins. The economic engine lies in person-to-merchant flows, subscription-based payment devices, embedded credit at checkout, and cross-selling financial products.

Both Paytm and PhonePe are repositioning accordingly. Merchant infrastructure is no longer defensive plumbing, it is the foundation for higher-yield financial cross-sell. As merchant acceptance deepens, platforms gain leverage in underwriting partnerships, device subscriptions and settlement services.

Capital markets are responding to this shift as well. Investors are less impressed by transaction milestones and more focused on contribution margins, cost discipline and repeat monetisation behaviour. The scrutiny has moved from GMV growth to earnings quality.

At a time when PhonePe is entering the market, the question public markets are asking is no longer who processes the most transactions but who builds the most defensible financial platform on top of them.

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[Edited by Nikhil Subramaniam]

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