PhonePe aims to replicate UPI success across expanding financial services

Fintech major PhonePe is strengthening its presence across key financial verticals—payments, lending, insurance, and wealth management—as it aims to replicate its success in the Unified Payments Interface (UPI) space across other domains.

 

Backed by Walmart, PhonePe plans to leverage its scale on UPI to drive cross-sell opportunities—a strategy widely adopted by consumer-focused fintech companies. However, what sets PhonePe apart is its vast user base.

 

At present, the overall user base of PhonePe is over 500 million. Of these, its merchant base is over 40 million.

 

"Given our strength in UPI, it makes sense for us to enable two key things: providing consumers with access to credit and empowering merchants with higher spending capabilities through credit instruments,” said Deep Agrawal, Head of Payments at PhonePe.

 

Company executives that Business Standard spoke to said digital payments in the form of UPI, coupled with innovations from the National Payments Corporation of India (NPCI), such as RuPay credit cards, credit lines on UPI, and UPI Lite, among others, enable the firm to extend its offerings on both sides of its business – consumers and merchants.

 

“For financial services, like lending and insurance, these verticals would look at UPI as a payment method enabling growth in their own categories. UPI has been the first payment method to get many individuals into the digital foray, and hence building experiences which coexist with UPI makes a lot of sense,” added Agrawal.

 

As of October, PhonePe had a share of 47.7 per cent in the UPI landscape, the largest among a list of over 70 third-party application providers (TPAPs) and payment service providers (PSPs).

 

Navigating tight regulatory framework

 

In the absence of a merchant discount rate (MDR) on UPI, lending has been the flavour for fintechs, due to better take rates on products such as unsecured and collateral-based credit.

 

Additionally, the banking regulator raised risk weights for unsecured personal credit last year, and the sector has seen slower growth. The Reserve Bank of India's Financial Stability Report pointed out that delinquency levels among borrowers with retail loans below Rs 50,000 remained high.

 

“For us, unsecured lending is one of the critical offerings that we have, but also one of the many offerings that we have. It is something that we build over time. We are not seeing anything from a very short duration of how it will impact us, but we are looking to build it from a long-term perspective,” said Hemant Gala, Chief Executive Officer (CEO), PhonePe Lending.

 

As a strategy, Gala elucidated that the firm had never done postpaid or a Buy Now Pay Later (BNPL) offering for its customers. When it comes to disbursements, PhonePe has disbursed Rs 300 crore worth of merchant loans per month. These loans typically range from Rs 60,000 to Rs 5 lakh, with the average loan amount being Rs 1.5 lakh.

 

Gala also added that they do not get into very small ticket loans.

 

While PhonePe does not lend on its own books, it enables disbursements through partnerships with other regulated entities. It has partnered with lenders such as Aditya Birla Capital, PayU Finance, HDFC Bank, Piramal Finance, IDFC First Bank, U Gro Capital, among others.

 

However, Gala added that, on an industry level, lending partners are cautious around new-to-credit customers, borrowers who may be overleveraged, and those running multiple loans.

 

“The good part is that everyone is also focused on repeat loans. Once you have loaned it to someone, you can see how the portfolio is repeated. If it has done well, you can offer the loans at a lower rate to the same customer and nurture the portfolio,” he explained.

 

Growing insurance penetration

 

On the insurance side, one of the recent additions to the company’s financial services bouquet, the firm is looking at ‘the right portfolio mix’.

 

“We try to ensure that we bring the right portfolio mix and products to make sure the firm has the right balance. Especially because of the payments, we have a decent amount of learning or expertise in managing fraud elements,” said Vishal Gupta, CEO, PhonePe Insurance.

 

Earlier this year, the company said it sold over 9 million insurance policies since entering the market in September 2021, of which 4 million were sold in just one year in 2023.

 

“Amongst the fintechs, insurtech is late to catch up with things. So, I think it's important to ensure how different guidelines, policies, and the adoption of insurance can drive the digital transformation of insurance. It’s a key concern for all stakeholders,” Gupta added.

 

Meanwhile, returning to the discussion around payments, Agrawal said he is bullish on the growth of the firm’s business-to-business (B2B) payments offerings, for which it received an in-principle approval to operate as an online payment aggregator (PA) in 2021.

 

“We feel that there is a significant opportunity available here to drive a lot of transactions for small and medium (SME) merchants. There are still many consumers and merchants that will go online, and offline merchants would start accepting digital payments,” he said.

 

The PA ecosystem has 41 players with full licences. Despite the number of online PAs in the market, Agrawal added that there is enough space for incumbents and new entities to grow in the market.

 

“We have over 40 million merchants. There’s a lot of learning we have obtained over all these years. We have worked closely with the ecosystem for so many years, and have been able to establish an operational model where we can diagnose and solve for every basis-point (bps) of a success rate drop for a particular use case,” he added.

 

Gala, however, says that the silver bullet in the fast-growing and heavily regulated space is going to be compliance. “We feel compliance is our biggest strength. It takes time and additional investment, but if you look at the organisation here, everyone understands, for instance, what digital lending guidelines (DLG) are,” he added.