UPI Payments: Making payments through UPI is completely free for ordinary users. This facility has been made available free of charge by the National Payments Corporation of India (NPCI) to promote digital payments in India. Despite this, digital wallet companies like Google Pay and PhonePe are earning billions of rupees. By FY24, i.e., March 2024, PhonePe’s revenue was ₹5,064 crore, a 74% increase from the previous year. Similarly, Google Pay’s revenue remained at the same level, bringing the combined revenue of both companies to over ₹5,000 crore.
How does a free service generate revenue?
There are no direct charges for transactions made through UPI, but companies use this to attract users and leverage their data. UPI acts as a free highway, bringing millions of customers to their apps. Subsequently, companies earn revenue by selling various products and services to these customers.
Rent and Extra Fees from Shopkeepers
Small shopkeepers, such as grocery stores or vegetable vendors, often require additional payment tools. PhonePe and GPay offer these services, such as QR codes and smart speakers. For example, smart speakers provide voice notifications for every UPI transaction. The monthly rent for each speaker is approximately ₹100. More than 3 million shops in India use these tools, generating an annual revenue of approximately ₹360 crore.
Revenues from POS Machines and Soundboxes
PoS machines for cards or UPI have a Merchant Discount Rate (MDR) of 0.5-1%. While there is no MDR for UPI transactions, companies charge for card and other services. Approximately 90% of PhonePe’s revenue comes from the payments business, where companies earn revenue by providing better service to shopkeepers.
Commissions in Bill Payments and Recharges
UPI is free for mobile recharges, electricity or water bills, DTH, and insurance payments, but apps earn 1-2% commissions from service providers like Airtel. These small commissions can add up to crores of rupees annually with large transaction volumes.
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Revenue from Advertising and Promotions
PhonePe and GPay display offers, scratch cards, and cashbacks within their apps. However, companies also charge brands for promotions. The apps analyze user data and show relevant ads. About 10% of PhonePe’s revenue comes from advertising.
Thus, even though UPI is free for users, apps like Google Pay and PhonePe are using it to earn billions of rupees from small businesses, services, bill payment commissions, and advertising.