PhonePe Struggles With Merchant Growth, Rising Losses
PhonePe is facing challenges in scaling its business profitably, as a recent diversification pitch has reportedly fallen flat. The company is experiencing rising losses, surging costs, and stalled growth in its small merchant base. The situation highlights the difficulty of achieving profitability in India's competitive digital payments sector, even for market leaders.
- A major driver of PhonePe's losses are employee stock option (ESOP) costs, which amounted to ₹1,813 crore in the first half of fiscal year 2026, representing nearly 46% of its revenue. In contrast, competitor Paytm's ESOP burden was about 2% of its revenue during the same period. - While the company's overall losses are high, its core standalone payments business turned profitable in the 2024 fiscal year with an adjusted profit of ₹710 crore, excluding ESOP costs. This profitability is overshadowed by widening losses in its new diversification ventures, such as the Pincode e-commerce platform, which saw losses increase to ₹205.6 crore in the six months ending September 2025. - PhonePe continues to dominate India's UPI payments landscape, processing about 48% of transactions by value, well ahead of rivals Google Pay (34%) and Paytm (6%). However, this market leadership faces a potential regulatory hurdle from the National Payments Corporation of India's proposed 30% market share cap, which could limit future growth if strictly enforced after December 2026. - The company's push into financial services like lending and insurance is still nascent, contributing only 4% to its total revenue in fiscal year 2024. Its stockbroking platform, Share.Market, has struggled with high customer acquisition costs and saw a dip in active users in mid-2025 amidst intense competition. - PhonePe's revenue growth has been partially dependent on non-recurring income streams. In the first half of fiscal year 2026, 19% of its operating income came from discontinued services like rent payments or from temporary government policy incentives for payment infrastructure development. - To fuel growth, the company has significantly increased its spending on marketing and technology. Advertisement and sales promotion expenses surged by nearly 50% year-over-year to ₹455.5 crore for the six months ended September 30, 2025.
