Rising Operating Costs Challenge Digital Payments Startups

Higher operating costs and insufficient revenue generation are posing challenges for digital payments startups, despite the surge in business volume due to increased adoption of digital payments in the country.

Payment processing charges, which fintech firms need to pay to technology providers, banking partners, or payment networks like the National Payments Corporation of India, Visa, or Mastercard, have sharply increased in recent times for most fast-growing players.

The absence of Merchant Discount Rate (MDR) or charges that merchants pay to payment service providers on Unified Payments Interface (UPI) transactions has exacerbated the financial difficulties of fintech firms.

“This is a major cost for payment companies, so no matter how much you grow in terms of total payment volume, your expenses shoot up accordingly, which impacts profitability,” said a top executive at a payment company anonymously.

PhonePe’s transaction volumes have increased significantly in recent years, but so have its payment processing charges. In FY23, PhonePe spent Rs 638 crore on processing expenditure, a more than threefold rise from Rs 199 crore a year ago. However, operational revenue increased by 74% to Rs 2,859 crore during the same period.

Similarly, transaction processing charges for BharatPe surged by 74% in FY23 to Rs 395 crore, while revenue more than doubled to Rs 903 crore from Rs 320 crore in FY22.

For Cred, payment processing charges rose by more than fourfold to Rs 704 crore in FY23 from Rs 155 crore a year prior. Despite a major revenue surge in FY23, Cred’s overall revenue increased by more than three times to Rs 1,484 crore from Rs 422 crore a year earlier.

For growing startups, expenses in supporting business growth are higher compared to more established peers, as technology backbone capability and fixed costs stagnate while variable expenses such as charges to card networks continue to grow proportionately.