The Search for Profitability
The Unified Payments Interface (UPI) revolutionised Indian payments by making them instant and free for consumers and most merchants. While this drove unprecedented adoption, it created a profitability puzzle for platforms like PhonePe, Google Pay, and Paytm.
With a zero or low Merchant Discount Rate (MDR)—the fee merchants pay for processing digital transactions—the core payment activity itself generates little to no revenue. This is changing. A new MDR framework effective from October 2026 will apply a small fee on higher-value merchant transactions, creating a direct revenue stream for the first time. This provides a powerful financial incentive for payment players to aggressively expand their merchant networks, as each new merchant represents a potential source of transaction-based income.
From Payments to a Full-Fledged Ecosystem
Simply processing payments is no longer the endgame. The real strategy is to use the payment relationship as a gateway to offer a suite of high-margin, value-added services. By acquiring a large and active merchant base, UPI players can cross-sell other products. These include business loans, where transaction data helps in credit assessment; inventory management software; payroll services; and advertising platforms that allow merchants to offer targeted discounts to customers. A dense merchant network also allows for the deployment of revenue-generating hardware like Soundboxes and Point of Sale (PoS) devices, which often come with a subscription fee. In this model, the QR code is not just a payment tool but the entry point into a lucrative B2B services ecosystem.
The Dawn of Credit on UPI
The integration of credit with UPI is another major catalyst for the focus on merchants. The Reserve Bank of India's approval for pre-sanctioned credit lines to be used on UPI means customers can now 'scan and pay' using borrowed funds, not just their bank balance. For this to work seamlessly, a vast and reliable network of accepting merchants is essential. Payment companies and their lending partners are therefore in a race to ensure their credit offerings are usable everywhere, from small Kirana stores to large retail chains. This transforms merchants into crucial partners in the distribution and consumption of credit, unlocking new revenue from interest and loan processing fees.
A Shift from User Growth to Merchant Loyalty
For years, the key metric for UPI apps was the number of users. However, with much of the urban and semi-urban population already on board, the market for new peer-to-peer (P2P) users is maturing. In contrast, the person-to-merchant (P2M) segment is now the primary driver of transaction volume, accounting for the majority of UPI payments. Building a large, loyal merchant base creates a strong competitive moat that is difficult for rivals to breach. While users can easily switch between payment apps, a merchant integrated with a company’s billing, lending, and hardware solutions is far less likely to leave. This makes the battle for merchants not just about capturing transactions, but about securing long-term, defensible business relationships.
