UPI Transactions Are Free; How Do They Make A Profit?

In an effort to diversify their revenue streams, payment companies are deliberately charging for certain transactions, including credit card payments and recharges.

How are UPI mobile payment companies profitable?

Commission income: Each of these enterprises has a brand placement deal with a brand and a commission on spending agreement with providers of daily necessities like bill payment, DTH activation, and mobile recharge.

UPI: What is it?

The National Payments Corporation of India (NPCI) created the Unified Payments Interface (UPI), a ground-breaking payment system. Since its launch in 2016, UPI has completely changed how people in India send and receive money, pay with UPI payment apps, and carry out online transactions. By facilitating the easy and quick transfer of money across various bank accounts, UPI makes it possible for consumers to send and receive money using their mobile phones.

How are UPI payment apps able to make money?

UPI payment applications facilitate safe and easy transactions by acting as middlemen between users and their respective banks. These apps make money in a number of ways, even though they provide their services to consumers for free. Let’s take a closer look at these sources of income:

Merchant Payments:

With the help of UPI payment apps, customers may use their smartphones to pay both online and offline retailers. These applications impose a small fee known as a commission, which varies from app to app but is normally equal to 1% of the transaction value. Merchants’ increased use of them has fueled the rapid growth of this revenue stream.

Value-Added Services:

In addition to standard fund transfers, UPI payment apps frequently provide other services. In addition to bill payment and mobile recharge, these value-added services also include investing in mutual funds, buying tickets, paying insurance premiums, and more. In order to gain access to the user base of UPI apps, service providers that offer these services frequently collaborate with them and pay a commission or transaction fee.

Cashbacks and Incentives:

UPI payment apps give users cashback offers and incentives to boost usage and user engagement. Sharing a percentage of the revenue received from retailers or service providers funds these incentives. Through incentives like discounts, cashbacks, or awards, UPI apps draw in new users and motivate existing ones to complete more transactions.

Advertising and Partnerships:

Partnerships and advertising are two relatively small sources of income for UPI payment apps. Nevertheless, they offer an extra source of income that can assist in defraying the app’s development and upkeep expenses. Users of UPI payment apps usually see tailored advertisements depending on their past transactions and other information. These applications work with companies, retailers, and service providers to present their customers with personalised ads or deals.

Platform Fees:

In exchange for using the UPI infrastructure, UPI payment apps must pay a nominal platform charge to the NPCI. This charge helps the NPCI, which runs and maintains the UPI ecosystem, to make money. Depending on the volume of transactions handled by the UPI app, the platform fee may change.

Transactional Costs and Revenue Implications:

Although UPI payment apps receive funding from the previously described channels, they also have to pay for some transactional expenses that have an effect on their bottom line. Among these expenses are:

Charges for Transaction Processing:

Every transaction that a UPI payment app processes may incur a modest fee. In return for supplying the UPI infrastructure and settlement services, the banks impose this cost. Depending on the volume of transactions and the terms of the partnerships between the UPI app and the banks, the transaction processing fees may change.

IT Infrastructure and Security:

For UPI payment apps to function properly, a strong IT infrastructure and transaction security must be maintained. To safeguard user data and stop fraud, they heavily invest in cybersecurity defences, compliance frameworks, and technological advancements. These security and infrastructure upgrades have an impact on the entire cost of operations.

Customer Acquisition and Marketing:

UPI payment applications run strong marketing campaigns and customer acquisition activities in an effort to grow their user base and boost acceptance. Significant marketing expenditures and promotional costs are associated with these initiatives. Although they have a long-term effect on revenue growth, they also have an immediate effect on profitability.

Apps for UPI payments feature a strong revenue-generation strategy. Competitiveness is one of the main issues UPI payment apps face. Due to the increasing popularity of UPI, there are already a number of apps accessible on the market, including Gpay, PhonePe, India’s very own Bhim UPI, and many more. As a result, it is anticipated that competition will increase in the upcoming years. As app developers attempt to draw in more users by lowering rates, this may result in a drop in transaction processing fees and merchant commissions.

Significant changes are occurring in the fintech business as payment companies are now looking at new and creative methods to monetize their platforms, prompting big participants to reassess their revenue models. A recent action by Google Pay, a significant player in the digital payment space, best illustrates this emerging trend.

Google Pay, a well-known player in the industry, recently started charging convenience fees for cell recharges, breaking with its long-standing policy of offering users these services for free. With this calculated move, Google Pay now aligns itself with competitors in the market like Paytm and PhonePe, who have previously imposed fees on some types of transactions.

Convenience fees are applied to recharges of Rs 100 or more made through the app’s unified payments interface (UPI) service. The fees vary based on the recharge value and range from Rs 1 to Rs 3.

Google Pay’s conduct is part of a larger industry trend where payment platforms are deliberately adding fees for particular transactions in order to increase the variety of income sources they receive. Leaders in the sector are looking for ways to maintain profitability in the face of increased competition, moving away from the conventional approach of providing a full range of services at no extra cost.

Dominance of key market players

The National Payments Corporation of India’s (NPCI’s) most recent data clearly shows the dominance of a small number of major firms in the payment market. In March 2023, PhonePe, Google Pay, and Paytm accounted for a significant 94% of UPI transaction volumes and 96% by value combined. Convenience fees were chosen because they support their overall objective of maintaining profitability while navigating the intricacies of the changing financial scene.

As payment companies modify their revenue models, this strategic change will have a wider impact on the fintech industry. These businesses are looking into new revenue streams due to the struggle for market share and the need to maintain steady profitability.