Processing charges a drag on fast-growing payments startups
Digital payment startups are facing rising payment processing charges despite revenue growth, impacting profitability. High operation costs persist due to fees charged by network operators and system maintenance expenses.
Higher operating cost and inadequate revenue generation is weighing on digital payments startups, offsetting surging business volume due to the widespread adoption of digital payments in the country.
Payment processing charges, which fintech firms need to pass on to technology providers, banking partners or payment networks like the National Payments Corporation of India, Visa or Mastercard, have skyrocketed in recent times for most of the fast-growing players.
The lack of MDR or charges that merchants pay payment service providers on Unified Payments Interface (UPI) transactions has worsened the financial woes 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 on the condition of anonymity.
Hollow growth
Take the case of PhonePe whose overall transaction volumes have soared in recent years but so has its payment processing charges. In FY23, PhonePe spent Rs 638 crore in processing expenditure, a more than threefold rise from Rs 199 crore a year ago. During the year, operational revenue jumped 74% to Rs 2,859 crore.
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For BharatPe, transaction processing charges surged 74% in FY23 to Rs 395 crore, showed financial results sourced from Tofler. Revenue climbed more than twofold to Rs 903 crore from Rs 320 crore in FY22.
For growing startups, expenses in supporting business growth are higher, compared to more established peers.
“Once you attain a certain scale, your technology backbone becomes capable of supporting higher volumes, so your fixed costs stagnate, but the variable expense in form of charges to be paid to card networks and others grow proportionately,” said the executive cited above.
For CCAvenue, payment processing charges made a major impact on gross revenue. In the third quarter of FY24, gross revenue stood at Rs 912 crore, but net revenue was at Rs 112 crore.
The company explained that net revenue reflects deduction of direct operating expenses from gross revenue. Payment processing charges majorly contributed to this segment.
High operation costs
No matter how much a merchant pays or does not pay to a payment processor, every network operator charges a fee for providing settlement service. There is also the cost of system maintenance, which are crucial for transaction settlements. New generation fintechs are mostly processing UPI payments, which are not revenue generating, said industry insiders.
“On UPI you do not make money, but you pay a share to your partners out of your own pocket, so this impacts the balance sheet,” said another chief executive of a payment firm.
The finance ministry offers a subsidy to banks in lieu of the zero MDR regime, but industry insiders said it is not enough to compensate for losses the industry incurs in supporting the ecosystem.
