Daybreak - With an IPO around the corner, Phonepe’s biggest strength is becoming its Achilles heel

Episode Date: March 26, 2025

 Phonepe is all set to debut in the public market in the second half of FY26. That perhaps seems like the natural next step for the fintech giant. After all, it commands nearly half of the market share in UPI transactions today. Between 2020 and now, it has gone from catering to one in five Indians to one in three. And yet, the path to its IPO isn’t quite as simple as you would think. In fact, it’s a tough road ahead for the company. And that’s precisely because of the one thing Phonepe is best known for – payments. You see, as much as 96% of Phonepe’s topline in the last financial year was thanks to Phonepe’s payment business. You’re probably wondering what’s wrong with that. After all, payments were what put Phonepe on the map. Fair point. But the thing is, being over reliant on payments could hurt Phonepe. Think about it. If anything about the payments business were to go south, it would be almost impossible for Phonepe to pivot in time. Which is why the key is to diversify. And it’s not like Phonepe hasn’t tried. Five years ago it launched its own financial services arm – Phonepe insurance. But unfortunately, today, there still isn’t much to brag about.Tune in. Daybreak is produced from the newsroom of The Ken, India’s first subscriber-only business news platform. Subscribe for more exclusive, deeply-reported, and analytical business stories.

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Phone pay is all set to debut in the public market in the second half of FY26. Now, that perhaps seems like the natural next step for the fintech giant. After all, it commands nearly half of the market share in UPI transactions today. Yep, between 2020 and now, it's gone from catering to one in five Indians,

to one in three. And yet, the path to its IPO isn't quite as simple as you would think. In fact, it's a tough road ahead for the company. And that's precisely because of the one thing phone pay is best known for. Payments. You see, as much as 96% of phone pay stopline in the last financial year was thanks to phone pay's payment business. You're probably wondering what's wrong with that.

After all, payments were what put phone pay on the map in the first place. Fair point, but the thing is being over-reliant on payments could end up hurting phone pay. Think about it. If anything about the payments business were to go south, it would be almost impossible for phone pay to pivot in time. And we're not just talking in hypotheticals. With the whole UPI ecosystem finally well established across the country, the government has been considering cutting down UPI-related subsidies. That would most certainly restrict phone pay from riding on the success of its star performer.

It's payments vertical. In fact, about 10% of the company's revenue in FY24 came from digital payment subsidies, which is why the key is to diversify. And it's not like phone pay hasn't tried. Five years ago, it launched its own financial services arm, phone pay insurance. But unfortunately today, there still isn't much to brag about. Sure, the company has sold about 15 million insurance policies so far,

and the total premium value amounts to 2,000 crore rupees. For any other insurance-broking startup, these numbers might be decent, maybe even impressive. But this is a company with over 600 million users in India. It burnt over 1,000 crore rupees to push its insurance product, of which 70% was spent on. on advertising and promotions alone. Yet, phone pay insurance has generated a meager 150 crore rupees in revenue in the last five years.

The real question here is whether phone pay's financial services arm can actually offset the impending revenue loss. Welcome to Daybreak, a business podcast from the Ken. I'm your host Rahal Philippos and I don't chase the news cycle. Instead, every day of the week, my colleagues, Nikta Sharma and I will come to you with one business story that is worth understanding and worth your time. Today is Wednesday, the 26th of March. PhonePays idea was simple.

Leverage its strengths for a tech-driven, fully digital approach to selling insurance, unlike going the traditional way of point-of-sale persons. The company's strengths were its vast user base, larger than any standalone insurance player in India, and its deeper reach into Tier 2 and 3 markets, where insurance penetration was low. Now, that strategy did end up working to an extent. extent. It led to some initial success in selling bike insurance in non-metro cities, as well as

sachet insurance products like a COVID-19 cover of 50,000 rupees at a low premium of 156 rupees. You see, phone pay engineered its financial services products, evolution and growth through four phases. Send, spend, manage and grow. That's not me talking. That's what its co-founder Rahul Chari said about the company's philosophy back in 2020. Now, when, it launched its insurance portfolio in 2021, it went all in on marketing. It roped in the likes of Amir Khan and Alia Bhatt to promote this new article. But unfortunately, just that would not cut it. A founder from a rival insurance broker said phone pay wanted to become a super app.

And while there's nothing wrong with that approach, its founders were overlooking the ground reality. You see, insurance requires much more attention, serious. and manual intervention. And that explains why phone pair is nowhere close to its biggest competitors in the insurance space. In FY24, when the company sold 4 million policies and generated 115 crore rupees in revenue, market leader Policy Bazaar sold nearly 18 million policies and ranked in 3,000 crore

rupees in top line. Sure, things did look up in 2024. It was able to sell 25% more policies than the previous. year, but the average premium value has remained nearly stagnant. At least half a dozen experts that the Ken spoke to said the company failed to make an impact in the insurance sector at large. Firstly, because its digital first approach to insurance had no real takers, and secondly, because it failed to bridge the obvious gap between supply and demand.

Even simple things like handling customer queries effectively, it just does not have the infrastructure for. The company claims to offer 24-7 support for insurance queries, but the Ken tried reaching out to its customer care services during business hours through half a dozen phone numbers, and each time it said, the ticket has been generated, you will receive a call within an hour. In certain cases, it also ended up seeing 24 hours.

By the time this story was published on the Ken's website, 120 hours had passed by and nobody had returned the call. On the other hand, policy bazaar and insurance dekho executives responded within 10 minutes of the ken raising a query. And that's not all. There is an even bigger structural flaw at phone pay insurance. And this one starts at the very top. Stay tuned.

Turns out, most of phone pay insurance's current key management personnel have no experience in the insurance sector. Vishal Gupta, the chief executive, previously worked with e-commerce retailer, Flipkart, and payment services firm Pine Labs. Likewise, you have Nalesh Agarwal, the head of business, who was a former advisor to investment firm or media network and the co-founder of Yellow, which is a neobank.

Similarly, most of its advisors function more like customer support agents. One executive with phone pay insurance that we spoke to said, typically in its job description for an advisor, the company looks for candidates with one to three years of experience in selling and not necessarily insurance. Now, that explains why this product hasn't really been converting. Till 2024, the company generated more than, than 400 million queries, of which only 9 million was successfully converted.

You see, at the end of the day, most people in the business will tell you that selling insurance, particularly in Tier 2 and 3 markets, needs some sort of manual intervention. And that really goes against the grain for tech-first phone pay. After all, it's been focusing on automation as its core strength. But when it comes to selling a 40-page policy document online, especially to customers in smaller you run the risk of mis-selling. Gurdtej Singh, the co-founder and CBO of good insurance brokers, a digital policy intermediary, says there's also a fundamental flaw in phone pay's execution.

He explained how it's a business of building trust with customers and that companies like Phone Pay are not capitalizing on their merchant base to establish that trust. They aren't incentivizing sales or using their vast network of merchants as touchpoints to push insurance. You see, phone pay's approach to all of its services, payments, insurance, wealth management, and even lending, is largely the same. Technology-led, self-service and digital first. But financial services require a more nuanced approach, especially with an IPO around the corner. Stay tuned.

Between spinning off from Flipkart and relocating its headquarters from Singapore to India, it has been a tough couple of years for phone pay. The transition ended up being very complex. It took over two to three years and involved coughing up a cool $1 billion in taxes. As a result, some of its new financial service entities ended up taking a backseat. And in the process, a bunch of key product launches, including things like lending services,

ended up getting delayed. The company, much like its peers, is also operating in a highly regulated environment. All of its entities fall under the purview of RBI, IRDAI, Seby and UIDAA. Keeping up with these regulatory demands ended up being so demanding that phone pay eventually decided to renounce

its account aggregator license. We've spoken about this on daybreak before. Account aggregators are RBI licensed non-banks that deliver a user's financial data from one entity to another. For instance, from a bank to a fintech, if, say, a user wants to open an account, all based on the user's consent, of course.

The bottom line is that it is up against plenty challenges. But the biggest one is that the broader insurance industry itself is struggling. Insurance penetration is falling year on year. And in this landscape, phone pay's deep pockets and aggressive marketing techniques just will not cut it. This is a push-driven industry where companies have to actively sell policies rather than rely on organic customer demand. But with an IPO around the corner, the company is going to have to think on its feet. The very fact that phone pay is heavily regulated calls for a diverse.

diversification of revenue. For context, earlier Ptm's revenue hinged on its payments vertical. But after the RBI's ban on the payments bank, the company's revenue and EBITA fell by 36% and 41% respectively in the June 2024 quarter. Despite the setback, Ptm made a steady recovery because it had diversified its revenue streams. Even in the case of Payment Gateway Insta Mojo, it fully relied on its payment aggregator license. Although a smaller player, Insta Mojo was profitable in FY23, but it lost 90% of its stopline the following year after RBI seized its license in September 2023.

The company has now pivoted its offering to digital commerce as a service, similarly to how Shopify operates, and yet it's nowhere close to its previous revenue. Now, the axe hangs over phone pay's head too, should it fail to diversify its revenue stream. Daybreak is produced from the newsroom of the Ken India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters and podcast extras. Head to the ken.com and click on the red subscribe button on the top of the website. Today's episode was hosted by Rahil Filippo's and edited by Rajiv Sien.