What’s cooking at PhonePe?

Hello, fellow Olio enthusiasts! 👋

Happy Hump Day and welcome to the 49th edition of Weekly Olio - your weekly dose of giggles, wisdom, and a sprinkle of intrigue with our tantalizing thought piece (yes, we're talking about Publisher's Parmesan here). 🤭

Today’s Publisher’s Parmesan talks about what’s new at PhonePe as they take on Google Play Store on its own turf.

Exciting, right? 👏

Will come to that, but let’s first start with the curation.

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Publisher’s Parmesan 🧀

What’s cooking at PhonePe?

Not many Indian tech companies that went head-to-head with global tech giants have managed to come out on top. But PhonePe, which battled Google Pay, seems to be an exception. With an almost 50% market share in UPI-led payments, PhonePe has emerged as the king overtaking Google Pay and PayTM in the process.

🎉 Drum roll, please! 🥁 Let's give a hearty round of applause to our guest post writer, Akshay Jassal! 📜🎩

The journey began back in 2014-15 when Sameer Nigam and his crew, seasoned by their time at Flipkart, spotted the Unified Payments Interface or UPI opportunity in the Indian digital payments landscape. When NPCI launched its white paper on UPI, they bet that UPI would become the default payment instrument for Indians upending wallets (led by Paytm) and decided to go all in. The fact that the government mandated zero MDR to push UPI further helped their cause.

Soon after, Google Pay and Paytm jumped into the race with their offerings and giant war chests, contributing to the rise of the UPI payments ecosystem. Fast forward to 2023, PhonePe leads the pack, thanks to its reliable – lowest payment failure rate – and feature-rich application.

But did it really help PhonePe win the battle?

While Paytm may only claim ~10% of the UPI payments pie, but they have managed to rake in close to ~$1 Bn in revenue in FY23, nearly 7X the revenue of PhonePe. For the longest time, PhonePe has been dealing with sticky questions on how it will monetise UPI and generate revenue.

Since there was no money to be made in peer-to-peer (P2P) UPI transactions, Paytm was forced to explore profitable avenues within the financial services landscape, such as insurance, lending, and stockbroking. The horrid listing of the Paytm stock in November 2021 did not help its cause - the stock tanked by more than 70% within six months. Meanwhile, PhonePe, under the Walmart umbrella, continued to dominate the UPI payments landscape as Paytm looked to change course.

Paytm’s sharpened focus on revenue, allowed them to lag behind on UPI while growing all their other businesses. As a result, their revenue grew to a massive ~$1Bn over the next 2 - 3 years. Sooner or later, PhonePe would need to recognise the same reality- leadership in UPI payments is a vanity metric unless there is a clear strategy to monetise its user base.

As the CEO Sameer Nigam set his sights on achieving profitability by 2025, PhonePe launched a slew of financial and other products to do just that:

1. Insurance (integrated into the main app)

2. Lending (PhonePe Business)

3. Stock broking & investments (Share.market)

4. ONDC based hyperlocal commerce (Pincode)

5. Android app store (Indus App Store)

The first three choices align seamlessly with PhonePe's fintech identity. But why the other two? Well, PhonePe was one of the early believers in UPI, and that bet paid off handsomely. Now, with the government introducing ONDC, many foresee it as the next game-changer. What UPI did to digital payments in India, ONDC is expected to do the same for e-commerce. To know more about ONDC and its potential, read Weekly Olio’s Edition #26.

But an app store? How did that make sense for a fintech firm?

Let's dive deeper to understand more.

The Indian smartphone market is the second largest globally, boasting approximately 700 million devices, with Google powering a whopping 95% of them. Indians are voracious consumers of these mobile apps, downloading 29 billion apps from the Google Play Store last year and spending nearly 5 hours a day immersed in them.

While Google has succeeded in building a largely neutral app store, the Google Tax has been a recurring issue for app developers, with a hefty 15-30% commission on all in-app purchases. There has been global discontent with these policies.

The tipping point came in 2019, when the creators of the hugely popular game Fortnite, generating billions of dollars from in-app purchases, decided to introduce an alternative payment method to dodge the Google/ Apple tax. Apple responded by banning Fortnite from the App Store, marking a watershed moment—a major player challenging the monopolistic policies of U.S. tech giants and setting a precedent for the world.

Closer home, s similar event took place in 2020 when Google removed Paytm’s app from the Play Store for a couple of hours, as it was leading consumers to external websites that allowed them to participate in paid tournaments to win real money prizes.

But more recently, Google faced an Antitrust ruling by the Competition Commission of India (CCI), mandating third-party app stores on Google Play Store. Google has appealed this verdict to the National Company Law Apellate Tribunal (NCLAT), setting the stage for a protracted legal battle.

As the battle continues, the only Indian companies that can enable developers to reach a broader audience are payment companies. Enter PhonePe. With half a billion downloads and nearly 170 million Monthly Active Users, they are perfectly poised to disrupt Google’s hegemony once again.

Here's where it gets interesting! 🤡

However, PhonePe needs to solve the cold start problem faced by every marketplace - to get more developers and more apps, they need more users; more users, more developers, more apps.

The Indus app store is PhonePe's answer to the supply-side challenge, providing a platform with enticing features to attract developers:

1. No commission on in-app purchases (IAP)

2. Round-the-clock local support team

3. Available in 12 Indian languages, in addition to English

4. Cohort-based app release management & some other cool features

And PhonePe will funnel its massive user base to the only 'India ka app store'—taking care of the demand side of the equation. They're also in talks with OEMs to preload the app store, though currently, only Nokia and Motorola are on board.

So how does PhonePe plan to make money?

With in-app-purchase (IAP) commission out of the picture, an Ad-driven revenue model seems to be the way forward. Another benefit that PhonePe will probably try to reap out of this move is to become a preferred payment partner for all the apps distributed from the Indus app store, pushing its digital payments market share even further and consequently exposing more users to its roster of products.

It'll be very interesting to see if PhonePe is actually able to provide a viable alternative to the app developers targeting the Indian market, while it tries to turn profitable.

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