UPI MDR puts payment fintech startups back on investors’ radar, VCs brace for higher valuations

UPI MDR puts payment fintech startups back on investors’ radar, VCs brace for higher valuations

The introduction of a merchant discount rate (MDR) on select UPI transactions is putting payments fintechs back on investors’ radar, giving companies that have spent years building transaction scale a clearer path to monetisation.

According to several venture capital investors Moneycontrol spoke with, the move could make payments businesses more attractive to investors by improving their earnings potential and changing the way they are valued.

From October 15, a 0.4 percent MDR will apply to specified person-to-merchant UPI transactions above Rs 2,000. The charge will be capped at Rs 300 for transactions of Rs 75,000 and above, while person-to-person payments will remain outside the framework.

Sagar Agarwal, founder and managing partner at Beams Fintech Fund, said the framework gives investors greater visibility into payments economics.

“For investors, the key change (now) is that UPI now has a defined monetisation pathway, which improves visibility on unit economics and reduces one of the structural uncertainties around payments businesses,” Agarwal said.

“Payments can once again become a credible monetisation layer rather than simply a customer-acquisition channel. That should improve investor appetite for businesses with meaningful payment volumes, strong merchant relationships and a clear path to monetisation,” he added.

A new revenue stream and higher valuations

For years, payment apps have relied on payments to acquire and retain users, with monetisation coming from financial products and other services. MDR changes that by attaching a revenue stream to the transaction itself.

Broader estimates suggest that a revenue pool of around Rs 20,000 crore has opened up, which will be divided between the banks and the fintechs that manage the UPI value chain, as per Vikram Chachra, founding partner of fintech-focused VC fund 8i Ventures.

While a bulk of that money will go to the banks, fintech startups also stand to gain. “Ultimately, fintechs are the ones moving the money, so whatever MDR kicks in is going to flow definitely to the bottom line of these companies. You should therefore see contribution margins and profitability jump up.”

For instance, a company, recording Rs 100 crore of gross profit, will see its profits increase. “Whether the multiple jumps up 20 percent or 30 percent, we don't know. We'll see – but immediately I see a boost in the gross margin of the business and higher gross margin businesses tend to pay at higher multiples,” Chachra said.

“And this will impact all stages positively, be it seed stage, be it mid stage, and multiples should also improve,” Chachra added.

This is true in the case of companies such as PhonePe. While the Walmart-owned firm, in March, had said it is delaying its IPO, the company’s chief executive, Sameer Nigam, told Moneycontrol in an exclusive interview, that the UPI MDR will now push PhonePe closer to an IPO. The company can potentially list on the stock exchanges as early as the current fiscal year.

Separately, the impact could extend beyond consumer payment apps, with investors also seeing opportunities in merchant-focused fintechs and businesses built around the UPI ecosystem.

The shift comes as fintech funding has become more selective.

Fintech startups in India raised $1.14 billion across 76 deals between January 1 and September 17 this year, down 26 percent year-on-year from $1.53 billion across 115 deals in the same period last year, according to Venture Intelligence data.

Deal volume, on the other hand, has slipped nearly 34 percent during this period. This comes even as the average deal size has risen to about $15 million from roughly $13.3 million in the comparable period.

ALSO READ: Fintech funding frenzy: Prosus, SIG, Flourish in talks to invest in fintech startups Vegapay, Rovia and Powerup Money

MDR could give investors another reason to back payments companies, particularly those with scale and strong merchant relationships. But the benefit will vary, as the framework covers only specified transactions and the revenue is shared across the payments ecosystem.

ALSO READ: Fintech funding frenzy: Northpoint, Prosus, Claypond, Elev8, Unbound to invest in Bachatt, CreditWise, NexEdge, TBX

Opportunities beyond payment apps

The investment opportunities are also likely to extend beyond payment apps themselves. As the economics of UPI change, startups building infrastructure around collections, reconciliation and settlement could see greater demand.

“It is very early to comment on the opportunity created by MDR. While the first reaction may be that this will lead to more investment in payments, areas such as transaction reconciliation and settlement will probably need rethinking and could create opportunities for startups,” said Sanjay Swamy, managing partner at early-stage investor Prime Venture Partners.

For investors, MDR therefore changes what can be underwritten in payments, but does not make transaction scale sufficient on its own. The focus is likely to remain on businesses that can convert payment volumes into durable margins and build higher-value products around them.

Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!

Find the best of Al News in one place, specially curated for you every weekend.

Stay on top of the latest tech trends and biggest startup news.