Payments Vs Lending: The Tale Of Paytm’s Two Engines 

Paytm began as a digital wallet, became a payments behemoth on the back of that and then built up the momentum with UPI. But two years ago it had to slow it all down and become a lending company. turn to profitability and the revival of topline after the Paytm Payments Bank bruising was down to this transition from payments to loans and distribution of credit products.  

But now, the company finds itself at another crossroads as the MDR rules for UPI could once again turn Paytm towards payments as a growth engine. How will that change the fintech platform’s revenue structure and how does the major focus on artificial intelligence (AI) play a role in this?   

Five years ago, Paytm was almost entirely a payments company. Payment services brought in ₹1,981 Cr of its ₹2,802 Cr operating revenue in FY21, about 71%. Financial services distribution contributed just ₹128 Cr, under 5%. That mix has since been turned on its head. According to the company’s FY26 annual report, financial services distribution, mostly loan distribution, grew at an 83% CAGR to ₹2,594 Cr, more than 20X its FY21 base. It now makes up 31% of the ₹8,437 Cr topline. 

Payment services is still the largest piece at 58%, but grew at a much slower 19% CAGR over the same period. 

More importantly, in FY26, the company reported a net profit of ₹552 Cr against a ₹663 Cr loss in FY25. In Q1 FY27, operating revenue rose 28% to ₹2,448 Cr YoY, so the company is on pace to stretch its profitability in FY27 too. 

Along the way, Paytm throttled its super app ambitions to a certain extent. It has exited businesses such as entertainment ticketing, scaled back its ecommerce ambitions and sharpened its focus on payments and financial services. 

But look closely, and Paytm’s super app playbook is still very much alive, but it is a focussed effort around its active payments users and merchants, not for just about every consumer out there. The fintech giant is increasingly looking to make more money from the financial relationships it already owns.

Merchants Drive Paytm’s Payments Business

One may see shades of PhonePe’s revenue model in Paytm’s payments business. The stakeholders are the same and the rules of the business are also the same. But Paytm had a different GTM strategy compared to PhonePe. 

The latter went for a user acquisition blitz on the UPI consumer side, which is reflected in its lead among consumers, while Paytm looked for deeper penetration on the merchants side. Paytm’s biggest contribution in that regard is the Soundbox, which was then emulated by every other player in the market. 

That itself makes it clear how Paytm approaches the payments business. It’s a merchants-first approach that set the company apart from other players, save for the likes of BharatPe, which also adopted a similar approach. 

But as with any other UPI app — in the zero MDR regime — a customer scanning a merchant’s UPI QR code does not generate any meaningful fee for Paytm. The zero-MDR framework has historically prevented direct merchant charges on UPI and Rupay. 

Paytm banked on its merchants base to monetise even as UPI monetisation remained a problem. This included merchant loans, insurance, point-of-sales device subscriptions and more. A similar playbook was adopted on the consumer side. 

UPI became the top of the funnel and other services down the funnel monetised this base.  

Even today, the MDR problem has not been solved as the government’s plans to implement a 0.4% MDR fee on certain high value transactions has now been deferred, as per reports. 

But merchant GMV rose 31% year on year to ₹7.1 Lakh Cr in Q1 FY27. Subscription merchant deployments reached 1.57 Cr storefronts, while payment processing margins remained above four basis points. Payment Services revenue grew 33% to ₹1,384 Cr in the quarter.

The merchants-centric stack generated ₹4,891 Cr in FY26, 58% of Paytm’s operating revenue. The business grew by 21% from ₹4,039 Cr in FY25, when regulatory disruption disrupted parts of Paytm’s payments ecosystem. While this is still 27.4% below Paytm’s peak ₹6,236 Cr payments revenue in FY24, this middle ground proves that Paytm has recovered to a large extent after the RBI crackdown in January 2024.  

Similarly, consumer activity also matters, even when individual UPI transactions are hard to monetise directly. In Q1 FY27, Paytm reported consumer UPI transaction value growth of 45% to ₹5.9 Lakh Cr, compared with industry growth of roughly 20%, and monthly transacting users of 8 Cr. 

Paytm’s management describes the recovery as broader than a single payment product. It spans offline small merchants, large merchants, online checkout and consumer payments. That breadth matters because the company can use the same acquiring infrastructure to sell devices and, eventually, distribute financial products.

“GMV growth is accelerating not just because MTUs (monthly transacting users) grew, but because usage per customer did. We focus on customer quality, product quality, and engagement, not just volume,” CEO and founder Vijay Shekhar Sharma said in the Q4 FY26 earnings call.

However, in Paytm’s filings, one key disclosure is missing. The company does not separately report how much Payment Services revenue comes from Soundbox and POS subscriptions versus transaction processing. Without that split, investors cannot isolate how much of the recovery is recurring subscription income, or whether the incremental revenue is being generated more efficiently.

This will also enable investors to track the expenses trajectory. Paytm incurred ₹2,573 Cr in payment processing charges in FY26, compared with ₹2,125 Cr a year earlier. Plus sales workforce reached 40,512 in Q4 FY26, up from 36,724. This is a particularly important figure because the company hinted in early 2024 that it would have to shrink its workforce to recover from the revenue drop as described above. 

Plus, quarterly sales employee costs increased 30% year-on-year to ₹317 Cr. So is the payments business still not seeing operating leverage? The next three to four quarters will be critical to understand this. 

Why Financial Services Could Change The Equation?

That’s the payments side of things. On the other side sits the distribution of financial services. This is another way of saying Paytm is a channel for insurance providers, lenders such as banks and NBFCs as well as digital gold investments.  

But in the post-payments bank world, this is the fastest-growing part of Paytm’s business. 

Revenue climbed 52% in FY26 to approximately ₹2,594 Cr. and in Q1 FY27, financial services grew another 45% to ₹814 Cr. 

According to the company’s FY26 annual report, financial services distribution, mostly loan distribution, grew at an 83% CAGR to ₹2,594 Cr, more than 20X its FY21 base. It now makes up 31% of the ₹8,437 Cr topline. Payment services is still the largest piece at 58%, but grew at a much slower 19% CAGR over the same period. 

On the lending side, instead of disbursing loans from its own books, Paytm helps banks and NBFCs reach customers, distribute credit and support servicing. The partner lenders provide capital and bear the principal lending exposure, while Paytm earns distribution-related fees and commissions under its partner arrangements. 

The economics depend not only on disbursement volumes but also on repeat borrowing, credit performance and the terms offered by partners. In Q1 FY27, Paytm said more than half of merchant loan disbursements went to repeat borrowers, so it is increasingly capitalising on its existing base.

But the lending business only covers about 7% of its subscription merchant base in Q4 FY26, compared with roughly 6% a year earlier. This needs to grow significantly for Paytm’s thesis to hold. 

After Q1, Sharma suggested that capital capacity with lending partners is not a constraint, but getting the right kind of demand for profitable credit growth is important.

Interest rate movements, because of RBI riskweight changes or repo rates add another layer of dependence, but Paytm is hoping that by being a distributor only, it is able to distance itself from the higher costs here. 

After all, the company is just a channel now, and as such it shouldn’t bear a significant amount of the higher cost of capital under a higher repo rate as announced by RBI recently. But high costs can make NBFCs more selective about new loans. This is also why Paytm needs to focus on monetising its more active merchants which are not covered under its lending distribution business. 

Incidentally, while distribution of financial services goes beyond lending, the focus is always on loan distribution rather than insurance or digital gold investments, both of which follow the same model of distribution commission. 

Can AI Make A Difference?

The competitive reality for Paytm is exactly the same as it is for PhonePe or CRED or any other UPI app that looks to scale into other areas. While the nature of revenue differs, the operating segments are all overlapping. 

And Paytm has to compete on multiple fronts like any other payments plus lending app. In consumer UPI, Paytm is well behind PhonePe and Google Pay. In August 2026, Paytm had a volume share of 8.03% compared to 45.64% for PhonePe and 32.26% for Google Pay

PhonePe, Google Pay, BharatPe, CRED, Pine Labs, Razorpay are all competing with Paytm when it comes to merchants services, and investments is the core focus for Groww, Zerodha and Angel One, where Paytm Money is not a major player any more.  

These are different competitive battles, but they converge on the question of how much of a merchant’s or consumer’s financial activity can Paytm capture profitably?

That’s where Sharma’s biggest new bet comes in. Software and AI-led services is the new focus. Paytm envisions the Soundbox evolving from a payment confirmation device to a small business engagement and management platform, which brings commerce tools, customer notifications and support in Indian languages. At its September 2026 AGM, it discussed the idea of Paytm Intelligence, or PI, as a potential offering.

The company disclosed then that AI is already deployed in product, engineering and merchant sales, as well as loan collections and consumer acquisition and retention. On the software side, the company is looking to make software that can help enterprises create an “agentic workforce” for running workflows and business processes. 

Importantly, Sharma added that by FY28, Paytm shareholders will see AI revenue reflected in disclosures under the commerce and cloud verticals. 

Whether this helps reduce Paytm’s dependency on cross-selling to its consumers and merchants is not clear. How the AI business might connect to this vast user base is also not clear. And with the UPI MDR debate far from settled, Paytm is likely to find itself waiting at the current crossroads for some time.  

In fact, one could argue that given Paytm’s profitability right now, it can afford to wait for the transition to MDR. This allows Paytm to build up more profitability in the next 12-15 months by continuing its current approach, and by then, if Vijay Shekhar Sharma’s words hold true, it may well be a fintech and an AI company.

[Edited by Nikhil Subramanium]

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