Digital payment firms in a no-win game as margins hit rock bottom

Time of India

2 days ago

The
digital payments ecosystem
has become intensely competitive with the
Reserve Bank of India
issuing payment aggregator (PA) licences to more than 50 entities, pushing core
transaction processing margins
to what industry executives see as unsustainable levels.
These aggregators facilitate digital payments for online merchants in categories such as ecommerce, food delivery and travel. With a crowded field and large players like
Razorpay, Cashfree
,
PayU
and
Paytm
slashing rates, newly licensed firms are finding it increasingly difficult to scale sustainably.
As of May 2025, 54 companies have secured online PA licences from the RBI. In addition to dominant online players, several offline-first firms including
MSwipe
,
Innoviti Payments
and
Pine Labs
have expanded into online payments. Startups like PayGlocal and DigiO, which focus on
recurring payments
, have also entered the fray.
'The market has become so competitive that prices for processing each payment transaction have dropped to anywhere between 15 and 60 basis points,' said the chief executive of one of India's largest payment processors. 'Ideally, pricing should have hovered around 1% per transaction to make the business viable,' he added. 100 basis points is equal to 1%.
Further, big players enter into subvention deals with their banking partners in lieu of large deposits and heavy volumes, which enable them to give attractive rates to clients. Smaller players cannot play this game, the chief executive said.
Pricing wars
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In some cases, the race for merchant acquisition has driven prices to zero.
A Bengaluru-based payments founder told ET that several well-funded aggregators were recently offering card-based payments to large merchants at no charge. 'They might display a 2% rate on the website, but actual negotiations lead to significantly lower fees — or nothing at all,' he said.
Infibeam Avenues
, which operates listed payment platform CCAvenue,
disclosed in its March quarter results
that its net take rate was only 11 basis points in FY25. The net take rate is arrived at after bank commissions are taken out from the gross margins.
'The domestic payments business is becoming a challenge. Merchants don't want to pay, especially when competitors are offering such low rates. We cannot match that pricing at our scale,' said a senior executive at a newly licensed PA.
The regulatory mandate that UPI-based transactions remain free of charge has further eroded industry margins, with players unable to monetise a large chunk of digital payments.
After Paytm
released its March quarter results
, chief financial officer Madhur Deora acknowledged pressure from larger merchants and alluded to limited headroom for charging the full MDR (merchant discount rate) on UPI transactions.
Pivoting to survive
PAs are looking beyond core processing to retain margins. Most are either targeting niche segments or embedding payments into broader financial services. 'We expect to generate 2% to 4% of our revenue this year from value-added services — and grow that to 7% to 10% in coming years,' said Vishal Mehta, managing director at Infibeam Avenues.
Segments such as recurring payments,
cross-border transactions
and enterprise pay-outs are gaining traction.
'We focus only on recurring payments via UPI AutoPay and NACH (National Automated Clearing House), where banks need a reliable product and good tech support,' said Sanket Nayak, founder of DigiO. The startup, backed by Groww and Rainmatter, integrates payment processing into its broader authentication suite. Rajeev Agrawal, chief executive officer at Innoviti, pointed out that as the market matures, there will be more verticalisation among PAs with each focusing on niche areas.
Cross-border players such as PayGlocal and BriskPe (a PayU-backed firm) are betting on higher margins in international commerce. 'Cross-border GMV (gross merchandise value) is smaller than domestic volumes, but the take rates and revenues are significantly higher,' said the founder of one such firm.
Despite deep discounting, there are early signs that the market may rationalise. Investors are now pressing portfolio companies to prioritise profitability over market share.
'We've seen this before. Remember the cashback wars in consumer payments? Paytm, PhonePe and Google Pay eventually scaled back,' said the founder of a mid-sized PA. 'Just last week, my sales team flagged a rival offering payments for free. I told them — stick to the basics. The burn won't last forever.' But industry insiders also agree that the market dynamics will eventually get the PA industry to settle for four to five major players, just like what was seen in the offline merchant payments space.