Disc – I am not invested in the company, and I am negatively biased. I do track the company, but I have not done deep dive – so please take my view with a bucket of salt.

UPI: Payment firms in a fix as UPI, RuPay incentives dry up – The Economic Times (indiatimes.com)

One of the things that has happened in Budget for FY25 is that incentives for digital payment promotion has gone down to 1441cr from 3500cr.

As of now, both P2P and P2M transactions are free. Then how does NPST and Sponsor Bank (say Cosmos Bank) make money?

The answer one can get is by reading conference calls, presentations of PayTM. PayTM recognized digital incentive payment in Q4 of every year.

You can see that PayTM earned 182cr from digital incentives in FY23 and it earned 288cr from digital incentives in FY24.

Below image re-affirms that P2M transactions receive subvention from government.
PayTM also earned some money through MDR. It lists the categories where MDR can be received – RuPay Credit Cards on UPI, Credit Overdraft on UPI, Debit & Credit card Processing, EMI aggregation offer.

So, considering these things, following are few points to ponder over –

• Cosmos bank is entitled to subvention money from GoI based its market share in P2M transactions. Cosmos bank does not want to commit large capex to NPST. So what cosmos bank has done is that – they have agreed to share some portion of incentive with NPST.
  I am not clear on accounting – but it looks like NPST recognizes the revenue upfront and probably Cosmos bank pays upon agreed rate to NPST. Then Cosmos bank receives the amount from GoI in Q4 and everything works out.

• Currently industry or investors are assuming that GoI incentives will grow in proportion with UPI transaction growth.
  GoI has, at least for now, not agreed with this and has reduced allocation from 3500cr to 1441cr. From GoI point of view, they have done the handholding to bring the industry to this stage. But from hereon, industry has to find ways to make money. MDR on transactions above 2000 is one idea. Eventually, Industry demand for incentive growth can be 10,000cr or more and Budget simply would have no appetite for this kind of outlay.

• I had asked this question in Q1 conf call. Management has confirmed that if outlay gets reduced, per transaction money they charge to Cosmos bank will get reduced.

PayTM Q1 call had already happened prior to budget. But there are news articles after the date and VSS talks about becoming profitable “without digital incentives”

Paytm sees no impact of lowering UPI incentives on its path to profitability (newindianexpress.com)

The question investors of NPST should ask themselves are –

• What is the probability the GoI would backtrack and increase the budget of digital incentives? Would it continue in FY26, Fy27 and so on – even if it happens in say FY25?
• What percentage of NPST revenue is from MDR categories that are mentioned above in PayTM presentation?

Hope this helps.