The logo of e-commerce company Flipkart at its headquarters in Bangalore. Photo: AFP

Walmart-owned Flipkart is partially spinning off its digital payments arm PhonePe to ensure better funding and speedier growth. The new entity is raising US$700 million funding, led by Walmart and existing investors, for a valuation of $5.5 billion.

As per the new arrangement, Flipkart’s stake in PhonePe will go down to 87% from 100%, but the two businesses will retain their close collaboration. PhonePe will constitute a new board of directors to focus on its development, and it can create a tailor-made equity incentive or ESOP program for its employees.

“This partial spin-off gives PhonePe access to dedicated long-term capital to pursue our vision of providing financial inclusion to a billion Indians,” said Sameer Nigam, founder and chief executive of PhonePe. “This move will help PhonePe maximize its potential as it moves to the next phase of its development, and it will also maximize value creation for Flipkart and our shareholders,” said Kalyan Krishnamurthy, Flipkart CEO.

Started by three former senior executives of Flipkart in December 2015, PhonePe was acquired four months later by Flipkart. It competes with rivals such as Google Pay, Amazon Pay, Alibaba-backed Paytm and the recently launched WhatsApp Pay. The Facebook-owned messenger app hopes to tap its existing 400 million users for its payments platform.

All these players use the Unified Payments Interface platform – an instant real-time payment system developed by National Payments Corporation of India, which facilitates inter-bank transactions. The platform started off with nine banks as members and currently has 140 member banks.

PhonePe currently leads the mobile payments market in India, by some metrics. In October, it surpassed Google Pay to become the top Unified Payments Interface app. PhonePe reported 835 million transactions in October, ahead of Google Pay, which processed about 820 million transactions that month.

It has also crossed the milestone of 250 million registered users, with over 100 million monthly active users. PhonePe aims to cross 500 million registered users by December 2022.

According to Credit Suisse, India’s mobile payments market is estimated to reach $1 trillion by 2023. The rise in smartphone penetration and the hassle free transaction provided by real-time interbank transfers have encouraged local stores to accept digital payments via phone applications.