December 13, 2023


Does ZestMoney’s fall spell trouble for the BNPL/fintech sector?

The Buy Now Pay Later (BNPL) way of consuming is seen by many as a convenient way to buy things. If you’re short on cash and have unpaid bills, companies, including several startups, offer BNPL services. Paytm Postpaid, Flipkart Pay Later, and Amazon Pay Later are examples. It seems everyone’s looking at lending in the fintech sector.

ZestMoney is one company in this field. While not a household name like the above examples, it was once valued at $450 million, and its prospects seemed promising. The company is shutting down at the end of this month and laying off 150 employees. Is this a symptom of a broader problem in the sector? Should other companies be wary?


Let’s get the basics out of the way first. BNPL is a financing option that allows you to buy a product and not pay for it immediately. BNPL lenders pay the merchants at the point of sale, and you repay the loan at a later date with little to no interest charges.

If you’re wondering how’s this different from a credit card, there are a couple of differences. First, to get a credit card, you need a good credit score and then follow a verification process. BNPL often comes with interest-free loans with a shorter credit period, usually 15 days to a month.

The BNPL market in India has gained momentum, mainly driven by GenZ consumers. With the e-commerce boom, it has become a preferred payment option for that demographic. RazorPay’s The Covid Era of Rising Fintech report stated that India’s BNPL market grew by over 630% in 2021. Other estimates say the market will reach $40-45 billion by 2026.

One player in the sector is ZestMoney. Over a decade ago, Lizzie Chapman moved to India as the fintech revolution began. Growing up with financial struggles, she wanted to see how a company could provide access to credit to those who didn’t have much or any of it. ZestMoney was founded in 2015 with Chapman as CEO, Priya Sharma as CFO and COO, and Ashish Anantharaman as its CTO. Only a year later would come news that was music to their ears – demonetisation. They were off to the races.

The company’s premise was simple – allow customers to pay later for products in the ₹50 to ₹5 lakh price range across 10,000 online sites and 75,000 physical stores. The company saw potential in younger clientele, millennials and GenZ. Many didn’t have a credit card, a limited credit history, and little data to build a profile to become ‘creditworthy’.

In just a couple of years, the company processed over a million monthly transactions. Things were going their way. It became a cardless EMI partner for Amazon, Flipkart, Xiaomi, and other merchants. Among its institutional investors were the likes of PayU and Goldman Sachs.

However, things began to take a turn for the Bengaluru-based startup. In 2022, the Reserve Bank of India (RBI) issued new rules for digital lending. It wanted to tackle hidden charges and illegal access to personal data. ZestMoney needed to change its business model into a software service model. Its finances weren’t in good shape, and it needed a buyer.

PhonePe decided to acquire the company at a $200-300 million valuation, less than the $400 million it was valued at during the previous funding round. While things were all set for both companies, PhonePe decided to exit the deal. It cited the company’s ownership structure and excess pending loans. Its founders then decided to leave the company earlier this year.

Last week, ZestMoney announced it would close down despite raising some money in August. It wasn’t able to revive operations. Should this be a warning to the rest of the sector? Was this all on the company or a symptom of the sector at large?

VIEW: The company is to blame

The company’s business model wasn’t seemingly well thought out. Amidst dozens of credit card companies in the country, ZestMoney offered something that others didn’t – buying things on EMI without a credit card. When PhonePe was evaluating the deal and doing its due diligence, it found that ZestMoney’s non-performing assets were in double digits. Some estimates say about 15%. Its monthly disbursements more than halved from its ₹600 crore peak.

The company’s ability to raise debt money to lend was constrained. The assets that weren’t lent stayed idle and weren’t making money to generate some cash flow. Perhaps what the company didn’t anticipate was regulatory considerations. By early 2021, central banks in Australia and England began taking a closer look at BNPL businesses to see the risks they were exposing the financial sector to.

From 2020 to 2022, the BNPL sector boomed and was at its peak. However, companies, including ZestMoney, weren’t making profits. That being said, ZestMoney was the only name in the BNPL space that faced turbulence once the RBI’s regulations were announced. Others have managed to weather the storm by redesigning their business models to make them viable.

COUNTERVIEW: The sector needs to watch out

While ZestMoney didn’t do itself any favours with its business model and functioning, there are bigger issues at play for the sector as a whole. One thing to keep in mind is that there aren’t any dedicated BNPL regulations in India. That could change in the future. The RBI is working toward making these companies more accountable by implementing data and consumer protection regulations, given the amount of data BNPL companies collect.

Providing access to credit is a good thing. However, the business model can be shaky. While there’s no issue with the BNPL model per se, some see risks that come from hidden costs, lack of transparency, and a population new to credit with no credit history. There are no free lunches after all. If a company says 0%, someone else is obviously paying for it.

The proliferation of BNPL platforms creates a problem. When new borrowers avail of BNPL services, they do so without disclosing how many short-term loans they’ve accumulated. The lender isn’t usually aware if there’s a problem. With more investors and private equity capital pouring in, BNPL companies have no choice but to expand their portfolio, beat their competitors, and satisfy investors. This means making it easy, often way too easy, to get a loan.

Reference Links:

  • Lizzie Chapman: Pioneering buy now pay later in India – Forbes
  • ZestMoney’s Dilemma: The Inside Story – Insider Finology
  • Goldman Sachs-backed ZestMoney, once valued at $450M, to shut down – Tech Crunch
  • India’s ZestMoney raises $20M to grow its digital lending service – Tech Crunch
  • Are we headed for a BNPL trap? – BusinessToday
  • Explained: Why ‘Buy Now Pay Later’ is a good idea which can quickly become a bad one – CNBC TV18

What is your opinion on this?
(Only subscribers can participate in polls)

a) ZestMoney’s fall doesn’t spell trouble for the BNPL/fintech sector.

b) ZestMoney’s fall does spell trouble for the BNPL/fintech sector.


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