‘Serving the underserved’—that is what Bengaluru-based ZestMoney claimed when it set up operation in 2015. At that point, less than 10 per cent of the Indian population had formal access to credit, according to a World Bank report.

With such a large market to tap into, the Buy Now Pay Later (BNPL) platform initially received great interest from investors. In a seed funding round in its initial year, the fintech firm raised $2 million from investors like Omidyar Network, Flourish Ventures and Nelson Holzner. It further bagged $15 million in its Series B funding round from Goldman Sachs, Naspers Fintech, Quona Capital and Omidyar Network in 2019.  

Through 10 funding rounds, the firm raised $134 million. However, the firm failed to get $100 million in funding from Zip, an Australian BNPL platform, in 2021, as per a report by The Ken. This signalled the start of trouble for the Indian fintech. 

Already suffering from bad loans and high customer acquisition costs, the fund crunch forced the company’s leadership to pursue a deal with Walmart-owned PhonePe. After this deal also fell through, ZestMoney founders Lizzie Chapman, Priya Sharma and Ashish Anantharaman left the firm a few weeks ago, making it evident that the BNPL platform has hit a growth roadblock. To understand this fall, one needs to review the firm’s customer acquisition strategies. 

Customer Growth Conundrum 

The BNPL firm entered the market with a promise that it will bridge the gap for sufficient credit access in India. Underlining this sentiment, Lizzie Chapman, one of the co-founders of the company, said in 2020 that India’s traditional banking system had failed to offer credit to many due to a lag in adopting proper unit economics. To address this gap, Chapman said that ZestMoney would acquire customers through equated monthly instalment options.   

A surge in the need for short-term loans during the pandemic boosted the company’s prospects. Digital payments platform Razorpay noted in a 2022 report that the BNPL sector registered a massive 637 per cent growth in 2021, after the onset of the Covid-19 pandemic dealt a severe blow to the Indian economy. As credit business went high during the pandemic, ZestMoney also witnessed a 300 per cent jump in transactions. On the back of this, the company’s revenue soared to Rs 72.4 crore in FY20 from Rs 26.7 crore in the previous fiscal. This further rose to Rs 89 crore in FY21 and Rs 145 crore in FY22, according to data reported by Inc42.   

However, this did not take the company into a path of profitability. In FY22, ZestMoney’s loss stood at Rs 399 crore, threefold higher than what was in the previous fiscal. A 2022 report by The Ken indicates that the firm’s biggest expense was service deficiency charges, arising out of bad loans, that amounted to Rs 244 crore. It added that the BNPL platform suffered from a high default rate when compared to industry standards.  

This is not surprising given the fact that ZestMoney caters to an audience that is not used to formal credit access. Could it be the case that one of the platform’s selling points prevented it from turning profitable? 

Commenting on the customer base of ZestMoney, Ravi Kishore Goyal, vice president of strategy at fintech firm Propelld, says, “ZestMoney’s main customer segment was the young and low-income consumers who did not have access to credit cards or formal credit channels. While this gave it a large and untapped market, ZestMoney was also exposed to higher default risk, as these borrowers had low or no credit history, poor credit scores, and unstable income sources. Moreover, these borrowers were more likely to be affected by the economic slowdown and job losses caused by the pandemic.”  

Goyal also argues that since ZestMoney is backed by venture capitalists, it prioritised growth over sustainability. For the firm, its growth depended on the loans it provided to the customers. While focusing on expansion, inadequate due diligence while disbursing loans might have come back to hurt ZestMoney when it sought loan repayments. According to Gaurav VK Singhvi, co-founder of We Founder Circle, the BNPL firm faced a higher-than-usual credit default rate.  He says that ZestMoney faced an inherently difficult loan recovery process where it had to allocate resources to address high service deficiency charges. 

“Aggressive lending practices, inadequate risk assessment, and a lack of due diligence contribute to these issues. By relaxing credit standards, misjudging creditworthiness, and overlooking borrower evaluations, the risk of defaults and NPAs increases,” Singhvi adds.  

The Failed Merger 

With mounting losses and the risk posed by high defaults, ZestMoney’s co-founders hinged their hopes on survival through a merger with digital payment giant PhonePe. Even here, things did not go as per expectations. When talks of a merger between ZestMoney and the Sameer Nigam-led fintech decacorn first emerged, it was believed that the move will help PhonePe make inroads into the BNPL sector inorganically. In November 2022, the valuation of the deal was estimated to be $200-300 million. This kept decreasing in the subsequent months. 

Ultimately, PhonePe decided to not go through with the deal. According to several media reports, the merger talks failed because PhonePe had concerns about BNPL platform’s due diligence processes and the condition of its loan book. The start-up sector was shocked over the deal’s cancellation. The failure of the merger also led to Lizzie Chapman, Priya Sharma and Ashish Anantharaman exiting the company they founded. 

Following these high-level resignations, ZestMoney’s reins were handed over to Mohit Chhajer, its vice president (VP) of finance; Mandar Satpute, chief banking officer and Abhishek Sharma, senior vice president for growth.  

The Road Ahead   

Abhishek Rungta, founder of Indus Net Technologies, believes that the first thing the new management will have to do is go back to the drawing board and refocus on its core business. “In this case, it would be its traditional EMI product, which operates on its time-tested credit evaluation, and a tech-led, digital sanction-to-disbursement process,” he says.  

Singhvi says a new trio on board would also have to implement strategies that will help the company reduce its default rates. “Customer segmentation through data analytics will help target borrowers with stronger repayment capacity, improving the portfolio quality. Refining customer acquisition strategies using data-driven insights will attract quality borrowers while reducing acquisition costs,” he adds. 

The writing on the wall is very clear—ZestMoney will have to rethink its customer acquisition strategies and begin to show profits in its books. This is pertinent since its technology and merchant collaborations were what set it apart in the BNPL market. Offering convenient financing options to customers and strengthening merchant relationships is ZestMoney’s safest bet to set itself apart from its former self and turn profitable.