Why Did ZestMoney Fail? A Cautionary Tale for India’s BNPL Sector
India’s buy-now-pay-later (BNPL) sector has seen tremendous growth recently. The idea of paying for purchases in installments without interest has resonated with younger, digital-first consumers. However, growth has come with its fair share of pains.
Last week, prominent BNPL startup ZestMoney announced plans to shut down. The Bengaluru-based firm that was once valued at $450 million could not survive amidst regulatory uncertainty and business model struggles.
ZestMoney’s failure offers key lessons for India’s BNPL sector. We analyze what went wrong and what other firms can learn.
The ZestMoney Growth Story
Founded in 2015 by Lizzie Chapman, Priya Sharma, and Ashish Anantharaman, ZestMoney quickly became a leader in India’s BNPL space.
The model was simple – partner with merchants to offer interest-free installments on purchases via its platform. The startup disbursed funds to merchants and recovered dues from customers in EMIs.
Backed by marquee names like PayU, Xiaomi, and Goldman Sachs, ZestMoney raised $140 million in funding. It onboarded over 10,000 online merchants and 75,000 offline retailers to its network.
At its peak, the startup disbursed ₹400 crore ($53 million) per month in credit and served 17 million registered users.
So where did things go wrong for this high-flying startup?
The Regulatory Blow
India’s central bank has been wary of digital lending apps extending credit lines. In 2020-21, the RBI banned fintech firms from loading credit lines onto mobile wallets and prepaid payment instruments.
This move severely impacted companies like ZestMoney which allowed customers to access credit limits on wallets.
Following the ban, ZestMoney found it harder to acquire customers digitally. It had to pivot to offline, feet-on-street distribution which was costlier.
Regulations also tightened norms around metadata collection, limiting the startup’s ability to underwrite customers.
The Failed Rescue
With growth slowing, ZestMoney saw its valuation drop from $450 million to $300 million. By mid-2022, the firm was scouting for a buyer.
Leading digital payments provider PhonePe emerged as the frontrunner. However, the $200-$300 million deal was called off earlier this year.
PhonePe reportedly developed concerns around ZestMoney’s high default rates, valuation asks, and synergies post-acquisition.
Backed into a corner, ZestMoney continued to bleed. The founders stepped down, handing control to investors.
A last-ditch effort at a strategic turnaround plan dubbed “ZestMoney 2.0” failed to revive fortunes.
Key Takeaways for India’s BNPL Sector
As a sector flush with cash and hungry for growth, BNPL firms can gain several lessons from ZestMoney’s abrupt downfall.
Regulations Will Tighten: India’s regulators have repeatedly warned against predatory lending apps. As the sector evolves, norms around data usage, credit underwriting, and recovery are likely to heighten. Firms need robust compliance muscles.
Core UVPs Will Get Tested: ZestMoney’s USP was instant credit with no hidden charges. But as growth plateaued post-regulations, its value proposition weakened. Companies need durable, defensible core strengths beyond just easy money.
Product-Market Fit is Crucial: ZestMoney saw its digital acquisition flywheel break down after the wallet credit ban. Firms need robust product-market fit across channels to pivot when needed.
Corporate Governance Cannot Be Ignored: ZestMoney saw its founders hastily exit amidst a crisis, raising questions internally. Investors leaned heavily on hired guns without results. Companies need proper checks and balances.
The Road Ahead
ZestMoney’s fall has led to investor caution around Indian BNPL firms. However, the sector holds immense potential in a consumption-based economy like India.
Consumer habits are slowly evolving from a transacting to a financing mindset. As credit penetration rises with digital growth, firms continuing to build robust and compliant BNPL platforms can thrive.
However, companies need to learn the right lessons from faltering pioneers like ZestMoney. Only then can BNPL truly unlock its promise while avoiding the pitfalls.
