A bruised ZestMoney has managed to live on after an emergency injection of up to $7 million from a group of investors including existing backer Quona Capital last week. The extended lease of life comes after its key investor Prosus wrote off its investment worth $38 million in the firm: a radical move that would have sealed the fate of many startups.
The investment write-off was part of a series of unfortunate events, which included a failed acquisition deal with PhonePe, and a subsequent exit of high-level executives.
The incident also puts spotlight on BNPL (buy now, pay later) questioning its sustainability as a business model. It may be recalled that ZestMoney was one of the early movers in the BNPL space. In its nearly eight-year-long journey, the Singapore-headquartered firm managed to win over investors, who pumped in more than $110 million to take it to heady valuations.
But the company is now surviving on a $7 million handout, a dramatic fall since the $435 million valuation in 2021.
ZestMoney’s business model and fundraise
ZestMoney says it uses advanced artificial intelligence and machine learning technology to perform risk profiling of e-commerce consumers who opt for EMI payment options. By collaborating with financial institutions, ZestMoney facilitates loans to such customers.
The company is partnered with over 8,000 brands to work on the BNPL option including major names like One Plus, Mi, Apple, and so on. The company had a zero-cost 3/6 month EMI option for the large ticket-size loans.
Coming to its fundraising, Zest Money has raised around $125 million to date including debt financing. It closed its major Series C round of $58 million led by Australian BNPL firm Zip Co. Ltd. in September 2021.
*The September 2021 Series C round valued ZestMoney at $435 million*
The downfall: RBI blow, funding winter, and more
BNPL firms have had a turbulent time, especially in the last one year or so. Most of this was triggered when the Reserve Bank of India came up with a series of guidelines and directives for BNPL firms.
One of the first major blows came in June 2022 when the Reserve Bank of India (RBI) prohibited all non-bank prepaid instrument issuers from loading instruments with credit lines.
This essentially meant these firms could no longer extend credit lines through the prepaid payment instruments, which includes cards and wallets. Until then, BNPL firms partnered with the banks to offer self-branded cards and allowed end users to use them for credits as and when required.
Just a few months later RBI’s guidelines for the first loan default guarantee (FLDG) dealt another blow to the BNPL firms.
To the uninitiated, the FLDG is an arrangement whereby a third-party service provider such as a fintech company compensates lenders if the borrower, in this case, end users, defaults.
The revised guidelines, however, sought fintech firms to give a guarantee to the lender as compensation for the losses arising from the borrower (end-user) defaulting.
This move further complicated things for fintech firms, especially because the guidelines did not mention any percentage figure for the guarantee, and the BNPL firms were already facing a lot of NPAs (defaults) on their loan portfolio.
The timing of the guidelines also coincided with the onset of the so-called funding winter, which meant startups could no longer repurpose VC money to offset the NPAs or burn.
A respite, however, came nine months later when the central bank set a 5% cap of FLDG on the total loan portfolio as the minimum guarantee for these BNPL fintech firms.
No fresh maneuvers left
Apart from the RBI guidelines and directives that left ZestMoney crippled, the firm had a lot more to deal with major loan defaults, non-availability of lenders, and poor cash flows.
The funding winter also meant ZestMoney had little leverage, considering that the last funding round was nearly two years prior. The company fired more than 100 employees in April, as per media reports.
ZestMoney’s crisis can also be understood by its financial statements which posted a loss of Rs 400 crore during FY22 against a revenue of Rs 138 crore during the same period. The company is yet to file its financial results for their last fiscal year (FY23).
For ZestMoney, the high policy overhang on its business has proved to be near fatal, despite a solid market and use case for its offerings. BNPL is an established tool for moving sales along today, and everyone appreciates it, including the regulator. The only issue has been controlling exposure (of institutions) and the way it is sold, which has led to the regulator’s interventions. ZestMoney is not, and will neither be the last startup to have been stumped by such changes. That is the nature of the startup business, where founders and their backers frequently seek to second guess regulatory moves, and invest accordingly. One hopes that this is a story that will end with some sort of redemption for the startup. Sad to say, the odds of that happening are looking very low.