When ZestMoney started in 2015, it aimed to make life affordable to large swatches of Indians who lacked access to structured loans with its buy now pay later (BNPL) products. The ease of availing these microloans made it popular, and it soon claimed to have a 17 million registered user base, with 85,000 retail touchpoints across India.
Investors were impressed by these promising numbers, especially after the Bengaluru-based fintech's popularity soared during the pandemic. Riding high on its growing approval ratings, the company raised over $130 million from many investors, including Ribbit Capital, Omidyar Network, Goldman Sachs, PayU, Quona Capital, Xiaomi and Alteria Capital.
Then Things Started Coming Undone
In March, a potential deal by PhonePe to acquire ZestMoney fell through after the Walmart-backed financial services unicorn raised concerns about the BNPL's due diligence processes and bad loans on its books. ZestMoney began scouting for additional funding to remain afloat while finding ways to cut costs. This resulted in it laying off about 20 per cent of its workforce or around 100 employees.
A few weeks later, in a surprise move, its co-founders—Lizzie Chapman, Priya Sharma and Ashish Anantharaman—resigned. However, they continue to remain shareholders in ZestMoney.
To Whom Does The Bill Toll?
While the cynosure has been on all that is not going in ZestMoney's direction, other BNPL players have also faced similar challenges. Amongst them is digital lending company BillDesk, which was undergoing talks for acquisition by PayU, the Indian subsidiary of consumer internet group Prosus. Pegged at $4.7 billion, this acquisition was cancelled despite getting a green light from India's competition watchdog Competition Commission of India (CCI).
Eoin Ryan, head of investor relations at Prosus, said in a press statement, "Certain conditions precedent were not fulfilled by the September 30, 2022, long stop date, causing the agreement to be terminated automatically."
Another BNPL player, Simpl, has been battling mounting losses, forcing it to lay off 150 to 200 employees this April, Entrackr reported. According to filings with the Registrar of Companies, the start-up's losses also rose to a colossal Rs 144.28 crore in FY22, up from Rs 6.39 crore in FY21.
So, what turned around the fortunes of the BNPL sector? Part of the answer lies in the clientele they cater to.
A report by RazorPay stated the BNPL sector witnessed a whopping 637 per cent growth during the pandemic. Most of these were customers largely unserved by traditional banking companies.
But these conventional players might be having the last laugh with their prudent approach.
A recent report from the US Consumer Financial Protection Bureau (CFPB) stated that users of BNPL products typically had lower credit scores and limited savings. Considering that they live on the financial margins, they are likelier to default on these alternative loans from non-traditional sources.
Abhishek Rungta, the founder of software engineering company Indus Net Technologies, said, "BNPL companies like ZestMoney cater to millennials and Gen Z customers. These user base exhibit a higher inclination towards online shopping while possessing limited access towards conventional credit forms like credit cards."
According to Ravi Kishore Goyal, vice president-strategy at education financial platform Propelld, BNPL's clientele in India comprises young and low-income consumers who lack access to credit cards or formal credit channels. Some also suffered job losses due to the pandemic, which reduced their repayment category.
Harish Parmar, the founder of debt management provider Singledebt, noted that the availability of easy credit options further pushes customers towards choosing BNPL services, which sometimes come with an interest-free period. It creates a perception amongst customers that they have ample time to repay the loan without any additional financial burden.
"Purchases made by leveraging BNPL are frequently impulsive and not accounted for in a customer's budget," he added. "This increases the likelihood of defaulting on the loan."
This growing delinquency then accumulates and reflects on the BNPL service provider's balance sheet. ZestMoney is a stellar example of this.
In FY22, the company's loss stood at Rs 399 crore, threefold higher than the previous fiscal. A 2022 report by The Ken indicates that its most considerable 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 compared to industry standards.
Writing On The Wall
Financial institutions have a reasonably straightforward process while extending loans. They use various metrics, including CIBIL scores, to check a borrower's creditworthiness, draw up a repayment schedule and get the customer to sign a legally binding contract.
According to a global TransUnion study, this can sometimes be tedious and time-consuming, which is one reason India had over 160 million underserved consumers by 2021-end. It found that about 5 per cent of consumers who started as credit underserved had migrated to becoming more credit active in a two-year window.
BNPL companies tried to cut through this underwriting clutter by promising to dole out the money within minutes. This was a huge draw for people who sought small loans instantaneously. Given its digital-first business approach, it leaned heavily on technology to increase the speed of the underwriting process.
ZestMoney claimed that its proprietary decision and risk engine, which runs on machine learning (ML), was its secret sauce for higher loan disbursals. The ML algorithms would sift through significant data points to underwrite new customers, who accounted for almost 70 per cent of its clientele.
In an interview with the Economic Times, co-founder and CTO Ashish Anantharaman said, "We have been good at using the right data points because we use data in its raw format, and then we kind of look at each of these data points and derive a value of them, it helps us."
Trying to put it in simpler terms, Vikas Garg, co-founder and chief executive officer (CEO) of fintech Paytail, explains that BNPL companies evaluate customers' eligibility by assessing various factors such as credit history, income and repayment category. "To gauge the borrower's trustworthiness, they may consider different data sources outside traditional metrics. After establishing eligibility, companies decide how much credit to extend depending on customers' income levels combined with spending habits and risk appetite displayed by their organisation," he added.
However, this is where the new-age BNPLs cede ground to the legacy lenders; they have a deficit of customer credit histories, which the latter have painstakingly built over the years in a bid to reduce their load of bad loans.
Moreover, Rungta points out that BNPL companies have lower repayment rates than traditional banks because borrowers do not need to make a downpayment or collateral. They can also explore loopholes like changing numbers to avoid repaying the loan.
Investors Cast A Wary Eye
While earlier investors looked at the quantum of loan disbursements and the customer base, they are now paying closer attention to a BNPL's recovery and delinquency rates. Top this with the recent happenings at BillDesk and ZestMoney, and investors are becoming even more cautious before opening their chequebooks.
Gaurav VK Singhvi, the founder of WeFounder Circle, a community of founders and angel investors, would like to take a tempered view, these challenges notwithstanding. According to him, BNPL payments will likely touch an annualised growth of 22.7 per cent, while the total payment volume may shoot up to $14,289.4 million in 2023.
"In this scenario, investors are not afraid to invest in BNPL companies," he affirmed. However, he conceded that the sector could grow if it eliminates current challenges.
This also means that BNPL companies, while boasting of being digital-oriented platforms, need to remember that they are ultimately financial entities—their success and survival hinge on ensuring minimal delinquencies rather than just democratising credit to the masses.