ZestMoney Bows Out as Regulatory Pressures Mount

🔍Insights

Nadeesh Kareemdathil, Apoorva Bajj

Dec 11, 2023 — 4 min read

ZestMoney Shutdown

ZestMoney, the buy now pay later platform, is set to cease its operations by the end of December, according to an internal communication to its staff. The company, currently employing around 150 individuals, is compelled to take this step as it grapples with financial challenges, despite efforts to revitalize its operations. In a setback earlier this year, ZestMoney faced the departure of its three co-founders, Lizzie Chapman, Priya Sharma, and Ashish Anantharaman, following unsuccessful attempts to secure new funding and finalize an acquisition deal with PhonePe, a digital payment platform.

In a statement released in May, ZestMoney outlined a strategic shift, emphasizing a focus on core digital EMI and personal loan products while discontinuing SaaS and insurance business operations. Over the past six months, the company's digital EMI product has faced challenges, encountering resistance not only from consumers but also from crucial partners such as payment aggregators, eCommerce platforms, and non-banking financial companies (NBFCs).

Prosus, an investor with a significant 19.4% stake in ZestMoney, wrote off its $38 million investment as the company grappled with its financial downturn. Media reports indicate that ZestMoney terminated over 100 employees during a transitional phase. Despite raising approximately $5-7 million in seed funding in July, the company's financial struggles persisted, culminating in the decision to shut down.

ZestMoney, which has raised a total of $125 million, including debt financing, experienced a decline following the implementation of new guidelines for Buy Now Pay Later (BNPL) companies by the Reserve Bank of India in June 2022. The regulatory measures prohibited non-bank prepaid instrument issuers from loading instruments with credit lines.

As part of its wind-down strategy, ZestMoney intends to retain a minimal finance and legal team. This team will focus on selling the remaining assets of the business to a suitable buyer and overseeing the closure process. Although it is unlikely to attract interest from major fintech companies, there is speculation that a traditional NBFC might consider acquiring the technology in a potential firesale.

Established in 2015, ZestMoney initially operated as a loan-sourcing platform, facilitating rapid credit disbursal at the point of sale, particularly for online merchants. Collaborations with prominent eCommerce players such as Flipkart, Amazon, Myntra, and Nykaa were key to offering pay-later services. Following the breakdown of acquisition talks with PhonePe, ZestMoney attempted a shift in its business model, offering its technology stack as a white-label solution to other fintech lenders and NBFCs.

ZestMoney’s Loss Surges; Operating Revenue and Expenses Rise

Fintechs Learn from ZestMoney's Cautionary Tale

Financial technology (fintech) experts suggest that stringent regulations have prompted non-banking financial companies (NBFCs) and banks to reassess their associations with digital lending platforms. The rapid expansion of the personal loans sector through these platforms has raised concerns at the central bank for an extended period. The Reserve Bank of India (RBI) has consistently urged banks and NBFCs to exercise greater responsibility when engaging with digital platforms for lending. Additionally, pressure from civil rights groups has mounted, advocating for the elimination of predatory lending practices and addressing concerns related to recovery harassment.

The recent adjustment in risk weightage by the RBI has further complicated these partnerships. While there were speculations about the potential impact on the Buy Now Pay Later (BNPL) business, particularly for platforms like Paytm, the fintech giant has refuted such claims. However, it is anticipated that fintech companies operating in the realms of small-ticket personal loans and BNPL may encounter significant challenges in the coming months.

The closure of ZestMoney serves as a notable example of how heightened regulations can profoundly disrupt the operations of fintech startups. Numerous fintech ventures have expanded into digital lending in recent years, and the regulatory shifts pose a threat to their continued operations. In August of this year, two major consumer internet giants, Flipkart and Swiggy, announced their foray into lending. While Swiggy ventured into the co-branded credit card segment, Flipkart set its sights on the personal loan business.

Google Pay has also intensified its collaborations for both personal and merchant loans. Another major player, CRED, entered the lending arena with a BNPL product in 2022 and is currently exploring opportunities to expand its lending product offerings. Despite the saturation of the market with various digital lending platforms, the RBI's decision to elevate risk weights appears to be a preventive measure against potential long-term catastrophes.

Fintech startups are recognizing that regulatory compliance is a fundamental aspect of their sector, and not merely an exception. In some ways, startups are acknowledging that merely activating digital lending channels may not suffice. In this context, the case of ZestMoney serves as a cautionary tale for the broader fintech ecosystem.