Daybreak - How ZestMoney can help PhonePe meet its goals

Episode Date: January 6, 2023

ZestMoney, the BNPL platform, is in the final stages of being acquired by online-payments giant PhonePe. But ZestMoney has been unable to get enough scale online. Even after going offline, it failed to manage risks. It saw its losses shoot up by 3X in the last financial year.PhonePe, meanwhile, has ambitions to expand by venturing into lending.Can ZestMoney's loss be PhonePe's gain?Tune in to find out.

Hi, this is Rohan Dharma Kumar. If you've heard any of the Ken's podcasts, you've probably heard me, my interruptions, my analogies, and my contrarian takes on most topics. And you might rightly be wondering why am I interrupting this episode too. It's for a special announcement. For the last few months, I and Sita Raman Ganeshan, my colleague and the Ken's deputy editor, have been working on an ambitious new podcast. It's called Intermission.

We want to tell the secret sauce stories of India's greatest companies. Stories of how they were born, how they fought to survive, how they build their organizations and culture, how they manage to innovate and thrive over decades, and most importantly, how they're poised today. To do that, Sita and I have been reading books, poring over reports, going through financial statements, digging up archives, and talking to dozens of people. And if that wasn't enough, we also decided to throw in video into the mix. Yes, you heard that right. Intermission has also had to find its footing in the world of multi-camera shoots in professional studios, laborious editing, and extensive post-production.

Sita and I are still reeling from the intensity of our first studio recording. Intermission launches on March 23rd. To get an alert as soon as we release our first episode, please follow Intermission on Spotify and Apple Podcasts or subscribe to the Ken's YouTube channel. You can find all of the links at the ken.com slash I am. With that, back to your episode. All growth comes at a cost. And one company that knows this better than others right now is Zest Money,

the buy now pay later fintech firm that entered the market seven years ago. Zest Money. claims that in this time period, it has given out loans worth $1 billion to 17 million users. But the fintech market in India is rapidly evolving and it is hard for anyone to keep up, including zest money, which saw its losses shoot up to over three times to nearly 400 crore rupees in the last financial year compared to the year before that. And guess what its biggest expense was? It was the cost of paying for bad loans which amounted to over 240 crore rupees.

But like they say, someone's loss is another's gain. It's been more than six months that zest money has been courting acquirers. And one of them is making all the news. It is the payments company PhonePay, which is valued at $12.5 billion. Recently, while announcing the full ownership separation of Flipk, and phone pay, Flipkarts Kalyan Krishnamurit said, and I'm quoting, we are confident phone pay will continue to scale and achieve its vision of providing financial inclusion to millions of Indians.

End quote. Now, a part of this vision that Krishna Murti was talking about includes phone pay's dream of getting into lending. And guess who makes for the perfect fit? Zest money, of course. The lending platform is very close. to being acquired by phone pay for about $200 to $300 to $300 million. But how exactly will phone pay achieve this vision through Zest Money?

Welcome to Daybreak, a brand new podcast from the Kent. I'm your host, Snigda Sharma, and in each episode, I will tell you a business story that is current, significant and most importantly interesting. Today is Friday the 6th of January. Before we get to the core of the story, we need to understand how fintech companies, are constantly having to evolve in order to stay relevant in the market. The Indian fintech ecosystem has seen tremendous growth. But with that also comes change. The quicker the growth, the faster the change.

Not long after we saw online payment gateways flourish, there was a realization within the industry that just catering to online payments won't cut it. That made fintech companies start looking at lending. And this is when the BNPL or Buy Now pay later model really picked up. It allowed people to enjoy the perks of a credit card without actually having one. Zest money was one such platform. In fact, it is one of the earliest BNPL fintech companies in the country. Phone pay meanwhile has grown to be a giant in the digital payments market.

A year after it was founded in 2016, it was acquired by FlipCart and its parent company Walmart. Ever since it has ushered in an era of growth and expansion for itself and has never looked back. But now, Flipcott and Phone Pay have announced that they are parting ways. Now, just to make it clear, both will still operate under Walmart. The idea behind this separation was to allow phone pay to raise funds independently and bring external investors on board.

And now that this separation is official, phone pay naturally wants to expand. And the next logical way to do it would be to get into Buy Now Pay Later or BNPL or lending. Meanwhile, Zest Money is already in the lending game. But how has it panned out for the BNPL company? For Zest Money, its growth was mainly driven by college students and young professionals. These are people who make small and medium-sized purchases.

on Amazon, Flipkart and other e-commerce sites. Zest Money and other startups like it except applicants even if they have a dodgy credit history. But they do it at really low borrowing limits. Once the user starts paying back regularly, their limits are increased. But here's the thing. A former Zest Money employee told the Ken

that Zest Money and other BNPL companies pay at least $1,000 to acquire one customer. So for this model to be profitable, a borrower would have to take at least four BNPL loans in one year. But Zest Money users were only taking 2 to 2.5 loans on an average in a year. So now, even BNPL is proving to be somewhat of a letdown. Irrespective though, Zest Money did have a pretty good year.

I'm referring to the financial year that ended in March 2022. It was good at least in terms of loan book growth. Its assets under management or AUM increased by nearly 80% to over €1,000 crore rupees compared to the previous year. Its income from the operations in the same year rose by almost 65% to over 140 crore rupees. Unfortunately though, all of this came at a price. The company saw massive losses and most of it came. from bad loans. The company's rate of defaults

stood at an all-time high of 12 to 13%. Ideally, this figure is supposed to be between 2 to 2.5% for BNPL lenders. A former employee at an e-commerce giant who declined to be named

helped us understand one of the reasons why this could have happened. They said, and I'm quoting, at the time of buying, zest money would pay the entire amount upfront to the merchant. It was then up to zest money to recover that money from the borrower. So even if the loan went bad, the merchant did not lose anything.

Merchants just had to pay the associate fee. End quote. Zest money did not have the capital to absorb these kind of losses. So it raised a funding from the likes of payment service provider pay you, venture capital firm Corna Capital, Investment Bank, Goldman Sachs, and B&PL giant Zip. It was a total of $140 million. The latest funding came in June

from a debt financing round at about $450 million pre-money valuation. But the Zip funding actually turned out to be a setback for Zest money. A person close to the matter told again that Zest money had actually sought $100 million but only managed to raise $50 million from ZestMoney. Zip. And even that did not come through fully. This happened after Zip suffered a net loss of $1 billion in August. And Zest Money's problems didn't quite end here. The Reserve Bank of India or

the RBI came up with a set of digital lending guidelines in September, causing a slowdown in the company's growth, but not its losses. But since then, Zest Money's monthly loan disburseals have fallen from 400 crore to about 100 to 150 crores now. But the company spokesperson denied this and said that Zest Money is still lending at an average of 400 crore a month. So what then is in this deal

for phone pay? An analyst at a venture capital firm told us that Zest money, at least until recently, has maintained a healthy rate of loan dispersals. And that is what makes it the perfect target for phone pay. Phone pay as a payments company has been trying to get into lending to achieve its dream of becoming a company that promotes financial inclusion for millions of Indians. But it does not have an NBFC or non-banking financial company license. This license is necessary for it to be able to start lending. Zest money meanwhile has already got it. So once the deal is done,

phone pay is expecting to inherit this long coveted license. Even though Zest Money is expected to operate as a separate entity, which means phone pay does not directly get to lend, it will unlock a new revenue stream for phone pay. Not just that, it will also get access to Zest Money's lending tech stack, its partnerships with 1,000 online stores and 75,000 offline merchants, including big ones like Apple and Samsung. Samsung. Plus, it will also get Zest Money's 27 lending partners, including large ones such as

Aditya Birla Capital, Tata Capital, Piramil Finance and ICICI Bank. So in a way, the RBI regulations on digital lending that came as a blow to lenders like Zest Money will actually benefit phone pay. The rules fundamentally changed the industry. Companies saw a substantial fall in their loan disbursements. But for phone pay, this might have helped them get a better price for zest money. Daybreak is produced from the newsroom of the Ken, India's first subscriber-focused business news platform. What you're listening to is just a small sample of our subscriber-only offerings.

A full subscription unlocks daily long-form feature stories, newsletters, subscriber-only apps, and podcast extras. Head to the Ken.com and click on the red subscribe button on the top of the website. I am Snigda Sharma, your host, and today's episode was edited by my colleague Rajiv Sien.