This comes amid a global reset in the BNPL sector, fuelled by interest rate hikes and an overall squeeze in consumer spending. ZestMoney has been on the block, looking for a buyer as it struggled to raise fresh funds after tech investors turned overly skittish this year, these people said.
If the transaction goes through, it will be the biggest consolidation move in the new-age lending sector.
Likely ‘Distress Sale’
The sector has, in recent months, faced intense regulatory scrutiny as the central bank introduced a set of rules affecting these businesses.
ET could not ascertain the size of the deal, but multiple people aware of the development said it would likely be a “distress sale,” and could potentially value ZestMoney much lower than its previous financing round last year, when its valuation was pegged at around $400 million.
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The BNPL startup has held talks with other potential buyers over the past two months as its cash runway shortened and it has been unable to shore up funds, people in the know said.
Illustration: Rahul Awasthi
“This story is purely speculative. We have no comments to offer,” a spokesperson for ZestMoney said in response to ET’s query seeking confirmation of the deal. PhonePe did not respond to ET’s email till press time on Thursday.
currently in the process of being spun off from parent entity Flipkart, is closing a fresh funding round at a valuation of $12 billion and is expected to shell out the deal amount in cash, another person close to the development said.
PhonePe was last valued at $5.5 billion in December 2020,
following a $700-million infusion from Walmart. ZestMoney will likely operate as an independent entity post the acquisition, another person said on the condition of anonymity as the discussions are private.
“The talks are fairly serious and likely to close in a few weeks…,” said another person close to the matter. “Negotiations are on about the price, keeping in mind the extremely cautious state of the markets, especially in the fintech space…”
Bengaluru-based ZestMoney, founded in 2015 by Lizzie Chapman, Priya Sharma and Ashish Anantharaman, last raised $50 million from Prosus-owned PayU and Australian fintech Zip Co in September last year, coinciding with the BNPL boom fuelled by a major uptick in online shopping.
At the time, the company was looking to snag up to $100 million in equity funding as part of the financing. However, the entire sum did not come through.
“Zip itself is on the verge of shutting down.. ZestMoney planned its spends thinking of the $100 million raise.. Its loan disbursal is about Rs 100-150 crore per month and the company is still burning around $5 million,” said another fintech executive who is familiar with the company’s financials.
Sydney-headquartered Zip’s market capitalisation has nosedived this year, hit by higher interest rates driving a rout for BNPL stocks. By October, Zip’s share price had plummeted nearly 93% from the highs of February 2021.
All told, ZestMoney has picked up around $142 million in equity funding. Its other backers include Goldman Sachs, Ribbit Capital and Xiaomi.
It competes with the likes of Axio (formerly Capital Float), facilitates no-cost equated monthly instalments (EMI) payments to customers on behalf of merchant partners and sits at the checkout of various ecommerce websites and points-of-sale of various offline retail partners.
Unlike Simpl and PayU’s LazyPay, which provide BNPL services for smaller, everyday purchases, Zest and Axio have focused on large-ticket items.
Some of ZestMoney’s key partnerships are with Amazon, Flipkart, Myntra, MakeMyTrip, Nykaa, Apple and Reliance Digital.
As of October, it said it had a merchant network of over 10,000 online partners and 75,000 physical stores and a registered user base of 17 million merchants.
ZestMoney’s losses widened threefold to Rs 398.8 crore for the financial year ended March 31, 2022, compared to Rs 125.8 crore for the previous fiscal year. Total revenue grew 62% to Rs 145 crore in FY22, from Rs 89.3 crore in the previous fiscal year.
With public BNPL stocks under immense pressure, privately held players are feeling the heat in the current downturn, increasing their dependency on debt. Globally, BNPL biggies such as Sweden’s Klarna and PayPal cofounder Max Levchin’s Affirm, among others, have struggled to hold on to their valuations.
In July, Swedish BNPL firm Klarna raised funds in a down round at a valuation of $6.7 billion, a drop of more than 80% from the $46-billion price tag it commanded last year.
Affirm’s stock was trading almost 92% lower from its November 2021 high. Its current market capitalisation stands at a mere $3.8 billion, from highs of almost $47 billion in November last year.
ET reported on April 8 that US-based BNPL firm Sezzle
took the call to exit India and shut its operations in the region as part of a restructuring exercise in line with its parent Zip, which signed a definitive agreement in February to acquire Sezzle.
PhonePe’s potential acquisition of ZestMoney comes at a time when it has been on the lookout for various licences, including stockbroking, to add more services for its active monthly user base of over 190 million.
It has also been wanting to acquire a non-banking financial company (NBFC) licence for a few years now.
While PhonePe will not own an NBFC licence under its own name, if the ZestMoney deal goes through, it will be able to run an entity with NBFC operations.
Industry executives told ET that as the regulator looks closely at digital lending players, it has been harder for fintech firms to receive approvals on their NBFC applications.
PhonePe has had plans to enter the merchant lending business since the start of the year.
“If the acquisition goes through, it will open up new use cases for both PhonePe and ZestMoney,” said a fintech executive who did not wish to be identified.
“On one hand, PhonePe can finally monetise payments by allowing users to pay everyday bills through credit and open Zest’s applicability to even offline payments. For Zest, it will expand to a much wider offline base of merchants and can become an everyday solution than just being a checkout provider for large ticket buys.”
At present, PhonePe claims to have on board 35 million offline merchants, leveraging its solutions. In May, PhonePe also announced the acquisition of wealth management firms WealthDesk and OpenQ for $75 million.
Rival Paytm, owned by One97 Communications Ltd, has been bullish on lending and touched an annualised disbursement rate of Rs 37,000 crore by October, the company has told the stock exchanges.
Digital Lending Guidelines
The Reserve Bank of India’s (RBI) new digital lending guidelines, introduced in August, will regulate the online credit segment and put the onus on regulated entities like non-banks.
The move will push several credit-offering fintech platforms to apply for an active NBFC licence, as the central bank allows loan disbursals and repayments only among borrowers and entities regulated by itself, reducing the role of lending-distribution platforms to mere direct selling agents.
August 12 reported that the new rules will step up pressure on new-age lending businesses to actively focus on their NBFC units and capitalise them to meet the central bank’s preference towards regulated entities.
This has heighted the entry barrier for several fintech firms aspiring to enter the lending segment, as the impetus stays with regulated entities.
However, firms such as ZestMoney were not severely affected as they already have an NBFC licence in their group. But with RBI’s operational rules on digital lending, credit fintech firms like ZestMoney have had to pay more attention to their asset quality.
These companies have been sweetening the deal for their lending partners to get around the rules with first loan default guarantee, whose future for now is in a flux, as RBI is yet to put out its final stand on the matter.