Future of Goldman Sachs backed Fintech: Can Zestmoney find a way to profitability?

Goldman Sachs-backed fintech, ZestMoney, faces uncertainty as founders resign the Buy now pay later startup. ZestMoney loses all three founders: what's next? ZestMoney turns to new management for guidance post their founders exit after the deal with PhonePe fell through. While the founders are still majority shareholders, will existing investors come through with Zest?

Picture this - you're scrolling through your favorite online shopping app, adding items to your cart left, right and center. But when it's time to hit the checkout button, the dreaded "Payment Required" message pops up and you're left with a sinking feeling in your stomach. What if you could buy now and pay later, without worrying about exorbitant interest rates and hidden fees? Well that is exactly what Zestmoney, the fintech startup, set out to do back in 2015 when they started shop . However, Amidst a lot of corporate drama, the founders of Zestmoney decided to exit the company, leaving many wondering what's next for the Goldman Sachs backed platform.

But I wouldn't count them out just yet - Zestmoney has managed to grow their books in a challenging market, proving that well thought out buy-now-pay-later schemes that leverage AI, are more than just a passing fad. Even PhonePe came knocking on their door, but unfortunately, the deal fell through.

Before we discuss the road ahead for Zestmoney, and take a peak at their numbers, a warm welcome to everyone who stumbled upon this newsletter by chance. I am Kamalika, better known as The Fintech Chronicler. And everyweek, we discuss the hottest item from the World of Fintech and Crypto. This weeks coverage just happens to the talk of F-Town: ZestMoney.

So let's start at the beginning.

Zestmoney: A brief History

Zestmoney, a Fintech company, was founded in 2015 by Lizzie Chapman, Priya Sharma and Ashish Anantharaman, with the aim of making life more affordable for India using technology-led solutions.

ZestMoney was founded in 2016 and is headquartered in Bangalore. ZestMoney was established by Lizzie Chapman, Priya Sharma, and Ashish Anantharaman as a web-based loan marketplace.

ZestMoney's official launch occurred in January of 2016, and the company's first retail partner was Overcart.

ZestMoney's technology platform expedites the disbursement and approval of microloans. Every loan applicant on ZestMoney is assigned a risk score based on their individual financial history. The company requires applicants who are new to credit and therefore have no credit bureau data to submit additional information before approving a loan.

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ZestMoney raised $2,000,000 in a seed round in September 2015 from Nelson Holzner and Omidyar Network, and then raised $6,500,000 in a series A investment in December 2016 from Omidyar Network and PayU.

Omidyar Network, PayU, Ribbit Capital, and Xiaomi contributed to ZestMoney's series A round of funding that closed in August of 2018.

ZestMoney secured $20,000,000 in series B funding from Quona Capital, managed by Goldman Sachs, on April 22, 2019. ZestMoney received further funding of $11,297,403 from Primrose Hills Ventures in March of 2020.

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So, obviously there was a lot of investor confidence in the company. Despite that why are we discussing about their future as if its on its last breath ? Or was it the Industry?that attracted investors ?

Growth of Buy Now Pay Later in India

BNPL industry in India is expected to grow by 22.9% on an annual basis to reach US$14,289.2 million in 2023.

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The BNPL industry in India has experienced strong growth in the last three years, driven by an increase in ecommerce penetration, thanks to the pandemic.

But some of the other factors that would contribute tot eh growth of BNPL, especially in Tier II and Tier III cities would be rising inflation and rising living costs. Because after all the promise of BNPL is not access to credit, oh no sir, it is to make things affordable to you!

BNPL acceptance is expected to grow steadily over the forecast period, with a CAGR of 12.2% during 2023-28. In 2022, the value of BNPL products in India will increase from US$11,628.8 million to US$25,387.3 million by 2028.

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Despite some regulatory hurdles, consumer BNPL spending is expected to increase by a significant amount in Q4 2022, largely due to the year-end festive and holiday season. The method will see an overall rise in adoption as more and more consumers turn towards more flexible payment options, as prices rise and the cost of living increases.

FinTech Decacorn Phonepe to Acquire Zestmoney: And why the deal fell through

?When 6 months ago, the deal was announced in public, of PhonePe acquiring Zestmoney, I simply could not stop gushing about it. I wrote a very detailed article here, in case you wanna hear my fan girl analysis of what I thought was a match made in heaven.

The crux of the story is that PhonePe is a Financial brand that is building across the financial stack. And the only firearm missing from their artillery was an NBFC license, that could help them set shop to start lending to their customer base.

But, turns out PhonePe didn’t really need the License as much as Zest needed the money. Which led to the deal falling through. (You can read my heartbreak from here).

One of the reasons behind the deal falling through was, NPA. Or Non performing assets.

Let me elaborate. So whenever a lender a gives us a loan, that is an asset for them, because the interest we pay them back, is an income the asset generates. But what happens when we do not pay them back, for whatever reasons? You got it, the asset fails to perform its tasks of generating an income, hence Non Performing Asset.

Now typically, lenders use credit scores to protect themselves from these downsides. But what happens when you are new to credit?

Well, Zest claimed to have built an engine with gathered lots of data on the user to draw an insight on their ability to repay the loans.

Only problem? Their NPAs were trending towards 10% of their books. While most of the industry found 3% to be too much to handle.

Add to that concoction, that the average ticket size of the loans disbursed came down significantly post COVID, meaning that they had to lend to more customers. Increasing their cost of acquiring customers.

Zestmoney Founders Resign

So it was that Phonepe did not find value in the deal, especially given the valuation that was being expected.

?Unable to find a buyer, and with investors losing faith, the founders decided that the best interest of the company would be if all of them quit. And that is what they proceeded to do. After announcing that senior vice president-growth Abhishek Sharma, chief banking officer Mandar Satpute, and vice president-finance Mohit Chhajer would be taking charge.?

Fintech had around 500 employees in December, but now has about 100. Since March, more than 150 Zest employees have moved to PhonePe. And about 100 more were made redundant and hence laid off.?

Road Ahead for Zestmoney: Challenges for New Management

So let us see. what does the new management have to solve for in the coming future ?

1. Give their existing employees confidence that things will turn around, lest they risk losing them too. And running a company with no one to execute is a tall order isn't it?
2. Figure a way to scale their business, bring in the revenues but without increasing customer acquisition cost, reduce the NPAs, which probably means tweaking their engine (a lot). improve the basket size of the loans, which could entail partnering with brands that sell higher ticket size items. reduce their costs (hard in the given circumstances). basically overhaul of the entire operations of their business
3. Have a funding runway that sees them through the above two?

Easy peasy right ? *eye roll*

Omidyar Network and existing Investors Step up for Zestmoney

Well, luckily some of their existing investors have stepped up. Like Omidyar.?

And not to forget PhonePe, who generously wrote off the $18 Million it lent to Zest, as an initial part of their acquisition talks. Oh, and since PhonePe has taken the IP for the lending engine, I am assuming that that means they will receive an annual fee for the same too.?

Conclusion?

If you asked me, the best way for Zest to go ahead is to start building a Lending as a service stack. They have a vast treasure of data, especially of borrowers from Non Metro cities. And they should look at refining their loan engine. Plus their NBFC license.?

Which means, literally any FinTech that isn't able to start lending, because of the Digital Lendign Guidelines can effectively rely on Zest. I am sure the investors of those FinTechs would also be delighted at the tunraround time for them to start lending right??

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