Why is ZestMoney shutting down?

Written by Kapronasia || December 11 2023

After a long moment in the sun, buy now, pay later (BNPL) has lost some of its luster. That’s not to say it will fade away. Far from it. In fact, many deep-pocketed fintechs and prominent incumbents in advanced economies have introduced the service because consumers like interest-free installment payments. However, pure-play BNPL firms that are essentially one-trick, loss-making ponies are in varying degrees of trouble. In the case of India’s ZestMoney, once a high flyer in the subcontinent’s erstwhile red-hot BNPL segment, the trouble seems to be terminal – and the company will reportedly throw in the towel at the end of this month.

There is no one reason for ZestMoney’s collapse, but we can think of several factors that rendered the company’s business model unsustainable. First, though India has a huge consumer population eager for de facto micro-loans, BNPL quickly has become a saturated market segment within financial services. Unlike traditional credit cards that can differentiate themselves with unique rewards programs, most BNPL services provided by pure-play firms can only rely on straightforward customer subsidies to build loyalty. At that point, it becomes a war of attrition that favors the deepest-pocketed fintechs. ZestMoney may have once been valued at US$450 million, but it was never profitable and had run out of money by earlier this year and could not persuade PhonePe to give it a life-saving capital injection.

In late March, PhonePe nixed the planned acquisition of ZestMoney, for which the Walmart-backed fintech giant has reportedly planned to pay US$200 million to US$300 million, after not liking what its due diligence checks turned up. PhonePe was justifiably concerned about the sustainability of ZestMoney’s business model as well as its debt liability. At the time the deal was called off, ZestMoney claimed to have a massive network: 10,000 online and 75,000 offline stores, and more than 17 million registered users. But too many of the users failed to generate adequate revenue to cover ZestMoney’s costs.

PhonePe was also reportedly unsure about how BNPL regulation in India would proceed. That is a valid concern as Indian regulators have a history of initially showing tolerance towards new digital financial services before moving to curb their growth – usually justified on the basis of a perceived danger to consumers, violation of existing regulations, or both. We got a taste of what might be in store for BNPL firms in July 2022 when the Reserve Bank of India (RBI) banned the loading of prepaid payment instruments with credit lines to preventing unauthorized issuance of credit cards with inadequate KYC and little to no investigation of applicants’ credit histories.  

After that move by the RBI, a negative knock-on effect ensued. The prominent Indian fintech PayU decided to shut down its BNPL card service LazyCard and the U.S.-based BNPL firm Sezzle chose to exit the India market. One can imagine ZestMoney could see the writing on the wall and that’s when it began trying to find a savior.

We will be interested to see if more Indian pure-play BNPL firms run out of cash in the coming months or if they can find a way to pivot to a more sustainable business strategy. ZestMoney’s experience should be cautionary for its counterparts.