ZestMoney’s Dilemma: The Inside Story

ZestMoney, a digital lending platform that planned to make life affordable for 300+ households in India, is now in a dilemma. From Walmart-backed PhonePe pulling its hand out of the acquisition deal to co-founders resigning, ZestMoney is making headlines constantly. The once-leading company in the EMI-based lending sector, why is ZestMoney on the negative side of the market? 

Ever since its landing in the digital lending sector in 2015, ZestMoney has achieved several milestones:

• It successfully gained the position of being a cardless EMI partner for Amazon, Flipkart, Xiaomi, ICICI Bank, and many other merchants in India. 
• In a mere two years, they achieved the milestone of gaining 1 million monthly transactions. 
• They had 23 institutional investors with popular names like PayU, Ribbit Capital and Goldman Sachs (Yes, the infamous SVB advisor).

Divided into three simple steps, everyone with a pre-set credit score could “Buy Now & Pay Later” up to ₹2 lakh capital with ZestMoney. Thus, as a point-of-sale financing, ZestMoney allows users to purchase items digitally and pay for them in instalments. 

But, today, you don’t hear about ZestMoney because of what it has done in its existence of 7-8 years. You hear in newspapers and finance magazines that ZestMoney failed to find a buyer and was abandoned by all of its founders. 

When things were going smoothly for ZestMoney, what turn of events made all the founders of the startup resign? Why did the acquisition deal with PhonePe become null and void after six months' worth of due diligence? How is a company with over 500 employees struggling with only a little above 100 employees at present? 

Reveal the in-depth fiasco that is ZestMoney in this article.

Why Did ZestMoney Need a Buyer?

Founded by Ashish Anantharaman, Lizzie Chapman, and Priya Sharma in September 2015, ZestMoney, a Bangalore-based fintech company, worked with Non-Banking Financial Companies (NBFC) to make digital lending easier for users. Being one of the startups from Y Combinator, ZestMoney became the leading lending platform for more than 1 lakh customers. Amidst hundreds of credit card companies thriving in India, a newbie, ZestMoney, gave people the one thing that others were reluctant to do. It was the option of purchasing things on EMI without a credit card. 

That’s right! ZestMoney brought credit cardless transactions for customers and made the complete process effortless. Catering to the B2C & B2B sectors, ZestMoney wished to change its business model into a software service model. This decision to transition was the result of the change in digital lending rules issued by the Reserve Bank of India (RBI). Not regulated at first, RBI, under the leadership of Governor Shaktikanta Das, brought fresh rules in September 2022 to make sure issues like high interest rates, hidden charges, illegal access to personal data, and more can be avoided. 

So this means that ZestMoney is not an RBI-approved lending company. But its tie-up with NBFCs and merchants like ICICI Banks, Amazon, Flipkart, etc. gives it a certain level of credibility, making it much safer to use. 

Since its foundation in 2015, ZestMoney's founders have focused on raising funding from its many investors. Till 2022, ZestMoney raised ₹110.9 Crore in 10 different rounds, with the latest round, the Conventional Debt Round, for ₹2.06 Crore in June 2022. The valuation of the fintech company came to be ₹368.3 Crore.

Despite this, the revenue for FY21 was ₹89.3 crore, whereas the loss was ₹125.8 crore. Similarly, revenue for FY22 was ₹145 crore, and the loss was ₹398.8 crore. The difficulties in raising funds and the losses the company had to suffer made the founders decide to start looking for buyers. 

PhonePe-ZestMoney Acquisition Deal: The Point Where Things Went South

While looking for a fitting buyer, ZestMoney approached various companies like BharatPe and PineLabs. In the end, the leading fintech company, PhonePe, decided to give a helping hand in this ordeal and acquire ZestMoney at a valuation of $200-$300 Million, which is over ₹165.5 Crore. Yes, I know! This offer was way less than the amount ZestMoney was valued at during its last funding round ($400 Million). However, the cash crunch they were facing and the strict regulations imposed by RBI in the digital lending sector made them accept the offer.  

Things were running smoothly for over 6 months, but then, all of a sudden, PhonePe decided to back off from the acquisition deal. The reasons given for the sudden cancellation of the deal were:

• Not finding a middle ground over ZestMoney’s valuation;
• ZestMoney’s ownership structure;
• Excess pending loans at ZestMoney and its eligibility criteria for giving loans.   

Following the failure to go ahead with the deal, all three co-founders, Ashish, Lizzie, and Priya, have resigned from the frontline. The founders hold an 18.44% stake in the company and would be supporting it as a shareholder. Along with this, more than 150 employees have shifted from ZestMoney to PhonePe, causing a huge backlash to the company in terms of efficiency, viability, and uncertainty. 

The Bottom Line

By the end of this deal, PhonePe is going to secure an NBFC licence arrangement by paying ZestMoney an $8 million price. They had also decided to forego the loan secured by ZestMoney, which helped them sail smoothly amidst the cash crunch crisis at the present time.

ZestMoney has also found replacements for the vacant positions of senior management. Senior Vice-president Abhishek Sharma, Chief Banking Officer Mandar Satpute, and Finance Vice-President Mohit Chhajer would be shouldering the responsibility to ensure positive outcomes for the company.  

The investing industry is becoming more and more cautious after the rise in uncertainty in the market. PhonePe’s unwillingness to continue with the deal is a fresh example of this statement. Will ZestMoney’s new management find the solution to the ongoing trouble, or would the plans to transition to software-based service blow away? The answers to these questions are the ones only time will tell.