ZestMoney Crisis Is Emblematic Of Deep Woes In Buy-now-pay-later (BNPL) Space

Indian fintech start-up ZestMoney has seen three of its founders quit after its acquisition by PhonePe fell through. 

ZestMoney is among India’s larger fintech players focusing on buy-now-pay-later (BNPL) but appears to have run into troubled times recently. However, when one looks at global BNPL players, many others also seem troubled. 

A slowing global economy and layoffs mean that the lower-than-prime borrowers that BNPL players targeted are now having trouble making repayments on their loans.

How did BNPL Lending Lose Its Sheen?

After coming into vogue in 2020, BNPL attracted billions of dollars in funding globally. It became especially popular with the younger crowds who weren’t given credit cards by larger banks and established players. 

Banks had a good reason not to extend credit to these borrowers: their lack of credit history or poor credit scores. Statistically, borrowers under 25 have a high default or delinquency rate. 

Yet, BNPL companies said that they would use different methods to assess the creditworthiness of these borrowers rather than just traditional methods like the use of credit scores. Clearly, these companies found customers where banks wouldn’t bother to look since banks and credit card companies mainly served “prime” borrowers. This was evidenced by surveys conducted in the US which showed that the borrowers of BNPL firms were majorly sub-prime borrowers. 

Some of these companies were market darlings when they listed on the exchanges in 2020 and 2021 but have seen their stock prices collapse since then. 

Affirm Holdings, a BNPL company which had reached valuations of $ 50 billion in 2021, now has a market capitalisation of $ 3.6 billion. Klarna, another large BNPL player, will see its valuation get cut from $ 45 billion to $ 6.8 billion last year. Its partner lending bank, Cross River Bank, has received a cease-and-desist order from FDIC for its lending practices.

Why did BNPL Lending run Into Trouble In India?

In India, BNPL did quite well, with reportedly 20 lakh cards being disbursed each month by BNPL companies compared to 15 lakh cards disbursed by credit card companies. 

While the companies grew rapidly, they couldn’t lend on their own account – and hence had to depend on partner non-bank finance companies (NBFCs) to lend. The partner NBFCs extended credit to the BNPL Company’s borrowers. 

In return for facilitating the lending and the collection, the BNPL company receives a fee from the lender. However, some companies have agreements with their NBFC partner firms to share losses in case a loan goes bad, which is known as the first loss default guarantee (FLDG). In case even a small percentage of loans go bad, the FLDG could have a strong impact on a company’s profitability.

Further, the RBI’s interventions on cards issued by BNPL players and the FLDG have caused trouble for these players. 

RBI has put up restrictions on the issue of cards by banks for BNPL players, making it difficult for these players to disburse cards. In addition, the FLDG, which incentivised NBFCs to lend to riskier borrowers, has become a grey area. 

With funding cuts for Indian fintech, their ability to run lossmaking operations is stalled as well. As a result, NBFCs have cut down significantly on loan disbursals to fintech customers. 

According to a report in Economic Times, Zestmoney disbursals fell to Rs 100 crores from a peak disbursal rate of Rs 600 crores as its NBFC partners cut down on lending. Even companies that do not have FLDG agreements would find it challenging to convince NBFC partners to lend liberally in the current economic scenario. 

The problems faced by ZesMmoney appear to be the result of a credit cycle turning. Ultimately, these companies’ technology-driven lending lent to sub-prime customers, the most vulnerable customer base in a recessionary period. 

The current state of many of these BNPL companies indicates that it might have been easy money driving the growth of BNPL and not better technology as these companies often tried to portray.

Also read: Explained: Why India's Rapidly Growing 'Buy Now Pay Later (BNPL)' Sector Is In Crosshairs Of RBI Regulatory Action