The failure of a startup is not only heart-wrenching for the company’s officials. But for the whole market ecosystem including investors, partners, as well as customers. One such recent example is ZestMoney- a fintech startup. ZestMoney has been in the headlines ever since PhonePe refused to acquire it. Not only had it laid off 20% of its workforce, but the founders stepped down too. Why ZestMoney failed?
Once a successful company with over 10k partners and 85k touch points in India doomed within 8 years of its existence. This is the most common query of folks. Did ZestMoney’s business model lack efficiency? Did it face the tough circumstances of the recession? Why did PhonePe call off the deal? Your mind must be hovering with numerous such queries. So, in this write-up, we will unravel the mystery that led to the failure of ZestMoney.
The Story So Far
The covid-19 pandemic turned out to be a purple patch for ZestMoney. Reason? The dynamic boom of the Indian BNPL market. The acronym BNPL refers to “Buy Now Pay Later.” You might have used this scheme too! How was your experience? Wasn’t it quite convenient for you? Everybody anticipated the grand success of this fintech startup. However, this golden period was short-lived for ZestMoney.
As we recovered from the pandemic, the company fell into a debt trap. The pie of debt grew bigger and bigger. Why? You may ask. Because of increasing Non-Performing Assets and a faulty business model! So why didn’t it get acquired by some big-successful firm? Well, it did. PhonePe was going to acquire it until it canceled the deal. Over time, ZestMoney lost its key partnerships one by one. And the exit of its founders was the last nail in the coffin.
To know- “Why ZestMoney Failed?” you need to study its business model. Let’s look at the next section.
Business Model of ZestMoney
Its business model comprises efficient working strategies like- Processing the Application, Credit Assessment, Approval of Credit Limit, and Partner Integration. While making a payment through ZestMoney, you can pay in installments. After the purchase, the customer needs to repay the loan amount in monthly installments. ZestMoney provides a repayment schedule outlining the due dates and amounts for each installment.
ZestMoney has partnerships with various e-commerce platforms, where customers can use their ZestMoney credit limit to make purchases. These partners integrate ZestMoney’s payment gateway into their checkout process. Some of its key partners are- Flipkart, Amazon, MakeMyTrip, Myntra, Nykaa, boAt, etc.
How ZestMoney Makes Profit?
When you pay for your purchases through installments, ZestMoney charges interest on your outstanding loan amount. The interest income forms a significant portion of ZestMoney’s revenue. The interest is also levied on other value-added services like personal loans, insurance products, etc. Also, it earns profits through merchant fees, processing fees, and late payment fees.
Why ZestMoney Failed?
The business model of ZestMoney described above sounds great! Isn’t it? But to your surprise earning the revenue through those prime revenue sources is not as easy as it sounds. Also retaining & expanding a loyal user base isn’t a cakewalk either. Why ZestMoney failed? Let’s talk about the reasons for ZestMoney’s failure one by one-
1. A Loophole in the Business Model
Earlier we mentioned the partnerships of ZestMoney with different firms. Although it sounds like a good collaboration. But it is not sustainable. Despite having over 10,000 online partners, ZestMoney still struggled to scale its user base. Those partners hardly helped the company to tap into long-term sustainability.
ZestMoney’s loan model is entirely dependent upon its partnerships with its lenders. The lenders include NBFCs too! (NBFC means Non-Banking Finance Corporations) that underwrite loans based on the credit risk evaluated by this fintech firm. Eventually, the loan default rate was going out of control which led to a high “bad debt rate.” You will get detailed info on the “bad debt rate” in the next section.
2. Debt Trap: A High “Bad Debt Rate”
First of all, let me explain the term “Bad Debt.” It refers to loans that are no longer recoverable. Why because the borrower is unable to pay the amount of money he/she took as a credit from the organization.
According to recent reports, ZestMoney incurred a heavy bad debt rate i.e. above 13%. Do you know what the healthy BNPL loan default rate is? It is a maximum of 2-3%. Can you guess how this loophole is related to the ZestMoney Business Model? It lacked in the credit assessment. It means it failed to check the creditworthiness of borrowers properly. They took high loans and failed to pay. This led to a massive bad debt rate for ZestMoney. However, the CBO (Chief Business Officer) of ZestMoney denied these reports and stated that the company’s NPS was always under 2.5%. However, the company has not released any official data yet.
3. Worrisome Financial Health
With a loss of Rs.398.9 crore in FY22, you can evaluate the worrisome financial health of the company. Although it had over 17 million registered users it was not easy to acquire and retain them. The Customer Acquisition Cost (CAC) of ZestMoney skyrocketed i.e. Rs.1000 per customer. It was based on alluring perks like cashback and coupons. However, with rising concern for the cash flow, ZestMoney stopped offering these perks. Also, it failed to fulfill some of the terms & conditions mentioned in its loan service agreement. As a result, it faced a huge backlash from the customers as well as the borrowers. This claim was again denied by the CBO without providing any official report. However, the sick financial health of ZestMoney can be seen from the following data–
4. Failed Acquisition by PhonePe
In the introductory part, you’ve read about the stepping down of ZestMoney’s founders. Even though ZestMoney was already in deep water. The failed acquisition by PhonePe made the condition worse. It undisclosed the loopholes of the company. How? You may ask. Let me tell you the whole story.
In November 2022, PhonePe was in talks with ZestMoney to acquire the latter. The acquisition cost was worth $200-$300 million. It could easily swipe off the sick financials of the company. So PhonePe carried out its due diligence on ZestMoney. As soon as the due diligence was over, PhonePe called off the deal! But why? Because it found two major loopholes in the company that we already discussed above. Those were-
- Concerns over ZestMoney’s business model
- Debt Liability
This fact was a huge shock for the investors! This BNPL fintech firm raised a valuation of $445 million last year. But now, due to PhonePe’s revelations, it will be more difficult for ZestMoney to raise fresh capital.
Is ZestMoney approved by the RBI?
The answer is- “No! ZestMoney is not approved by the RBI.” The Reserve Bank of India does not regulate money lending fintech apps. Although ZestMoney’s platform complies with the latest lending guidelines of RBI. Also, it has partnered with some licensed banks that are regulated by RBI for seamless financial services. As of now, it partners with ICICI Bank, Aditya Birla Capital, CSB Bank, Tata Capital, HSBC, DCB Bank, etc.
To execute business successfully, the business model should be free of any loopholes. Although practically it is not cent percent possible. But the loopholes should not be big enough to shake up the company’s financials. ZestMoney’s financials have raised concerns of investors over fintech firms. By now you might have understood- Why ZestMoney failed? Numerous startups failed due to unstable business models. Also, transparent due diligence is helpful for investors, because it reflects the true financial conditions of the company. After realizing its lacking points, ZestMoney will improve its functioning for sure. Let’s hope that the change in leadership in ZestMoney may bring some positive results in the future.