The Rise and Fall of ZestMoney

Hey there,

Goldman Sachs-backed BNPL startup ZestMoney shuts down after raising $130M+.

Despite ambitions to disrupt credit cards for new internet users, the fundamentals didn't add up.

Here is the detailed breakdown of reasons behind ZestMoney's Epic Downfall 👇

First, here is some quick context: ZestMoney, started in 2015, aimed to revolutionize the Indian credit market by focusing on small-ticket loans for first-time internet customers. This vision attracted high-profile investors, including Goldman Sachs, and raised over 1000Cr in funding in its 8-year tenure.

Even with support from big investors like PayU and Quona, the Bengaluru-based startup ZestMoney, with around 150 employees, is closing down. Majorly because they couldn't find a buyer or keep their business going.

And, here is what led to the downfall of ZestMoney:

1. Indians believe in save now, pay later:

The cultural preference for saving over borrowing in India has played a big role in the limited adoption of the Buy Now, Pay Later (BNPL) model.

This preference led to a lower-than-expected uptake of BNPL services among Indian consumers, impacting ZestMoney's growth and sustainability.

2. Disrupting a huge market with just a feature:

ZestMoney's attempt to disrupt the $500 billion credit card market with BNPL, is essentially a feature rather than a full-fledged financial product.

And to disrupt a well-functioning credit market, you need more than a feature.

3. Commoditization and market saturation:

The BNPL space in India saw more than 100 funded startups offering similar services, often backed by the same investors.

This saturation and commoditization of the BNPL service led to intense competition, making it difficult for ZestMoney to stand out and retain a unique value proposition.

4. Solving a non-existent problem:

ZestMoney targeted new internet users in India with small loans, but this didn't meet a major or urgent need. Credit card penetration in India is low, around 4-5%, unlike in countries like Canada, the UK, America, and Switzerland, where it's 70-80%.

This difference, and the fact that many Indians don't have traditional credit scores, likely led to an overestimation of the demand for BNPL services.

5. Regulatory challenges and operational issues:

The Reserve Bank of India's (RBI) guidelines significantly impacted ZestMoney's operations, particularly the prohibition of non-bank prepaid instrument issuers from loading instruments with credit lines in 2022.

Additionally, the company faced major loan defaults, non-availability of lenders, and poor cash flows, further exacerbating its challenges.

And top of that, the founders' interest in ZestMoney ended earlier this year after unsuccessful attempts to sell to PhonePe, leading to their departure. This hastened the company's downfall.

This situation serves as a big lesson for other BNPL companies relying on similar models. They should consider adding unique features, pivoting their strategy, or merging with larger entities.

Otherwise, they risk merely postponing the inevitable by continually seeking more funding.

✍️ Jargon of the day

BNPL - Buy Now, Pay Later (BNPL) is like a short-term loan. When you buy something, instead of paying the full amount right away, you pay in smaller parts over time. It's like breaking up your payment into easier, smaller chunks. This way, you get your item immediately but pay for it gradually.

Imagine you want to buy a smartphone that costs $1000. With BNPL, instead of paying $1000 all at once, you might pay $250 every month for four months. You get the phone immediately after the first payment, but you finish paying for it over four months.

Loved this edition? Or have some thoughts to share? We'd love to hear from you

Cheers,
Karthik