In an email to employees that attempted to be personal and touchy, Lizzie Chapman, one of the three founders of ZestMoney, said that she along with her two co-founders — Priya Sharma and Ashish Anantharaman — have immense belief and faith in the potential of ZestMoney. “We will also ensure to provide full support to the incoming management team and do everything we can to support them for the next 4 months to ensure a smooth transition”. This letter was written on the May 15, when the founders decided to give up their senior management positions and move on from ZestMoney, a company created by them eight years ago.

On Tuesday, seven months after that email, ZestMoney has shut down.

Failed deal

The brunt unfortunately is being borne by three employees who were elevated to fill the promoters’ shoes. The end was meant to happen and that was quite evident when PhonePe called off the $200-300 million deal in March. ZestMoney failed due diligence and PhonePe walked away. Apparently, the non-performing assets of ZestMoney was in double-digits (15 per cent if grapevine is to be believed) while monthly disbursements more than halved from the peak rate of ₹600 crore, which took the sheen out of the business model.

But who should be blamed for this? The immediate answer would be that ZestMoney couldn’t withstand the Reserve Bank of India’s curbs on prepaid payment instruments (PPIs), especially the blow served in June 2022 that halted loading PPIs through credit lines.

But here’s a point to ponder — lending businesses don’t go bust because of regulations; they fail when the asset-liability management (ALM) fails. What’s still worse is building a business on regulatory arbitrage or on the hope of constantly treading on the grey patch.

In ZestMoney’s case, it was a mix of both. The ability to raise debt money to lend was getting constrained, and the assets which were lent weren’t making enough money to the cash-flow pool. Meanwhile, the construct of ZestMoney as a buy-now-pay-later (BNPL) business was built on an assumption of no regulatory considerations to factor. This was also getting challenged especially after the second wave of lockdown imposed during the pandemic when the central bank was inundated with grievances on how borrowers were being abused for late payments and missing instalments on loans availed of through fintech apps. There were instances of privacy of customers’ mobile phones being violated.

By early 2021, central banks in Australia and England started clamping down on BNPL businesses for the kind of risks they were exposing the entire financial services landscape to. These countries were the largest BNPL markets globally, and one could say they were mature markets compared to the rest of the world.

In India, the years 2020 to 2022 entirely belonged to the BNPL lenders. They were at the peak of their business, though nobody, including ZestMoney, was making profits because the models were designed for growth not profitability. To top it, the BNPL segment was priding on how it was giving banks’ credit cards business a run for its money. Therefore, the RBI’s decision to tighten its focus on this segment to avert systemic risk became important.

To be fair, the RBI’s action destabilised almost every fintech in the lending space, because in the B2C segment most of them were only dealing in PPIs, which were the lowest hanging fruit. Yet, only ZestMoney has vanished from the scene among the then leading players; others have managed to recast their business plan and make it a viable business model. They haven’t fled the field. Lizzie Chapman & Co decided to take the easier route of calling it quits when the going got tough, and this is why the company’s failure must be shouldered by ZestMoney’s founders.

Basic tenets of lending

Its failure reiterates a few basics in the lending business. First, one cannot make money by lending more to the existing borrower to ensure that he remains a good borrower forever. Second, focusing on growth to keep the credit quality in check is just a temporary dressing on the wound. It will fester sooner than later. Lastly, lending is all about underwriting the loan diligently; not about burning equity on customer acquisition and retention in fancy ways, or handing out a loan in 10 seconds.

Pushed to the wall, fintechs are gradually understanding these basics. Maybe, we won’t encounter another ZestMoney-like incident. At least not too soon.

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