In a significant development within the financial technology sector, ZestMoney, a once-prominent Buy Now, Pay Later (BNPL) startup valued at $450 million, is set to cease operations this month. Reports indicate that the company is laying off its remaining 150 employees, citing regulatory uncertainties and the lack of success for its revised strategy, known as ZestMoney 2.0, under new management.
ZestMoney faced challenges starting in early 2023 when the proposed acquisition by Walmart-owned fintech firm PhonePe fell through. The deal, initially expected to be valued between $200 million to $300 million, encountered obstacles during due diligence, including valuation disagreements and a high default rate of around 10-12 per cent.
On Thursday, shares of One97 Communications, the parent entity of digital payment app Paytm, experienced a sharp decline, hitting the lower circuit limit of 20 per cent. This drop followed Paytm’s announcement of plans to reduce small-ticket loans in response to regulatory changes.
Analysts predict that Paytm’s shift away from small-ticket Buy Now, Pay Later (BNPL) loans, which constitute over 50 per cent of total disbursements, will significantly affect its overall loan originations. The company clarified in an exchange filing that merchant loans would remain a focal point, unaffected by recent regulatory guidance.
In response to industry shifts, other major consumer lending applications are also experiencing a slowdown in unsecured small-sized loans. Lending partners are becoming cautious with loans in the sub-Rs 50,000 category. Banks and large NBFCs are expected to prioritise collaboration with fintechs that demonstrate profitability, a strong book, and robust underwriting capabilities after RBI raised risk weights on consumer loans to cool down the unsecured credit market.
Broader challenge
The impact is not limited to individual companies, as the entire industry sees a shift toward a focus on larger-ticket personal loans and merchant loans. This shift is driven by a combination of regulatory changes, increased caution among lenders, and a rising trend in bad assets among small-ticket-sized personal loans.
The aftermath of ZestMoney’s closure and Paytm’s strategic shift underscores broader challenges in the financial technology sector. While there is a slowdown in unsecured personal loans, BNPL and small-ticket consumer lending categories are expected to be particularly affected in the initial wave of changes. Industry experts suggest that the traditional BNPL model, imagined as a starting point for consumers with no credit history, is facing challenges, and there may be a reevaluation of the high-interest, short-duration loans known as pay-day loans.
As the industry navigates these shifts, survival strategies for BNPL players become paramount, with a need for adaptability and resilience in the face of evolving regulatory landscapes and changing consumer preferences.
