ZestMoney is also learnt to be in discussions to raise separate equity capital from some of its existing investors, however, those talks are preliminary, these people said on the condition of anonymity.
Three people familiar with the fresh developments said PhonePe’s move to purchase ZestMoney’s technology stack and hire 150 of the startup’s staff would help it expedite the launch of its own lending business. Bengaluru-based PhonePe has also applied for a non-banking finance company (NBFC) licence, said people in the know, as it pushes the pedal on building its credit business.
“After the deal fell through, PhonePe has decided to forgo the loan secured by ZestMoney. It is also paying them $8 million for the licensing agreement … By hiring employees from ZestMoney and using their technology, it will become easier for them to kick off their lending business,” said a person close to the matter.
ET first reported on March 30 that PhonePe had walked out from acquiring ZestMoney after a six-month-long due diligence raised red flags, coming as a big blow for the buy-now-pay-later (BNPL) company.
PhonePe’s latest move is significant as it provides a lifeline to ZestMoney temporarily, with the debt burden eased off. However, the cash position at the company is still uncertain, said multiple people aware of the matter. As ET reported earlier, PhonePe was offering $90 million in cash for ZestMoney, with the transaction also entailing taking on ZestMoney’s debt and a $10 million founder pay-out.
Discover the stories of your interest
Queries emailed to the spokespersons at ZestMoney and PhonePe remained unanswered till press time Tuesday.ZestMoney has been scouting for additional funding since the acquisition talks fell through, and has reached out to its existing investors.
ETtech“ZestMoney had been in talks with its current investors for additional funding as it looks to pivot into a software-as-a-service business aimed at digital lending,” one of the people cited earlier said. However, Naspers-owned PayU, which owns around 15% in the company, is unlikely to participate in the round, the person said. Ribbit Capital, Omidyar Network, Goldman Sachs along with the founders own a majority stake in the firm.
In September 2021, Australian BNPL player Zip had pumped in $50 million in ZestMoney. Since then, globally, BNPL as a segment has received a massive blow, as a financial slowdown and rising interest rates severely impacted markets worldwide.
All told, ZestMoney had raised $134 million over multiple equity rounds from investors and was last valued at around $400 million.
Quick pivot to survive
Founded in 2015 by Lizzie Chapman, Priya Sharma and Ashish Anantharaman, ZestMoney began life as a loan sourcing platform to enable quick disbursal of credit at the point of sale, mainly focussed on online merchants. It works with ecommerce majors like Flipkart, Amazon, Myntra and Nykaa to offer pay-later as a product. It has built credit partnerships with multiple lenders like Aditya Birla Finance, Tata Capital and Hero Fincorp. It acquired Nahar Credits, a Chennai-headquartered NBFC, to take a certain share of the loans on its own books.
After the talks for a complete acquisition of the company fell through, the ZestMoney founders have decided to change its business model. “They (ZestMoney) want to leverage the tech stack they have built as a credit aggregator and offer it as a white-labelled solution to other fintech lenders, NBFCs or banks who might use it to process their own credit business,” said a person familiar with the goings-on at the company.
ETtechSince the country’s central bank put forth digital lending guidelines, fintech lenders need to adhere to strict regulations around flow of funds and accounting of loans. With a platform like ZestMoney which is compliant with the latest lending guidelines, they may be able to speed up their go-to market and remain compliant.
Employees move to PhonePe
PhonePe has also brought on board as many as 150 of ZestMoney’s employees to build its own lending platform. ZestMoney had around 580 people on its payroll.
“The business-to-business lending as a service that ZestMoney is now morphing into will be a much smaller business and will need a smaller team,” said a top executive at a rival lending startup. Unlike in credit where there is a large revenue opportunity through interest margins, if Zest manages to move into a software service model, revenue will be generated only through fee income.
PhonePe, hived off from Flipkart last year, has since raised $750 million from the likes of General Atlantic and Ribbit Capital, and its US parent Walmart at a $12 billion valuation tag. The online payments firm had pitched lending as a key part for its latest fundraising.
(Graphics & illustrations by Rahul Awasthi)