PhonePe May Buy BNPL Startup ZestMoney in a Major Consolidation Move – ETBrandEquity | Team Cansler

highlights

  • Several people aware of the development said it would likely be a “fire sale.”
  • ZestMoney will likely operate as an independent entity after the acquisition
  • With public BNPL shares under pressure, privately held players are feeling the heat of the current downturn



<p>PhonePe May Buy BNPL Startup ZestMoney in a Major Consolidation Move</p>
<p>“/><figcaption class=PhonePe could buy BNPL startup ZestMoney in a big consolidation move

Online payments company PhonePe, which is majority-owned by US retail giant Walmart, is on the verge of acquiring buy-now pay-later (BNPL) platform ZestMoney, two insiders told ET.

This is happening amid a global reset in the BNPL sector fueled by rate hikes and a general slowdown in consumer spending. ZestMoney was on the lookout for a buyer as it struggled to raise fresh funds after tech investors got overly nervous this year, these people said.

If the transaction goes through, it will be the largest consolidation step in the new-age credit sector.

Probably ’emergency sale’

The sector has faced intense regulatory scrutiny in recent months as the central bank rolled out a raft of regulations affecting these companies.

ET was unable to determine the scope of the deal, but several people aware of the development said it would likely be a “fire sale” and could potentially price ZestMoney much lower than it did in its previous funding round last year when its valuation was set at around $400 million.

The BNPL startup has been in talks with other potential buyers over the past two months as its cash trajectory shortened and it was unable to raise funds, insiders said.

“This story is purely speculative. We have no comments to make,” a ZestMoney spokesman said in response to ET’s request for confirmation of the deal. PhonePe had not responded to ET’s email as of Thursday’s press time.

PhonePe, which is currently being spun off from parent company Flipkart, is completing a new round of funding valued at $12 billion and is expected to shell out the transaction amount in cash, said another person close to the development.

PhonePe was last valued at $5.5 billion in December 2020 after Walmart infused $700 million. ZestMoney will likely operate as an independent entity after the acquisition, another person said on condition of anonymity as the talks are private.

“The talks are quite serious and will probably be concluded in a couple of weeks…” said another person close to the matter. “The price is being negotiated given the extremely cautious market situation, especially in the fintech space…”

Big Ticket Focus

Bengaluru-based ZestMoney, founded in 2015 by Lizzie Chapman, Priya Sharma and Ashish Anantharaman, most recently raised $50 million from Prosus-owned PayU and Australian fintech Zip Co in September last year, which coincided with coincided with the BNPL boom fueled by a surge in online shopping.

At the time, the company wanted to raise up to $100 million in equity as part of the financing. However, the entire sum did not arrive.

“Zip itself is about to close. ZestMoney planned its spending in anticipation of the $100 million increase An executive familiar with the company’s finances.

Sydney-headquartered Zip’s market cap has plummeted this year as higher interest rates have sent BNPL shares fleeing. By October, Zip’s stock price had plummeted nearly 93% from its February 2021 highs.

All told, ZestMoney has raised approximately $142 million in equity funding. Other backers include Goldman Sachs, Ribbit Capital, and Xiaomi.

It competes with companies like Axio (formerly Capital Float), allows customers to make free equalized monthly installments (EMI) on behalf of trading partners, and sits at the checkout of various e-commerce websites and point of sale of various offline retail partners.

Unlike Simpl’s LazyPay and PayU, which offer BNPL services for smaller, everyday purchases, Zest and Axio have focused on high-volume items.

Some of ZestMoney’s key partnerships are with Amazon, Flipkart, Myntra, MakeMyTrip, Nykaa, Apple, and Reliance Digital.

As of October, there was a merchant network of over 10,000 online affiliates and 75,000 physical stores and a registered user base of 17 million merchants.

ZestMoney’s losses tripled to Rs.398.8 crore in the year ended 31 March 2022 compared to Rs.125.8 crore in the previous year. Total revenue increased by 62% to Rs.1.45 crore in FY22 from Rs.89.3 crore in the previous financial year.

Global meltdown

With public BNPL shares under immense pressure, privately held players are feeling the heat of the current downturn and increasing their reliance on debt. Globally, BNPL biggies including Sweden’s Klarna and PayPal co-founder Max Levchin’s Affirm are struggling to stick to their ratings.

In July, Swedish BNPL firm Klarna raised funds in a round of declines with a valuation of $6.7 billion, down more than 80% from the $46 billion price it hit last year .

Affirm’s stock has traded nearly 92% lower from its November 2021 high. Its current market cap is just $3.8 billion, down from highs of nearly $47 billion in November last year.

ET reported on April 8 that US-based BNPL firm Sezzle has accepted the call to exit India and shut down its operations in the region in a restructuring in line with its parent Zip, which in February reached a definitive agreement to exit India acquisition of Sezzle.

NBFC license

PhonePe’s potential acquisition of ZestMoney comes at a time when the company has been looking at various licenses, including exchange trading, to add more services to its active monthly user base of over 190 million.

For a number of years she has also wanted to obtain a license for non-bank financial companies (NBFC).

While PhonePe will not hold an NBFC license under its own name, if the ZestMoney deal goes through it will be able to run an entity with NBFC operations.

Industry executives told ET that fintech companies are finding it harder to get approvals for their NBFC applications as the regulator scrutinizes players in the digital lending space.

PhonePe has had plans to enter the merchant credit business since the beginning of the year.

“If the acquisition goes through, it will open up new use cases for both PhonePe and ZestMoney,” said a fintech executive who asked not to be named.

“On the one hand, PhonePe can finally monetize payments by allowing users to pay everyday bills with credit and opening the applicability of Zest even to offline payments. For Zest it will be extended to a much broader offline base of merchants and can become an everyday solution that is not just a checkout provider for large ticket purchases.”

Currently, PhonePe claims to have 35 million offline merchants on board using its solutions. In May, PhonePe also announced it had acquired wealth management firms WealthDesk and OpenQ for $75 million.

Rival Paytm, owned by One97 Communications Ltd, has been bullish on lending, hitting an annualized payout rate of Rs 37,000 crore through October, the company told bourses.

Digital Borrowing Guidelines

The Reserve Bank of India’s (RBI) new digital lending guidelines, launched in August, will regulate the online lending segment and put the burden on regulated entities like non-banks.

The move will prompt multiple loan-providing fintech platforms to apply for an active NBFC license as the central bank allows loan disbursements and repayments only among borrowers and self-regulated entities, reducing the role of loan distribution platforms to mere direct selling agents.

ET reported Aug. 12 that the new rules will increase pressure on new-age lending firms to actively focus on and capitalize on their NBFC units to accommodate the central bank’s preference over regulated entities.

This has raised the entry barrier for several fintech companies looking to enter the lending segment as the momentum remains with the regulated entities.

However, companies like ZestMoney were not greatly affected as they already have an NBFC license in their group. But with RBI’s operating rules for digital lending, lending fintech companies like ZestMoney have had to pay more attention to the quality of their assets.

These companies have sweetened the deal for their lending partners to circumvent the rules with the first loan default guarantee, the future of which is in flux for now as the RBI has yet to take a final position on the matter.

They say the Enforcement Directorate’s investigation into Xiaomi India’s royalty payments has a greater impact on foreign companies, including competing Chinese ones, creates an uncertain environment and could harm the larger electronics manufacturing ecosystem.

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  • Posted November 25, 2022 at 11:00 AM IST

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