PhonePe may forgo ZestMoney's $18 mn debt after failed acquisition: Report

ZestMoney is said to be in talks with some of its existing investors to raise separate equity capital, the report said

After PhonePe's withdrawal from acquiring lending startup ZestMoney, the Walmart-owned digital payments giant is looking to strike a commercial agreement with the lending firm in lieu of an $18 million loan it had given to the cash-strapped company, The Economic Times reported.

ZestMoney is also said to be in talks with some of its existing investors to raise separate equity capital. However, these talks are still in the early stages, the report said.

According to people familiar with the fresh developments, PhonePe's decision to buy ZestMoney's technology stack and hire 150 employees from the startup would help it expedite the launch of its own lending business.

PhonePe has also applied for a non-banking finance company (NBFC) licence, as it is working on expanding its credit business, they added.

PhonePe-Zestmoney acquisition deal called off

PhonePe had backed out of its acquisition of ZestMoney after a six-month due diligence raised flags, dealing a significant blow to the buy-now-pay-later (BNPL) company.

PhonePe's latest move is significant as it provides a temporary lifeline to ZestMoney by easing the debt burden. However, the company's cash position remains uncertain, said multiple people aware of the matter.

As earlier reported, PhonePe was offering $90 million in cash for ZestMoney, as well as taking on ZestMoney's debt and a $10 million founder payout.

Since the acquisition talks fell through, ZestMoney has been looking for additional funding and has approached its existing investors.

ZestMoney has been in discussions with its current investors for additional funding. However, Naspers-owned PayU, which owns around 15 per cent of the company, is unlikely to participate in the round, the person familiar with the matter said.

A majority stake in the company is held by Ribbit Capital, Omidyar Network, Goldman Sachs and its founders.
 

Zip, an Australian BNPL player, invested $50 million in ZestMoney in September 2021. Since then, globally, BNPL as a segment has taken a massive hit, as a financial slowdown and rising interest rates have severely impacted markets around the world.

ZestMoney's business model

After the negotiations for a complete acquisition of the company fell through, the founders of ZestMoney decided to change its business model.

"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," a person familiar with the goings-on at the company was quoted as saying by ET.

Since the country's central bank issued digital lending guidelines, fintech lenders need to follow strict regulations governing the 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 while remaining compliant.

PhonePe hires Zestmoney employees

PhonePe has also hired up to 150 of ZestMoney's employees to work on its own lending platform. ZestMoney had around 580 people on its payroll.

A rival lending startup executive stated that ZestMoney's shift towards business-to-business lending as a service would result in a smaller business and would require a small team.
 

Unlike in credit, where interest margins provide a significant revenue opportunity, if Zestmoney manages to transition to a software service model, revenue will be generated solely through fee income, he added.