PhonePe pulls the plug on acquisition deal with ZestMoney in India

The buy now pay later segment has been growing at a rapid rate across India. Consumers from Tier I, II, and III cities have flocked increasingly toward BNPL schemes to fund their purchases at a time when access to traditional credit is becoming expensive. This has resulted in high a high-growth environment for BNPL providers in India. According to PayNXT360, BNPL payments in the country are expected to grow by 22.9% on an annual basis to reach US$14,289.4 million in 2023. Medium to long-term growth story of the BNPL industry in India remains strong. BNPL payment adoption is expected to grow steadily over the forecast period, recording a CAGR of 12.2% during 2023-2028. The BNPL Gross Merchandise Value in the country will increase from US$11,628.8 million in 2022 to reach US$25,387.2 million by 2028.

Amid the growing adoption of the flexible payment method, which is expected to further rise in H2 2023, non-BNPL-focused fintech firms are also mulling to create their presence in the segment.

PhonePe, one of the leading mobile wallet and prepaid payment instrument providers in India has raised multi-million-dollar deals in H1 2023. These funding rounds are part of the firm’s strategy to expand into new business verticals such as consumer lending and insurance, among others. To mark its foray into the short-term lending segment, PhonePe has been actively in talks with ZestMoney to acquire the BNPL provider, which has been reeling under the pressure of the macroeconomic environment and funding winter.

• In April 2023, though, PhonePe pulled the plug on its acquisition talk with ZestMoney as the latter failed to pass its due diligence test. PhonePe not going ahead with the acquisition of ZestMoney is a reflection of the deep-rooted problem with the fast-growing sector. Many players operating in the segment have opted for high growth over due diligence. Additionally, firms have offered credit to a wider segment of the consumer demographic without doing proper credit checks to accelerate their growth. This trend, coupled with the macroeconomic environment and funding winter, has led to the collapse of big names in the sector.

In India, the PhonePe - ZestMoney deal has left industry players confused surrounding the practices that are followed across the BNPL sector. Amid the current macroeconomic environment, due diligence has become a major tick box for firms to decide on the go-ahead with the deal. The failure at ZestMoney means that more focus will be placed on due diligence when it comes to potential mergers and acquisition deals. Going forward, PayNXT360 expects fintech firms prepping for mergers and acquisitions to do proper due diligence to find out issues that can possibly hinder the deal and rectify them before the deal goes south.

Read More - Strategic alliances lead to new BNPL solutions in 2023

In the fast-growing digital payment ecosystem in India, PhonePe - ZestMoney is the second large deal that has fallen through over the last few quarters. In October 2022, Prosus NV canceled the US$4.7 billion deal to acquire payments firm BillDesk, as the conditions of the deal were not met. With these large deals not materializing, mergers and acquisitions deals will become much more difficult for founders and investors that are looking for an exit, at least in the short term.

For ZestMoney, the failure to secure the deal from PhonePe means more troubles ahead. As it is on the verge of running out of funds with no other prospective buyer in sight, ZestMoney is expected to announce layoffs across the departments in the near term.

• In April 2023, Simpl, another BNPL provider in India, came into focus for laying off employees to cut costs and extend their runway. The firm laid off more than 25% of its total workforce in lieu of the current economic condition.

While merger and acquisition deals are falling through and firms have been announcing layoffs to extend their runway, the BNPL market has not lost its sheen and the opportunity is still massive in the sector. This is evident from the high growth achieved by these firms over the last year. Simpl, for instance, reported a growth of 17 times in its revenue in FY 2022 compared to FY 2021. In 2022, the firm announced that it had a total of 42 million registered users. Furthermore, it onboarded 19,000 merchants, taking the total to 26,000 at the end of 2022.

Read More - Funding rounds highlight the investor confidence in the Middle East BNPL sector in 2023

Read More - Apple’s foray into the BNPL sector is another step towards becoming a bank in 2023

This data indicates that there is a clear demand for payment methods like BNPL among both consumers as well as merchants. PayNXT360 expects the demand to further accelerate in 2023, as inflationary pressure and a decline in disposable income lead more consumers to BNPL schemes.

The potential growth of the sector is also evident in the fact that leading fintech firms such as PhonePe are mulling having a presence in the short-term lending market in India. This itself shows that there is a high-growth potential in the BNPL market if done right. From the short to medium-term perspective, PayNXT360 expects more players to enter the market, either through mergers and acquisition deals or by launching an in-house product.

• In February 2023, CRED, the Indian fintech unicorn, also announced its foray into the BNPL segment through the launch of the CRED flash feature. The short-term lending product is powered by Parfait Finance Investments, an RBI-registered NBFC. CRED has revealed that its BNPL service is aimed at removing the friction of dealing with OTPs and switching to external apps.

The growing presence of these unicorn fintech firms in the BNPL sector is a testament to the potential growth of the BNPL market in India over the next five years. The demand for short-term credit remains robust among consumers. Consequently, more and more fintech giants are expected to enter the market, thereby driving the competitive landscape and innovation in India.

While the BNPL sector has a massive growth potential, the failure of the PhonePe - ZestMoney deal will bring in some negativity in the space, at least from the short-term perspective. With the payment segment getting tagged as a risky proposition, venture capital and private equity players will also have second thoughts about investing in firms that offer BNPL services.