Work and life and health have gotten the better of us over the last couple of months. As has the syndicate which has taken so much of our time! We are slowly getting back on the writing wagon though and there couldn't be a better restart than this conversation with Lizzie Chapman of Zest Money, the Buy Now Pay Later player.
This has been a break-out year for Buy Now Pay Later companies. What till a couple of years ago was still seen as a somewhat niche fintech category is now very much in the mainstream, what with the successful IPO of Affirm earlier this year, and Square's purchase of Afterpay. We have wanted to cover BNPL in India for a while — in many ways, the category is particularly interesting in an Indian context. Unlike the West, credit cards in India haven't really taken off in the same way and there's an argument to be made that BNPL can help Indians leapfrog credit cards altogether.
As a recent report from Credit Suisse has noted:
Payments and digital lenders (incl. BNPL) have unlocked credit for new-to-credit (NTC) customers by providing BNPL and EMI loans in partnership with banks and NBFCs. Nearly 30-60% of these customers are new to credit, with 80% from outside Tier-1 cities.
BNPL players like Simpl, LazyPay, ZestMoney, Amazon Pay, PayTM, etc. have pre-approved Rs10k to Rs100k credit line to over ~200 mn customers. These BNPL loans have positive unit economics —take rate of ~1.6% (MDR from merchant) and contribution margin of ~0.7% for a15-day tenure, after accounting for delinquencies, funding and collection costs (MDR), and late payment fees.
ZestMoney is one of the BNPL players I've been following for a while - I have heard great things about the company, the product and the team. CEO Lizzie Chapman recently won the Economic Times Startup Award's Woman Ahead category and last month the company received a $50M strategic investment from the Australian BNPL group, Zip, which is making a push for global expansion. Zest currently has a reported user base of ~11M and has partnered with more than 10K online merchants and 75,000 physical stores across the country. It is present at the check out of the largest e-commerce platforms like Amazon, Flipkart, Myntra, MakeMyTrip and Yatra. Also, retail brands like Apple, Reliance Digital etc making it the largest omni-channel BNPL brand in India.
Despite this, Zest is, by the standards of start-ups in India, a relatively low-key company. When I spoke with Lizzie Chapman (before the Zip deal was announced) she said, "We're not in the crazy unicorn club, which is the only thing that gets covered these days. As founders, we're quite sensible and we're a bit older, so we're really genuinely trying to build a business that's going to last for decades. And when you're playing a game that lasts for decades, you're not so bothered about the short term trends and valuations. But what that means is we miss out when it is a bubbly time, like right now."
That is likely to change, as Zest and BNPL grow in importance in India. Lizze and I had a long, wide-ranging conversation covering everything from the development and evolution of BNPL in India, the surprise BNPL categories in the country, Zest's move into covering insurance through BNPL, and why we are unlikely to see a Klarna or Afterpay making a foray into India anytime soon. The conversation was very insightful, and I felt it was best to keep edits to a minimum! Extracts from our conversation, organized thematically, are below.
BNPL in India - not a new phenomenon
We don't see BNPL as an overnight sensation. First of all, everybody has a different definition of BNPL. And in some ways, I think India is already the biggest, most entrenched pay later market in the world. It's just that we haven't codified it. Bajaj Finserv is by far the biggest player - it does as much volume as Affirm right now. And in many ways, the entire retail world in India already operates on this basis. It may not be digital and institutionalized, but do you ever pay for anything on time in this country? So it's already a phenomenon and a few tech companies are kind of packaging it and putting a label on it. So we're a bit more liberal in our definition. And we think that this is already a very thriving BNPL market and economy. It's just interesting that the world has woken up in the last couple of years because of Afterpay, Affirm and the like and, and that's great.
"Pay in three" as a category creator
Just to give you the context when we started 70% of our customers were new to credit. They did not use credit cards. They needed us for affordability and they would actually pay for it. They would pay almost anything because if they didn't use us, they couldn't buy this smartphone, right. This smartphone, what was going to get them business or work or whatever. So we found there was a huge market, huge opportunity, and people just needing affordability. What has changed in the last three years, I would say, and really accelerated to the pandemic is let's say in the early days, 5% of our customers had a credit card. Now credit card customers and even prime customers are giving up on credit cards and looking at these products. So it's becoming a more prime product.
When we started, most people were buying electronics and expensive things, on a six to nine months EMI. Now our most popular product is what we call pay in three - basically three months EMI. It's interesting because that's actually what Afterpay and all have exploded on in the West. There it's every two weeks here it's every month. But I think that just represents salaries are obviously different, right? So people need three months or even six months to pay for the same thing that you can probably pay for in six weeks in the US so this pay in three type phenomenon all over the world is very real and it is very real now in India. It is by far the fastest product category for us.
Very short-term credit in India — still a small market
30-day or the very short-term loans are actually relatively small, still in India. That hasn't exploded yet. I think in the US a lot of people literally live paycheck to paycheck, even people with very high salaries. They earn a few thousand dollars a month, but by day 20 they've spent all their money. So even a 30 day credit line has a lot of value. They can't afford to buy their foundation or whatever they need. In India, people are, it's a cliché, but they're much more prudent with their financial situation. So aside from people who are genuinely struggling, even low-income, people will not get into such a month to month cycle. So I don't think they value the 30 day loan as much as people do in the West. We've been having this conversation for six years with merchants, they say, but we've got UPI, we've got wallet, we've got net banking - what does this bring? Whereas when we say we will split the cost of a Rs. 10,000 product into Rs. 2,500, they get that immediately. With our pay in three product, we can get really, really good uplift for the merchant in revenue. And that means we can give it for free to the customer. On these 15 and 30 day products, we don't find the revenue potential from the merchant is very high yet. I also wonder if part of it is the consumer landscape in India - you have two rupees shampoos, people don't buy in bulk. That used to confuse me when I first came here. In India, excess or induced consumption is not a thing. People are far too savvy and smart, and that behavior doesn't really exist. So therefore we become less of a kind of marketing tool to the merchant and are more just a really useful product to the customer.
Moreover, I don't think people value credit for such a short period. You can also always get credit from a store in this country. You know, there's always a bit of leeway the way that you pay for things here, which doesn't exist in the West. I remember I had this Eureka moment when I'd been here a month and my landlady was a travel agent and she said, I'll give you a good deal on your flight. I needed a flight to London and I was like, I've never been to a travel agent, but let me test her out. And she said, one of the benefits of booking to me is you don't have to pay for three months. I said, I think you're basically giving me credit for three months. And she's like, but that's very normal - I do that for all my clients. And I was like, whoa this is really interesting because that doesn't exist in the West. That would have to be a FinTech or a bank taking that risk.
How local behaviours dictate key BNPL categories - edtech and travel are surprises
I think we have to recognize local behaviors and understand what works here. One good example is edtech. This has been one of the most booming categories for buy now pay later credit products. It's huge. And that's because it's such a critical piece of every household. We're doing a ton of laptops at the moment, which we realized are for families because kids are still not in school, so they need an extra laptop. We know people in India will spend a lot on their kids' education. So again, if there are facilities available that allow them to spend more upfront on better quality education, absolutely they will use them. In the US this is just not really even a category.
Travel is actually much bigger than we expected and much lower risk than we expected. In the West it's considered the riskiest category because people don't pay if they didn't enjoy the trip or if something went wrong. Again, it's cultural. We realize most of the travel we financed is going to visit relatives. It's basically like going home, right? So you're not going to complain about that. We spoke to Affirm about the kind of travel they were financing, and it was all holiday packages. And if the holiday package doesn't live up to your expectations, you might withhold some of the payments. And we realized that a lot of the time, what we're doing is we're upselling a customer who would have taken a train or driven. A flight flight would be, maybe 30 to 50% more expensive than the alternative, but it gets there a day quicker. So customers will pay for that if there's a financing option available.
Expanding into insurance as a category
We are also going to soon launch selling our own insurance, with BNPL as a payment option. We think that it is going to be a big category. The pandemic obviously accelerated this. We found out amongst even our own existing customers is they may get a very basic policy from their employer. Let's say they work at a call center or software company, but their parents aren't covered. And so finally they now really want to have a nice premium from a private insurer for their parents. It's seen as a lifestyle product to have good insurance policy for your parents.
Offering an installment plan for insurance is a tough nut to crack since the insurer themselves are not supposed to give subscriptions. So basically we have to be a partner to a policy — it's a bit complicated. But I think it's much needed because these upfront policy premiums are so expensive. And now the reason we actually got our insurance license ourselves is we now want to kind of break down insurance into smaller sachetized products. So, rather than buying an expensive all comprehensive policy for your family, could you just buy a maternity product when your wife gets pregnant? Just as small maternity cover, just for six months in the event that she wants to have it in this hospital or whatever. We're now going to work with some general insurers to break down their products into smaller pieces, and then also put any EMI on that.
It's quite fun and I actually don't think I've seen that anywhere. The things in India with everything in financial services, is that it feels very highly regulated. So people avoid stuff like that, because it's like a regulation. Whereas we think, well, let's try. And then if we need the license, we'll get the license. Let's figure out a way to do it within the realms of regulation.
The evolution of credit in India
The secular trend has been improvement in credit quality over the last five and a half years since we've operated. This is partly because we've improved, meaning we get better at underwriting, but we have definitely seen a massive increase in awareness.
We used to say that our market was very credit, naïve - that's changing rapidly. The ecosystem is evolving fast. For example, you can get a loan in GooglePay right now. There are so many apps that are offering a personal loan. There's just a lot more noise and therefore education is happening. The Bureaus have also been very aggressive in promoting their consumer scores. There are loads of companies that give you your consumer credit score now for free as a perk to drive engagement like Credit Karma did in the US. As awareness has gone up, the deterrent factor is finally kicking in because that was always the biggest problem in the pas - do people really care about their credit score in India? Now, I think they do. For example, young people today, even at a low-income, dream of having a home loan one day now. That's a very real aspiration. And then to get a home loan in the future you may as well start building your credit score now. So that's finally kicking in.
Covid has been challenging, of course. Aside from the pandemic, we had this very dramatic moratorium for six months. I think Colombia was the only other country that had a moratorium. That creates a lot of confusion for customers as it gives them these slightly mixed messages. Is it a holiday? It doesn't affect my credit score. So that was really difficult. We had to spend a lot of time on education and communication. Basically our whole marketing budget went into communication and education, but I think that was necessary because there was so much noise and confusion.
But once we got through that, we actually had a surprisingly good experience in terms of how customers behaved. We had predicted probably a 50% worse outcome than it actually was in the end. Our net credit costs were basically the same as the previous year, which tells you that customers were far more aware and knew, going into complete default was, was going to be a recipe for long-term financial disaster. So customers were very proactive. They wanted to restructure, they wanted to legally do the moratorium so that it didn't affect their score. It was surprising actually, how kind of well behaved customers were, where they did everything we wanted them to do. There were other surprises as well. We assumed self-employed customers would be really severely impacted but that wasn't the case. I think they had more cash reserves in their life. So they quickly paid off outstanding debts. Or you could also say that self-employed customers are even less likely to have credit cards and other options. So they may behave more better for the one lender that supports them. So, I think a lot of people were positively surprised, certainly in our space.
Gen Z and the adoption of BNPL in India
In the US there is all this talk about Gen Z just bypassing credit cards and just going straight to BNPL. In India that is a harder trend to break out. I would say though that in India Gen Z is basically most people. That's the biggest portion of the population. And they are so, so digital - dramatically more than unexpected. And I'm not just talking about kids in Bangalore, I'm talking about even smaller towns, the amount of digital consumption has gone through the roof. So I think the physicality of a credit card is less critical now than it used to be. They're so comfortable with mobiles - Indian, young people don't even care about laptops. Everything is on their mobile, their life is on their mobile. So for that reason, I think that if they're offered all the same functionality, same pricing and everything that you would get on a physical credit card, why would they not do it on digital?
More broadly though, what a lot of people say to us is that they hated the business model and the lack of transparency of credit cards and leave very soon after trying it. I think that is probably true, but that may have always been true in India, meaning that's why a lot of people who had gone through the previous financial crisis are not queuing up to get a credit card. There was a, there was a general reticence. Plus, it's much harder now to get a credit card in a lot of economies because of the rising gig workers and people's salaries stagnating. So the pool of people who actually credit card eligible is not growing and the credit cards are being offered at very high prices, very prohibitively high prices.
I was just on a call with our marketing team and spoke to a new guy who joined and I said to him, have you used the product yet? And he said, yeah I've been using the product since before I joined and I've now also convinced my mother to. I said, oh wow, how did you that? He said, well, my mum says I would never take a loan. I would never take a loan. And I said, there's no loan here. Look at the app. It doesn't use the word loan. This is just buy now pay later. And so there is an argument that there's a kind of overhang anywhere in this country that lending and credit is not desirable. So this basically repackages it in another format. I think that might be the same version of that.
Using BNPL repayments to build credit scores
The Zest repayments also go towards building their own credit score and that is crucial for a certain segment, especially for that more new to credit segment. We've done surveys and customer discovery and it's often the second or third biggest reason why they used it. The new to credit segment often use these products in India to build that credit score.
I know in some European countries, for example, it doesn't, and some BNPL players almost sell their non-reporting as a benefit. Because there's no risk it will mess up your credit score. Whereas here, very few people look at it like that. It's almost the other way round, certainly for the mass market. They think, I can actually get a credit score because my bank is not going to give it to me.
On why we likely won't see Klarma or Afterpay enter India any time soon
The interesting thing is none of these guys are actually very serious about India. We keep talking about it — I've actually been speaking to Klarna for about 10 years, because I remember when I first came here, I thought maybe could I work for them in a year? So I spoke to them about that. But they're always saying India is a bit scary. So many multinational brands either don't enter or make big mistakes. I think the success stories are people who invest deeply over a long time in understanding the local market. A brilliant example recently is Ikea. They've actually been in India for 15 years, even though they only launched relatively recently. I have a friend, a Swedish friend, and she's been here for seven years, just working on local strategy, she spends her life going into people's houses, looking at how they use their kitchen shelves because people store things differently, etc. So when they finally launched, they're so well-designed for the India market because they spent literally seven years researching. I think that's the challenge. Ikea had an infinite time line, because they're going to be around forever.
An Afterpay, though, needs a six month market entry strategy and it needs to be making a hundred percent growth within six months. And that's hard here. That's really hard. They know that these are not easy markets. The other big, big, big difference is that you will have new to credit customers. For the first few years most of our customers were new to credit. We actually barely use the credit score for the first years because none of them had a credit store. So we just used alternative data and really basically controlled for fraud because that was our biggest risk. In India, you end up spending a lot more time in India working on fraud, account takeover, a lot of identity related problems that are very specific to this market. If you have things like social security numbers and stuff that's a bit more regimented. They know that their models won't adapt quickly and therefore it's going to be a year or more of losses. And in a big population it could really hurt. So I think they're - sensibly - a bit cautious. And then I think the problem with India is you've always got to have a long time horizon because the investment in learning and the investment in building your regulatory muscle is this space is very hard.
If you take a regulatory gray risk in a market like India, you can just get shut down. And that is a real headline risk. India does have a bad reputation from a regulatory perspective. We, by the way, think the opposite where we think that because it's so tough in a way it's actually sometimes easier to operate here because you know what you can and can't do. It's a level playing field in financial services. There aren't too many loopholes for regulatory arbitrage. In India, all of that is very hard to justify. The regulator will just shut you down. I think for a domestic player, that's actually nice because we know what we can and can't do. We can go and ask them. It's very black and white. I think also part of what's going on here is that they know that it's going to be a long journey and there's no, there's no point in rushing in. They'd probably rather let people like us create the market. So I think, I think it'll be a while before we see market entry of some of these players