Lizzie Chapman, co-founder of Buy Now Pay Later (BNPL) platform ZestMoney which won top honors in the Woman Ahead category of the Economic Times Startup Awards 2021, believes the time for BNPL in India is now. Chapman, who co-founded the company long before the e-commerce and digital payments boom began in India, told ET’s Ashwin Manikandan
in an interview that these companies will generate more market capitalization in the country than anywhere else in the world. Edited excerpts:
Financial services have unfortunately been dominated by men in India. Was it a challenge to break into this space?
It’s much better than three years ago. The past two years have been great for women leaders. There is definitely more awareness. In fintech, there are actually some very strong founding women – there’s Upasana Taku who leads Mobikwik’s IPO charge; Mabel Chacko and Dina Jacob of Bank Open are strong founders. In fact, we also have a rich history of influential and influential women in India’s biggest banks. In a very ironic twist, India may be better off than the world by having senior women in every business. We could definitely do better and we need more female VCs, but it takes time.
When you co-founded ZestMoney in 2015, India’s fintech ecosystem was much smaller than it is today. What made you bet on Indian fintech?
I started as an equity researcher at Goldman Sachs. Very early in my career, I became interested in India, especially Indian finance. I was working with a large endowment fund that would invest in Indian banks, and my job was to fly here and meet with CEOs of Indian banks. We have also invested in private NBFCs. At the time, I had invested in Muthoot Finance when it was still a private family business. I happened to spend a month in Kochi, understanding the gold lending space, visiting small gold shops and gold merchants in the streets of Kerala. It was so obvious at the time that India was about to explode, both from a consumer credit standpoint and from an economic standpoint. It was obvious that large companies in the fields of travel, e-commerce and financial technology would be created; everything was just starting. I think I was in a club of entrepreneurs who thought like that (Paytm founder Vijay Shekhar Sharma was another), who thought it was an opportunity to disrupt.
Many people in India understand zero cost credit cards and IMEs, but BNPL, which is still nascent, does not. How does ZestMoney present BNPL to customers?
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In India, we have found that MIL is very well understood. Indians also understand the difference between credit and EMI. With credit, there is a slightly negative connotation, but EMI does not. In our approach, we use the concept of IME to explain our product proposition. There is so much overlap that it is all jargon, frankly. What’s important is that customers and retailers understand the product.
Bajaj Finance has been providing zero cost financing solutions for two decades. How do BNPL new age companies differentiate themselves?
In many conversations with investors and venture capitalists they would comment – “but BNPL is tiny in India”, and my response to that will always be – “yes, but only if you exclude Bajaj Finance”. A market cap of $ 15 billion has been built in India by this company. They were doing digital marketing for companies with a financial product, and they did it before Afterpay and Klarna and others. However, we believe the BNPL model for digital consistency is a different challenge. There are young digital customers coming into the market with high expectations and they are very demanding. And many incumbents find it difficult to deliver this experience.
Globally, very few BNPL companies make a profit. What is the right business model?
It’s a mix of credit, payments, and marketing. You help brands convert repeat credits. Bajaj cracked it and they cracked it for physical retailers. In the past 18 months alone, the world has realized its potential, but we have known it for a decade. I still think India will be the biggest BNPL market in the world. There will be more market capitalization created in this segment in India than anywhere (elsewhere) in the world. It will be an India category.
Do you see BNPL as a challenger to incumbent operators such as banks and NBFCs offering low cost personal loans?
We actually work with incumbents and most of our credit is off our books. We work with 22 of the biggest banks and NBFC – we don’t want to beat the incumbents, we want to work with them. This sets Indian fintech apart from the world, where fintech and global banks compete.
ZestMoney has an NBFC license. Do you plan to take more loan risk on your books in the future?
We don’t want to be an NBFC, we want to be a platform for NBFCs who are much more familiar with underwriting and collecting. We will get any license we need to be in compliance – so we have an NBFC license, but we would rather activate a bank that has regulated and capitalized business. Why do double work? The regulatory and political environment in India would push towards this system. In the West, there is a lot of friction and tension between technology, especially Big Tech and traditional banking, and that is ultimately not good for consumers.
Over the past month, there has been fundraising activity in the Indian BNPL space with both ZestMoney and Capital Float raising capital. Do you think this space is under-capitalized right now?
While this is a multi-billion dollar market creation in a few years, BNPL’s actual funding is currently still very low. While $ 50 million (capital raised by ZestMoney and Capital Float in respective rounds) is fantastic, there are entire categories far more specialized than BNPL (which are) in raising a lot more capital. It’s such a big market in India, but what surprises me is that there is still little competition. There are only a handful of companies, including us and Capital Float. In comparison, if you look at the UK which is a much smaller market, they have Afterpay, Zip, Klarna, PayPal all beating themselves up.
Why are old fintech and e-commerce companies in India as well as pure-play companies struggling to break BNPL?
It takes some capital to get off the ground. Even Klarna is not an overnight success; it’s a 15-year-old business. Everything related to credit becomes more complex – there would be unsuccessful stories. And if some don’t work, investors get nervous about funding the space. Because there is not enough inflow of capital, it becomes more and more difficult to develop the market with critical mass. I think we are there now. The success of Klarna, Afterpay and Affirm is a catalyst. It will be interesting in the months to come. I would like to add that BNPL is not a complementary activity; it is very complex and requires special attention. I think there will soon be five or six large specialized BNPL companies in India.
Do you think any of the big BNPL companies – Klarna, Affirm, Afterpay – would enter India soon?
India is a difficult market for global FinTech companies. Hope I am not speaking against the grain, but PayPal has struggled here and if PayPal – which is a company I have idolized – found it difficult in India, then others would be aware that this would be a tough market. Any of the guys in the world coming here should invest heavily, rename products, learn about socio-economic diversities, learn about KYCs. It’s going to be a big project and I don’t think they’re there yet.
Has your belief in BNPL ever been called into question?
The reason BNPL is so clear is that we have studied it all over the world. The reason people were turning away from credit cards and turning to BNPL around the world was that there was real cynicism about credit cards. In 2011, I was so amazed at the informal credit implicit in the system here. In the UK you even have to pay to pre-book a hotel. Here trust is built into the system, and I don’t think India is a low trust society. What I mean is BNPL is a product that people in India already understand. The entire supply and demand chain here operates on implicit credit. Like any good business, BNPL builds a product around disorganized behavior implicit in the system.
How do you mitigate the repayment risk associated with loans for the Indian market?
There is a trend in technology companies around the world which is âgrowth at any costâ. We believe that anything related to credit – and BNPL is a credit product – should be aware of risk models. We focus on affordability. In India, there aren’t many unscrupulous products yet. The Reserve Bank of India can also look at regulations as this market develops and we support that. Indian customers are unique – they are savvy, they are aware of the fees, and they don’t like to default. In the UK, people are much more complacent about their financial behavior and take on a lot more costs, just like in the US. Therefore, I think it would be more unlikely in India to have such a credit bubble like in Western markets. We have a well-regulated financial market and strong banks that have no incentive to over-indebted customers.