Lizzie Chapman, Co-Founder Buy Now Pay Later (BNPL) Forum zestmoney who
Received top honor in the Women Ahead category of the Economic Times Startup Awards 2021Believes in Time for BNPL India has come. Chapman, who founded the company long before the e-commerce and digital payments boom in India, told ET’s Ashwin Manikandan.
In an interview that these firms will generate more market capitalization in the country than anywhere else in the world. Edited excerpt:

Unfortunately, financial services in India have been male dominated. Was it a challenge to break into this space?

It is much better than it was three years ago. The past few years have been great for us female leader. There is definitely more awareness. In fintech, there are some really strong female founders – Upasana Taku who is leading MobiKwik’s IPO charge; Mabel Chacko and Dina Jacob are strong founders of BankOpen. In fact, we have a rich history of senior powerful women in even the biggest banks of India. In a very ironic twist, India could be better off globally when it comes to having senior women in companies. We can certainly do better, and we need more female VCs – but it takes time.

When you co-founded ZestMoney in 2015, the Indian fintech ecosystem was much smaller than it is now. What made you bet on Indian fintech?

I started out as an equity researcher at Goldman Sachs. Early in my career, I became interested in India, especially in 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 the CEOs of Indian banks. We have also invested in private NBFCs. At that time, I had invested in Muthoot Finance, when it was still a private family run business. I spent a month in Kochi, visiting small gold shops and dealers on the streets of Kerala, understanding gold lending locations. It was so clear then that India was about to explode from the point of view of consumer finance and also economically. It was clear that large businesses would be built in the travel, e-commerce and fintech spaces; It was all just picking up. I guess I was in a club of entrepreneurs who thought so (Paytm founder Vijay Shekhar Sharma was another), who thought this was an opportunity to disrupt.

Many people in India understand credit cards and zero-cost EMIs but not BNPL, which is still nascent. How is ZestMoney offering BNPL to the customers?

In India we found that EMI is well understood. People in India also understand the difference between credit and EMI. There is a slight negative connotation with credit, but not so with EMI. In our outreach, we use the concept of EMI to explain our product proposition. There’s just so much overlap that clearly it’s all jargon. The important thing is that the customer and the retailer understand the product.

Bajaj Finance has been providing zero-cost financing solutions for over two decades. How are the new age BNPL companies diverging?

In a lot of conversations with investors and VC funds, he used to comment – “But BNPL is small in India,” and my response to this would always be – “Yes, but only if you exit Bajaj Finance.” This company has created a market cap of $15 billion in India. They were doing digital marketing for firms with a financial product, and they did it before Afterpay and Klarna and others. However, we recognize that the BNPL model for the digitally compatible poses a different challenge. Young digital customers are coming into the market with great expectations and there is a huge demand for them. And many incumbents find it challenging to offer that experience.

Worldwide, very few BNPL firms are actually making profits. What is the right business model?

It is a mix of credit, payment and marketing. You are helping the brand convert repeat credit. Bajaj cracked it and they cracked it for physical retailers. It is only in the last 18 months that the world has woken up to its potential, but we have known it for a decade. I still believe that India will be the largest BNPL market in the world. More market cap will be created in this segment in India than anywhere else in the world. It will be an India category.

Do you see BNPL as a challenge to the incumbents like banks and NBFCs offering low cost personal loans?

We actually work with incumbents and most of our credit is not on our books. We work with 22 of the biggest banks and NBFCs – we don’t want to beat the incumbents, we want to work with them. This differentiates Indian fintech from the world, where fintechs and banks are competing globally.

ZestMoney holds NBFC license. Are you planning to take on more credit risk on your books going forward?

We don’t want to be an NBFC, we want to be a platform for NBFCs who know underwriting and collections better. We’ll get whatever license we need to comply – so we have an NBFC license, but we’d love to enable a bank that has regulated, capitalized the business. Why do double work? The regulatory and political environment in India will lead to this system. In the West, there’s a lot of friction and tension between tech, especially Big Tech, and traditional banks, and it’s ultimately not good for consumers.

There has been funding activity in the Indian BNPL space during the past month with both ZestMoney and Capital Float raising capital. Do you think this space is under-capitalized right now?

If this is going to be a multi-billion dollar market creation in a few years, the actual funds going into BNPL at present are still very little. While $50 million (
capital raised by zestmoney And
Capital float in respective round) is fantastic, whole categories are more specialized than BNPL (which are) raising more capital. It is such a huge market in India but I am surprised that it still has less competition. There are only a few firms including us and Capital Float. In comparison, if you look at the UK, which is a very small market, they have Afterpay, Zip, Klarna, PayPal all fighting it.

Why are legacy fintech and e-commerce companies as well as pure-play firms finding it difficult to crack BNPL in India?

Some capital is needed to take it off. Even Karnal is not an overnight success; This is a 15 year old company. Whatever touches the credits gets more complicated – there will be fail stories. And if some don’t work out, investors panic to fund the space. Since there is not enough capital influx, it is becoming increasingly difficult to build a market with critical mass. I think we are there now. A catalyst is the success of Klarna, Afterpay and Affirm. It’s going to be interesting in the coming months. I would like to add that BNPL is not an add-on business; It is highly complex and requires special attention. I believe that soon there will be five or six big BNPL companies specializing in India.

Do you think any major BNPL firms – Klarna, Affirm, Afterpay – will enter India soon?

India is a tough market for global fintech firms. I hope I’m not speaking off-turn, but PayPal struggled here and if PayPal – a firm I’ve idolized myself – has found it tough in India, others will know. This will be a tough market. Any global person visiting here would need to invest heavily, rebrand products, learn about socio-economic diversities, know about KYC. It’s going to be a big project and I don’t think they are yet.

Was your faith in BNPL ever challenged?

The reason BNPL is so obvious is because we’ve studied it all over the world. The reason people around the world were turning away from credit cards and jumping into BNPLs was because there was a real craze about credit cards. In 2011, I was very surprised by the informal credit inherent in the arrangement here. In the UK, you also have to pay to pre-book a hotel. There is a built in belief system here, and I do not believe that India is a low faith society. I would say that BNPL is a product that people in India already understand. Here the entire supply and demand chain works on implicit debt. Like all good businesses, BNPL builds a product around the disorderly behavior inherent in the system.

How are you mitigating the repayment risk involved in lending to the Indian market?

There is a trend in the tech business around the world, which is ‘growth at all costs’. We believe that anything that touches credit – and BNPL is a credit product – should be aware of the risk model. We are focused on affordability. There are not many unscrupulous products in India yet. As this market grows, the Reserve Bank of India may also consider regulations and we support that. Indian customers are unique – they are knowledgeable, they are fee conscious, and they don’t like to default. In the UK, people are more complacent about their financial dealings and charge much higher fees than in the US. So, I think it would be more impossible in India to have such a credit bubble like in the western markets. We have a well regulated financial market and strong banks which do not encourage customers to over leverage.