PhonePe pulling the plug on the ZestMoney deal has sent a bunch of fintech players, especially in the buy-now-pay-later (BNPL) space, into a tizzy, with some even opting for pre-diligence to avoid shocks later, stakeholders told FE.

The Bengaluru-based fintech decacorn last week did not proceed with its offer to acquire ZestMoney because the latter’s due diligence did not meet PhonePe’s standards, as reported earlier, leaving industry players confused about the practices followed at ZestMoney and the wider industry.

“The failure at ZestMoney, because of their diligence part, has caused alarm bells to ring across the board. Now, any fintech player prepping for an M&A will do a pre-diligence just to try and find out whatever issues they can possibly have and will look to rectify those well in advance,” said Siddarth Pai, founding partner, 3one4 Capital, which backs over 10 fintechs, including players like Open and Jupiter.

“Due diligence (DD) used to be a tick in the box sort of a thing back in 2020–2021, but now DD has become the determinant as to whether one wants to go ahead with a deal or not. The limited or lack of DD, in the past, is coming back to haunt players in the industry,” Pai added.

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While there will be increased scrutiny of BNPL players, the sector hasn’t turned unattractive yet, others argue. PhonePe engaging with ZestMoney for at least six months means BNPL was still attractive to PhonePe and the deal falling through was only an isolated case and not an industry-wide issue, said Vikram Chachra, founding partner of 8i Ventures, which has invested in multiple fintechs, including Slice.

“If BNPL was not attractive to PhonePe, it wouldn’t bother talking to ZestMoney in the first place. The deal not going through will not impact the industry, which we continue to be bullish on even now” he said.

However, in the wake of large deals like BillDesk-PayU falling through in October last year and now the talks between PhonePe and ZestMoney not materialising, investors are asking portfolio firms to rely less on M&As as an exit option. “M&A is an option but not a very reliable one, especially after two important deals not going through. Founders should instead aim for IPOs, retain their company forever and get rich on dividends,” Chachra said.

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“The BNPL space has not lost its sheen, the opportunity is still massive,” said Madhusudan Ekambaram, co-founder and CEO, KreditBee, a large BNPL player. “The recent events have, however, brought in some negativity in the BNPL space, questioning the product itself. The industry will see some jitters as BNPL now gets tagged as a very risky proposition. Now, investors will also have second thoughts before investing in companies that have BNPL as an offering,” Ekambaram added.

Along with that, the episode at ZestMoney will also likely prompt fintech players to tweak their hiring profiles so they can continue bringing in veteran bankers who know the nuances and can understand RBI’s language better, investors said.