Zomato’s reduced losses may have grabbed some attention, the story everyone is talking about is the foodtech giant’s plan to enter the BNPL (Buy Now, Pay Later) market.
Let’s say it’s Friday night. And you have a strong craving to eat pizza. So you open Zomato, search for your favorite restaurant, and get ready to order your pizza. But then you are presented with a variety of payment options. And now you are thinking, “Should I pay Rs. 400 now or later?” The ability to pay later is certainly appealing.
Well, you don’t immediately see your bank account decline when you do, right? Also, you will not get SMS alerting you about your crime from your bank. Isn’t that enough to make you happy? There, you may be “slightly” inclined toward the option to pay later.
Zomato’s eyes and ears are wide open. It also knows all its competitors who are doing similar work. Every day, an increasing number of consumers choose to pay later. At the same time, Zomato is upset with this. It realizes that every time someone chooses to pay later, he or she misses out on a small amount of revenue.
How is it, you ask?
When you choose the latter route as a Zomato consumer, a BNPL firm like Simpl, LazyPay, or ZestMoney is ready to complete your transaction. These companies give the order amount to Zomato in advance, but only after keeping a small part of the transaction cost. And this price can range from 1% to 2%. Take your pizza order, for example. BNPL Corporation makes anything from Rs. 4 – 8 in Rs. 400 food orders
Zomato suffered losses while BNPL Company made profits. win-win situation? Well, only for BNPL companies.
On the surface, this may seem like a small number. But what if you keep adding this amount to millions of orders? It could be crores of rupees. And forget Zomato, which is ready to lose crores of rupees just because your consumers want to pay later?
So one day Zomato gets out of bed and realizes that giving all that revenue to BNPL firms is a terrible idea. Then it says that he is going to start his own BNPL firm! Yes, a food delivery company now aspires to become a full-fledged fintech player.
When you think about it, Zomato’s logic is quite straightforward and it is based on two factors. To begin with, it is up to the expansion of its primary business. As you can see, online food delivery in India is still in its infancy. To get an idea of this, we need to look at Zomato’s most recent financial data: almost 50% of their customers who bought food on Zomato in 2021 were “first timers”.
It also suggests that there may be a large untapped market that has yet to reach online food delivery apps. Second, those new customers will be big supporters of BNPL games in the near future. And moreover, it is a thriving business that is projected to grow 15-fold to $45-50 billion by 2025.
But the story does not end here. Zomato understands that by creating their own BNPL counterpart, they will be able to attract more people to ‘eat now and pay later’. This is in the interest of Zomato. Because those who pay later are more likely to order more. In fact, when McDonald’s began accepting credit card payments several years ago, the average order value rose from $4.50 to $7. This is an increase of 55%!!!
It is a matter of basic psychology and consumer behavior. So maybe, just maybe, maybe Zomato is trying to increase its average order value in this way.
And if it is successful, they will not only save money by adopting their in-house BNPL solution, but they will also be able to charge higher royalties on orders. This is the secret ingredient of financial success. To remain consistently profitable, Zomato needs to keep the average order price high and that is their only way to move forward.
But what if people don’t pay and their credit defaults? Isn’t Zomato going to lose money? Would it have been better to tie up with those BNPL firms?
This possibility is always there. And it is likely to happen. However, Zomato has a lot of information about you, you know? They are aware of your eating habits, payment habits and the amount you spend on their app. As a result, they can make an educated decision as to whether or not you will be eligible for BNPL credit. And the objective here is not to become a BNPL giant, but to retain the consumer within the ecosystem and get as much value as possible.
To be clear, Zomato isn’t the only food delivery company that is lending. In January, Germany-based Delivery Hero revealed that it will also push the envelope with its BNPL offering. The driving factor for both Zomato and Delivery Hero, both are public firms that have similar reputed profitability benchmarks across the stock exchanges. They may have realized that last-mile deliveries won’t help them get there. They also need lenders to grow.
Many on Twitter fought over whether Zomato’s ‘BNPL’ or ‘ENPL’ could be the beginning of the end of trading, whose share price has been falling for some time anyway.
Any delay will be reported to credit rating organizations such as CIBIL and CARE Ratings, and will have a detrimental effect on your credit score. And a bad credit score can affect your ability to get loans in the future. It is possible that your information could be used to trace your shopping habits.
Who would have thought that a small food order could affect your credit score?
But will it all work out the way they hope? Well, your guess is as good as ours.
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