Walmart-backed PhonePe has cancelled a deal with ZestMoney over due diligence concerns. It would be a massive setback for the buy-now, pay-later platform, whose backers include Goldman Sachs, PayU, Xiaomi and others.

“The transaction has been cancelled. There were some issues with due diligence, and as of now, PhonePe has not proceeded,” a person with direct knowledge of the matter told Media.

ZestMoney facilitates buy-now-pay-later (BNPL) loans by paying lending partners’ purchases directly to merchants, allowing customers to repay lenders in instalments.

PhonePe launched talks to buy ZestMoney in November to bolster its digital lending business. To be sure, PhonePe does not currently have digital lending on its platform but does have other financial services such as insurance, mutual fund distribution, digital gold and silver, and more. In January, PhonePe announced a massive $1 billion funding round and said it would launch a digital lending service on its platform soon.

PhonePe initiated talks to acquire ZestMoney months after BNPL was hit by the Reserve Bank of India (RBI) digital lending guidelines, making it difficult for the fintech startup to extend personal credit lines through credit cards.

ZestMoney has been looking for a buyer for at least a year as it struggles to raise capital, the sources said. According to media reports, PhonePe will pay $20-300 million for ZestMoney, far below ZestMoney’s last valuation of $470 million.

Founded in 2016 by Lizzie Chapman, Priya Sharma and Ashish Anantharaman, ZestMoney has a customer base of 17 million and disburses Rs 400 crore in monthly loans. The company has 27 lending partners and merchant partnerships with 10,000 online brands and 75,000 offline stores.

ZestMoney raised $50 million from Australian BNPL fintech Zip Co on September 22. This is part of a larger Series C round that will see participation from existing investors such as Goldman Sachs, Quona Capital, Xiaomi and Alteria Capital, among others.

ZestMoney’s losses tripled year-on-year to Rs 398.8 crore for the financial year ending March 31, 2022, according to RoC (Registrar of Companies) filings. The company’s loss was up 216% from the Rs 125.8 crore reported in the fiscal Year 2020-21 (FY21).