Under the Spotlight AUS: Zip Co (Z1P)

A clear winner in the BNPL rally of the last few years, Zip is stepping out of Afterpay's shadow as a strong business itself. With 7.3m customers in 12 markets, what's happening beneath the surface at the fintech?

The Model

Sitting below the Zip ($Z1P) brand are several products all aimed at providing easy-to-access consumer credit. At its core, all offerings revolve around the flexibility to pay off purchases in weekly, fortnightly or monthly instalments, without interest.

ZipPay and ZipMoney are their headline Australian offerings.

ZipPay allows consumers to spend up to $2,000 and repay the figure in 4, interest-free instalments. That being said, accounts which do not meet the minimum balance repayment requirement are charged a $7.95 account fee. Zip also allows consumers to choose their repayment period: weekly, fortnightly or monthly.

ZipMoney caters to a larger spender; the spending cap is catered to each customer’s individual credit limit but reaches $50,000.  

The buy-side is only one way BNPL companies earn revenue. They can also capitalise on merchant fees. Those who opt in to a BNPL plan pay no more at the point of sale, instead merchants pass on a fee to Zip for facilitating the purchase.

More attractive merchant fees than competitors is one of Zip’s differentiators. While Afterpay ($APT) takes close to 4% of transaction value, Zip is a full percentage point lower. Note that both figures are considerably higher than standard credit card charges. 

By the end of June, 2021, Zip had over 2.8m customers in Australia and New Zealand using their products. The company did US$393m in revenue on US$5.7b in sales volume during the last financial year globally. ANZ was the company’s revenue engine despite having fewer customers than the States.

Interestingly, Zip’s biggest customer segment is the 30-39 age group, going against the narrative that the service is providing credit to the young, low income, reckless shopper. Further data from the RBA indicates that BNPL is more than just a trivial payment method. 20% of BNPL users cancel their purchase if such a payment method is not available at the point of sale. A strong quotient of shoppers rely on the flexibility Zip offers.

Getting competitive

There are over 10 listed BNPL providers listed on the ASX. Zip was one of the earliest and through a mix of product and first movers advantage, was able to become the second largest BNPL provider by volume and market capitalization.

Still, Afterpay is far and away the market leader. With a valuation hovering around A$30b as it approaches a buyout from Square, Afterpay leads the category. Their customer, volume and revenue numbers lead the market as the APT stock price outperformed all competitors. Despite rising 500% in the last 5 years, Zip is still down 65% from its February highs. Afterpay is up 32x in the last 5 years despite a 35% fall from highs. 

Is there room to co-exist between BNPL competitors? Founder Larry Diamond himself said in an interview with the AFR that the BNPL companies “are fighting against the credit cards, and the PayPals of the world – those dinosaurs”. A rising tide will lift all ships.

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Going global

What started with Chappelli Cycles in Sydney, Australia has grown to over 50,000 retail partners in 12 global markets. The expansion started with Zip’s acquisition of US-based QuadPay in mid-2020. Very quickly, QuadPay topped Australian customer figures with over 4.4m users. More recently, Zip has also acquired Czech-based Twisto, South Africa’s FlexPay while investing in India’s Zest…all similar BNPL companies. 

Zip is also entering the crypto space, a seemingly natural and inevitable progression for the modern fintech. While the details are yet to be revealed, in some form, Zip will offer cryptocurrencies to its customer base within the next year. Whether this is enough to turn around the stock price after a relatively poor 2021, or a catalyst to kick or a way to step out of Afterpay’s shadow, we shall see.

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