Business Strategy and Outlook
Zip’s focus is on maximising its addressable market. Its business is more diversified than single-product BNPL players, with varieties in financing options, transaction limits, and repayment schedules. Customers enjoy a simple sign-up and checkout process, high acceptance by retailers and flexible financing solutions to help better manage their cash flows. Merchant partners may benefit from increased conversion rates, basket sizes, and transaction frequencies.
The firm operates a revolving credit business in Australia. ZipPay finances up to AUD 1,000, and ZipMoney AUD 1,000 and above. It also boasts a broader merchant base including retail, home, electronics, health, auto, and travel. Around 70% of revenue is derived from customers, mainly from account fees and interest. Meanwhile, Zip Business provides unsecured loans of up to AUD 500,000 to small and midsize enterprises. Zip adopts a Pay in 4 installment financing model overseas, helping it scale up faster and keep up with competition on the underpenetrated global BNPL landscape. The acquisition of U.S.-based QuadPay materially boosts its growth prospects. It also operates in the U.K., Canada, Europe, Mexico, and the Middle East. Zip enhances customer stickiness via ongoing product add-ons. It has a Pay Anywhere function that lets users transact at a wide variety of avenues without being confined to merchant partners. Users also benefit from promotional offers, cash-back deals, or free credits. Newer features include crypto trading, credit reporting, and savings accounts. For merchant partners, Zip invests in co-marketing to help them acquire new customers.
Zip has strong earnings prospects, its margins are projected to be increasingly under pressure and it will not achieve the same penetration and transaction frequency overseas as it had domestically. While it benefits from the growth of e-commerce and increasing preference for more convenient/cheaper forms of financing, heightened competition to its products is anticipated. The capital-intensive domestic business cannot scale up as quickly, it is relatively late (compared with Afterpay) in its overseas foray, and QuadPay also lacks a clear differentiation.
Financial Strength
Zip is in reasonable financial health, with no signs of significant credit stress. As of September 2021, the net bad debt ratio for its core ANZ business sits at 2.44% of receivables, while arrears are at 1.87%. Its debt/capital ratio is 61%, while the ratio of equity/receivables has improved to 52% in fiscal 2021 from 8.1% in fiscal 2017. Zip’s bad debts are anticipated to stay manageable in a major credit event. Unlike some peers, Zip conducts a greater degree of background check before onboarding customers, such as collecting bank statements and pulling in information from a credit bureau. Soft credit checks are similarly performed when onboarding new customers overseas. These help compensate for the fact that its receivables are higher-risk due to them having longer repayment periods and higher transaction value (notably for Zip Money) or it having a Pay Anywhere model. The fact that the company’s installment businesses (such as QuadPay) have shorter turnover periods and lower transaction values is noted, meaning it can know much earlier (relative to credit cards) if customers have trouble making payments and can therefore amend its risk controls accordingly. Most its Australian receivables are funded by its asset-based securitisation program, with undrawn facilities totaling AUD 608 million as of September 2021. It also has USD 188 million and AUD 105 million of undrawn facilities to fund QuadPay’s and Zip Business’ receivables, respectively.
Bulls Say’s
- Zip is well placed to continue growing its transaction volume, given its variety in financing options and retailer base, as well as its Pay Anywhere model which provide greater avenue to spend using its products.
- Zip benefits from an accelerated shift to e-commerce, increased adoption of cashless payments, and a growing need among merchants for effective marketing amid a challenging retail backdrop.
- Zip is expected to face lower regulatory risks than its BNPL rivals, as it already conducts a greater degree of background checks and ZipMoney is already regulated by the National Credit Act.
Company Profile
Zip is a diversified finance provider, offering consumer financing via a line of credit (via Zip Pay and Zip Money) and instalment-based finance (via QuadPay, Spotii, Twisto, and PayFlex); as well as lending to small to midsize enterprises (via Zip Business). Zip’s fortunes are largely tied to the buy now, pay later, or BNPL, industry. Most of its products–Zip Pay, QuadPay (Zip U.S.), and PayFlex–do not charge interest based on outstanding balances. Around 60%-70% of Zip Pay’s/Zip Money’s revenue is derived from customers, mainly via account fees and interest. Meanwhile, its instalment businesses primarily generate revenue by receiving a margin from merchants, which compensates it for accepting all nonpayment risk and for encouraging consumers to transact more frequently.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
