29 September 2020
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Will Zip mirror the meteoric rise of Afterpay?

Maureen Jordan
31 August 2020

Last week was a big one for Zip Co (ASX: Z1P). After last Wednesday announcing a deal with eBay that allows Zip to offer working capital finance to small businesses through the eBay platform, its share price jumped a huge 27%.

But what’s this buy now pay later (BNPL) industry that surfaced in recent years all about? And what’s the story behind Zip Co?

The BNPL industry has been a major global disruptor to the credit card industry. Under the BNPL model, the consumer makes an online or in store purchase, the BNPL provider pays the retailer and generally receives a commission, while the user pays the provider back over time. It’s a modern day take on the old lay-by system. These payment platforms have taken the globe by storm, with their use accelerating due to COVID-19 and increased online buying. A Roy Morgan report says Australians under the age of 35 make up almost 56% of BNPL users, with those over 50 just 14.2%.

A November 2018 BNPL report from the Australian Securities and Investments Commission (ASIC) put the number of users of at least one BNPL method at more than two million. These days customers using these payment services total more than 5.8 million, with up to 10% of all online transactions done via a BNPL provider.

So with consumers loving this new way of buying, more providers have come on the scene, and no doubt more will emerge.

So let’s unzip Zip Co’s story. Kicking off in 2013, the company listed on the ASX in 2015. In 2016, it acquired popular budgeting app, Pocketbook, a personal finance and expense tracking app. In 2017, Westpac made a $40 million equity investment in the company. In 2019, Zip bought PartPay, a New Zealand company with positioning in the UK, the US and South Africa. PartPay was also part owner of Payflex, giving Zip additional positioning in South Africa.

In the same year, Zip acquired Spotcap, an online lender that offered unsecured loans to small businesses. Now rebranded ‘Zip Business’, this facility aims to provide $100 million access to lines of credit from US-based Victory Park Capital Advisors through eBay, while also designing products for cash flow management. “This comes at a time when Australia’s small businesses are confronting the extreme challenge of COVID-19, which has created enormous pressure on cashflow and ongoing business investment,” said Zip co-founder and Chief Operating Officer, Peter Gray, in an ASX statement.

“A thriving small business community is critical to the health of the Australian economy and we are deeply committed to supporting the growth of these important businesses,” he said.

Zip now has partnerships with both eBay and Amazon, as well as business lending through Zip Business. It made a show stopping announcement this year, after recording a 67% share price increase in June from the acquisition of US BNPL company QuadPay. Following the acquisition, Peter Switzer (Chairman of Switzer Financial Group) interviewed Zip’s CEO Larry Diamond, who was keen to discuss his company’s success and future plans. Listen here.

“One in 10 customers are using buy now, pay later…if we contrast that to the US, 20 times the market size, it’s incredibly large,” said Diamond regarding their acquisition of QuadPay.

“The recovery in the share price helped make the transaction more exciting,” he added.

In July 2020, a month after Zip announced full ownership, Quadpay reported record breaking numbers, adding 133,000 customers in July and surpassing two million customers in August. And their monthly transactions increased by 30% in the June quarter. QuadPay also announced partnerships with Internet Retail 100 merchants, Mastercard Vyze and secured a debt facility from Goldman Sachs and Oaktree.

This relatively new company has boasted a number of great achievements and the growth in its share price reflects that. On Friday, it reached a market price of $8.88.

And what’s the back story of Aussie BNPL superstar Afterpay, considered to be the buy now, pay later leader?

When the stock market crashed in March, Afterpay’s share price collapsed from its $40 range to $9. Since then it has been on a rapid upward trajectory, with its price closing last Friday at $88.75. Various respected broking houses put its true worth at opposite ends of the spectrum. UBS has a sell rating, saying Afterpay’s shares are only worth $28.25, while Morgan Stanley’s target price is $106, thinking that the BNPL provider can increase total users to 15.1 million before the end of this financial year.

In 2020, Afterpay made the following announcements:

  • Partnerships with Qantas’ Frequent Flyer programme, Apple Pay and Google Pay.
  • Tencent Holdings became a substantial shareholder in May 2020.
  • Clearpay, their global buy now, pay later platform in the UK and US, reached 1 million active customers in its first year

Despite the vast gap between their share prices, Zip and Afterpay are flavour of the year stocks, with Zip appearing to be following in Afterpay’s footsteps and on the road to being an internationally recognised brand and serious player in the BNPL space.

Read more: Can you make money out of buying Zip Co?

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