ZIP Zip Co Limited

By Stuart Condie

SYDNEY--A cloudy economic outlook and increased investor focus on profitability over growth is forcing some buy-now-pay-later companies to change strategy.

Growth of installment payments is slowing as more consumers pull back on discretionary spending and even miss repayments due to rising living costs. Platforms that surged in popularity and valuation as the Covid-19 pandemic drove consumer spending away from services and toward goods purchased online are trying to sharpen their focus in an attempt to regain momentum in the crowded payments industry.

Shares of companies including Affirm Holdings Inc. and Zip Co. have tumbled by 80% or more since February 2021, with funding costs rising and many tech stocks out of favor due to a renewed market focus on the bottom line. A strategy that accelerates the path to profit could be the only one that reignites investor interest.

Zip is counting on a merger with smaller rival Sezzle Inc. to attain the scale it believes will attract large U.S. merchants and generate positive cashflow by June 2024. Australia's Latitude Group Holdings Ltd. is also trying to size up and is buying Humm Group Ltd.'s consumer finance operations to bolster its own buy-now-pay-later platform. Humm says the unit was unprofitable over the four months through April and is urging shareholders to accept the proposal or face a further decline in shares that have already shed more than 40% since early 2021.

"The negative effects of this competitive environment on profitability are likely to be amplified by increasingly challenging economic conditions," Humm said in May in a letter to shareholders. "Operational scale is vitally important in this sector and macro environment."

The moves by Zip and Latitude continue the consolidation trend kicked off by Block Inc.'s acquisition of Afterpay, the leading buy-now-pay-later operator in Australia and New Zealand, in early 2022. Block CEO Jack Dorsey said the platform, which generates revenue from a slice of the sales ticket and customer late fees, would tie Block's Cash App and seller ecosystems more closely together.

Yet losses at fashion-focused Afterpay equaled 1.17% of total payment dollars processed during its latest quarter, compared with 0.9% for its latest full year ended June 2021.

Tom Beadle, an analyst with UBS Group AG, said Afterpay would be worth far less than the $29 billion it was valued at when the acquisition was announced in August 2021. Back then its shares were trading at just under 100 Australian dollars, which is about $72. Beadle thinks 20 Australian dollars per share would be optimistic right now.

"The bull argument for buy now pay later was that, in say five to 10 years' time, buy-now-pay-later would account for 30% of all global e-commerce payments. That's just not going to happen," Beadle said.

So smaller players are tweaking their approach.

New York-based Splitit Payments Ltd. announced in April it was ditching a brand-based strategy and would instead offer its platform for merchants to use under their own label. The so-called white-labeling could help declutter crowded checkouts and will cut Splitit's customer acquisition costs, Chief Executive Nandan Sheth said.

Splitit offers interest-free installment payments against unused credit on a consumer's existing credit-card account, so its users have already been credit checked by issuers. This helps reduce write-off rates that could ultimately pose an existential threat to buy-now-pay-later providers, Sheth said.

"The incumbent buy-now-pay-later providers have done a masterful job of enticing consumers and merchants. However, the business model in my opinion is broken," Sheth said. Splitit has been used online by Google in Japan since December 2021 and the companies are in talks about extending the partnership to the lucrative U.S. consumer market.

Others are honing in on specific industries and services where transactions are larger and default rates are lower. Australia-listed Openpay Group Ltd. is betting on healthcare and education, where consumers have a relationship with their service provider. The key to keeping losses down is to only offer installments on very specific procedures or qualifications, Chief Strategy Officer Brian Shniderman said.

"I'm being very surgical about my credit boxes. There are certain types of elective procedures that carry more risk and among those the Brazilian butt lift is right at the top of the list," said Shniderman, who founded and led Deloitte Touche Tohmatsu Ltd.'s global payments practice for 14 years before joining Openpay in 2020.

UBS's Beadle said he expects some players to disappear as the industry matures. Change is inevitable, he added.

"Businesses that hand out free money to their customers are always going to grow fast. I don't think what these businesses were doing was particularly innovative."

Write to Stuart Condie at stuart.condie@wsj.com

(END) Dow Jones Newswires

June 08, 2022 19:17 ET (23:17 GMT)

Zip (ASX:ZIP)
Historical Stock Chart
From Nov 2024 to Dec 2024

Zip (ASX:ZIP)
Historical Stock Chart
From Dec 2023 to Dec 2024