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zipMoney in race to write point-of-sale credit through mobile phones

Walking into zipMoney's digs on York Street in Sydney reveals a company on the move, both figuratively and literally.
Fifty-odd people are packed in like sardines. A table tennis table on an interior balcony with graffiti on its wall has been commandeered and converted to a desk on which half a dozen young staff, some in basketball shorts, are working on code. The office is in the process of being packed up for a move to the AMP centre on Bridge Street, to accommodate the growing team.
zipMoney, a point-of-sale credit provider founded in June 2013 and floated in September 2015, delivered its first set of full-year results as an ASX-listed company in late August. Key metrics are accelerating.
In the full 2015 financial year, zipMoney had revenue of $400,000, a cash balance of $1 million, transaction volume of $5 million, a loan book of $3 million, 6,000 customers and 200 merchants.
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zipMoney customers profile
Fast forward one year. The full 2016 year numbers showed revenue of $4.3 million, a cash balance of $7.1 million, transaction volume of $52 million, a loan book of $40 million, 52,000 customers and 2,000 merchants.

The company is rapidly moving towards profitability after making a net loss of $7 million for 2015-16 (or a $2.1 million loss on an EBITDA basis). It completed a $20.6 million placement in June to strengthen its balance sheet.
Not surprisingly, zipMoney has landed on the radar screens of some astute small cap institutional investors. It is understood Thorney, Acorn Capital, Regal Funds Management and Telstra Super are among its shareholders.
Having listed at 20¢ a share a year ago last Friday, the stock went as high as 85¢ last month and was trading at 72¢ on Friday – up almost 70 per cent since its surge in April – delivering a market cap of about $170 million.
Question of momentum

The performance comes despite new shares being issued this month as part of the funding for the acquisition of the budget management app, Pocketbook, which will help zipMoney crunch data.
But can the momentum be maintained? Answering that requires consideration of the zipMoney business model, its people and the competitive landscape.
zipMoney provides another way to pay. By offering customers a "buy now, pay later" proposition with an interest-free period, it's an alternative to using a credit card at the point of sale.
Customers are acquired through merchants, who can integrate zipMoney into the checkout. The financing comes in the form of transactional accounts of up to $10,000 with a revolving line of credit. Customers are approved in less than three minutes over their mobile phone.

zipMoney earns fees from merchants and customers. For customers, these include establishment fees (only for lines of credit over $1000); a $5 account fee per month (charged only when there is a balance outstanding); late fees (a flat fee of $15 after 21 days); and interest revenue when the interest-free period lapses. Interest rates are the same as a credit card at around 19 per cent. One in six customers enter the interest-paying period, compared to two-thirds using credit cards. Only 0.1 per cent of zipMoney's revenue comes from late fees.
ZipMoney has a second product, zipPay, which is offered for smaller purchases and has a different fee regime.
Unlike a peer-to-peer lender, which connects borrowers with investors over a platform, zipMoney provides credit from its own funding facilities. These include a $108 million debt facility from Victory Park Capital, a US-based alternative credit investment firm which has also funds US fintechs stalwarts like Square, Kabbage and OnDeck. The asset backed securitisation warehouse facility is secured against a pool of underlying receivables. At its full-year results, zipMoney said $75 million of its facility is still available and it has an option to extend both the amount and the term should loan growth accelerate.
zipMoney is also in discussions with one of the big four Australian banks to provide a new securitisation warehouse. It says this will halve the weighted average cost of capital of the loan book. The WACC of the new facility is expected to be around 6 per cent.

Taking on risk

zipMoney's senior management team has skin in the game. Co-founder and CEO Larry Diamond, formerly of Macquarie Group, Deutsche Bank and Pacific Brands, holds 26.5 per cent of the equity; the other co-founder, chief operating officer Peter Gray, has another 9 per cent. Board members and other managers hold a further 5 per cent. The company's chairman is the well-known Victorian senior counsel Philip Crutchfield. Megan Quinn, the co-founder of online designer fashion company Net-A-Porter, is a non-executive director.
So what are some key risks for zipMoney investors that this management team will be navigating the fintech through? Two main ones are: credit quality; and competition in the fast-moving world of global payments.
Like any consumer finance business, zipMoney will seek to avoid excessive bad debts by focusing on its assessment of credit quality. In its full-year results, bad debts – measured as a percentage of gross receivables – were 1.1 per cent at the end of June, up from the 0.6 per cent reported at the time of the float but down from 2.3 per cent in January. zipMoney says its lending decision-making to date, determined by a proprietary algorithm, appears solid when compared to an industry benchmark for bad debts of around 3 per cent of receivables. Of course, how this figure performs in a recession is a big unknown.

Competition is also a competitive threat. zipMoney is seeking to fend that off by scaling as fast as it can. Locally, it is competing with the likes of GE Capital, HSBC Finance, FlexiGroup and Afterpay.
FlexiGroup, which has a market cap of $820 million, had $1.5 billion of receivables at end of 2015. In July, it launched a new product, Certegy X-Pay, against zipMoney. Afterpay, which listed on the ASX on May 4, has seen its share price double delivering it a market capitalisation of $420 million.
Big players

GE Capital, now owned by KKR & Co, has more than 3 million customers in Australia including point of sale finance for retailers such as Coles, Myer, Harvey Norman, The Good Guys and Bing Lee. Meanwhile, HSBC Finance offers interest-free finance through 1000 retailers including JB Hi-Fi and Ikea.
Other domestic start-up competitors include PromisePay, while offshore players such as PayPal Credit, Klarna, Billpay and Affirm could target the Australian market. Traditional card companies are also responding: for example, American Express has launched "Pay your way", which allows customers to spread payments for larger purchases over smaller fixed monthly amounts at a reduced interest rate.
To keep competitors at bay, zipMoney is seeking to scale up relationships with merchants. When zipMoney shares rose sharply in April, the market was responding to the sign-up of Open Colleges, Oz Design furniture and Thermomix. Online education is one of the company's target sectors, where the fee-for-service market with $5 billion a year. Two of its other target sectors, online travel and accommodation, and dental, cosmetic and elective health, are each worth $15 billion.
Shaw and Partners, the only broker providing equity coverage of zipMoney – it has a buy recommendation and 12-month price target of $1.00 – says the "addressable market" in retail, travel, education and health is $100 billion a year.
zipMoney will also use the $6 million acquisition of Pocketbook, which completed a fortnight ago, to enhance its data capability. All of the staff of budget management app – which offers users a holistic understanding of their financial profile and helps them track and manage bills, spending and savings – are being retained after the deal and most will join zipMoney's dedicated data and risk team, which develops the behavioural data models, to determine risk-based pricing and bolster anti-fraud and credit risk detection technology.

Given its algorithms are yet to be tested by an economic downturn, zipMoney remains a high risk investment. It will appeal to those who understand the ebb and flow of the global fintech and payments landscapes, and those who believe in the power of data to inform the provision of credit and provide customers with slick borrowing experiences.