ZIP: "The Phoenix that has risen from the ashes of the BNPL sector.", page-60

The assumption that merchants will willingly absorb a 6% fee is overly optimistic. Many operate on thin margins, particularly in retail and travel, where absorbing such costs is impractical. With rising costs from inflation, wages, and supply chains, merchants may pass these fees on to customers or discontinue BNPL entirely. The belief that they’ll prioritise absorbing fees over profitability is a stretch.

Discretionary spending, which is vital for BNPL, is highly sensitive to economic pressures. With rising interest rates and cost-of-living challenges, consumers are already stretched. Adding fees at checkout risks increasing cart abandonment, particularly for Zip, which relies on discretionary purchases to drive volume. Compounding this issue is the growing competition from alternatives like credit cards, which often come with cash-back perks and better-established trust.

Zip’s financial fundamentals raise serious concerns. While bad debts may currently sit at 1.6% of TTV, any economic downturn could see defaults rise sharply. The company also relies heavily on external funding, and rising interest rates increase its cost of capital. This creates pressure on margins in an already competitive and low-margin industry.

Regulatory changes are another factor that cannot be ignored. Increased scrutiny of BNPL could force companies like Zip to implement stricter compliance measures, potentially capping fees or increasing operational costs. Such changes would add significant strain to an already challenging business model.

Suggestions like loyalty programmes and merchant tools may sound appealing but come at a cost. These initiatives require significant investment, and with margins already stretched, they could further erode financial stability unless Zip can find a way to increase merchant or consumer fees significantly—an unlikely scenario in a competitive landscape.

The prospect of industry consolidation may occur, but it’s more likely to reflect the struggles of smaller players rather than the strength of the business model. Larger players with stronger backers, like Afterpay under Block, are better positioned to weather these challenges, leaving companies like Zip vulnerable to being overshadowed or acquired.

The future of BNPL, and Zip in particular, is uncertain. The pressures from consumers, merchants, and regulators are mounting, and while the BNPL model may continue in some form, it’s far from guaranteed that all current players will survive. Zip’s reliance on discretionary spending, exposure to rising defaults, and dependence on external funding place it in a particularly precarious position.