Lacklustre Larry

Laser focused
path to profitability
fearless

all this as the bad debts rise and all their businesses close…..what a shocking BOD





Zip Co co-founder and chief executive Larry Diamond is not afraid of tech giants Apple and PayPal and the big banks, declaring growth is still on the agenda for the buy now, pay later company.

News that Zip would stymie overseas expansions, pull out of business-lending products and refocus its attention on the United States, Australia and New Zealand markets sent the shares up another 14 per cent on Friday to close at 88¢.

While investors cheered the change in direction, fears about whether the cash-strapped buy now, pay later sector can survive in the face of ever-increasing competitive threats mean the stock is still down 79 per cent since January.

Apple joined Commonwealth Bank of Australia and National Australia Bank in announcing plans to provide its pay-in-four services in Australia later this year.

But Diamond brushes off the threats, saying it “validates what we pioneered”.

“We’re not concerned about these guys. They’ve been innovating through bureaucracy, innovating through imitation. We’re not concerned,” he said.

Zip co-founder Peter Gray says the banks have not focused enough on merchant relationships and failed to add meaningful customer numbers, despite their rhetoric about innovation.

“CBA is on their third or fourth iteration of trying to crack buy now, pay later and to some degree they’ve made no progress,” he says.

“The number of their customers utilising their offering would be fairly small and they don’t add any benefit to the merchant.”

Even as the Labor government looks to bring the buy now, pay later sector under the credit act and tighten the screws on regulation, Gray says the younger generation trusts the Zip brand more than the banking sector battered by the Royal Commission into banking misconduct, giving it another leg up on the banks.

“Banks also have a lack of trust from a newer generation of Australians. Six million Australians have used buy now, pay later in the last 12 months. I think it’s a generational shift in the way consumers are paying, managing short-term credit,” says Gray.

Flaws in the banks’ approach

Diamond also points to gaps in Apple’s offering, given only one in two Americans have an iPhone, and other flaws in the banks’ approach.

“It’s not a holistic proposition for merchants, not a holistic proposition for consumers. So when we talk about democratising affordable credit and making it accessible to everyone, that’s problem number one,” says Diamond.

“Number two is the type of customers linked to prime and super prime [very high credit scores] customers. Their underwriting models do not understand how to tackle younger consumers with thin files who have been less active.”

Tackling consumers with thin credit files, however, has led to an explosion in bad debts, particularly in the US market where Zip has been trying to grow fastest. These, combined with rapidly soaring marketing costs and the looming writedowns flagged for relatively recent acquisitions and pulling out of markets Zip has only just entered, have left significant question marks over the gung-ho approach.

East 72 founder Andrew Brown says the model is under significant threat from its competitors, the deteriorating economic outlook and the rising costs of doing business and marketing it.

“CBA’s strategy here, by setting up their own buy now, pay later business, is that these things don’t belong under separate entities,” says Brown.

“Can you have pay-in-four as part and parcel under a banking operation that’s doing all kinds of banking? It belongs there because the single cost of it as a standalone to market it – it just doesn’t work.”

Diamond says reining in bad debts and controlling funding costs have helped Zip, with marketing costs also increasing alongside returns.

“Our business model has a range of costs and marketing is another cost. But as long as it has the appropriate return on capital – and we look at how much you paid to a customer and what’s the lifetime value of that customer – as long as that equation is healthy, it is a cost of doing business,” says Diamond.

But Brown, a vocal critic of Zip’s now scuppered plan to merge with US-focused Sezzle in a move he and others labelled “growth at all costs”,points to the conundrum for pure-play buy now, pay later entities.

“If they’re standalones, they also depend on equity investors. The great thing that Afterpay did was to raise tonnes of equity capital from the Australian market because that financed all the losses. In essence Zip have done the same thing with their last equity raise in February,” says Brown.

UBS analyst Tom Beadle, a long-time critic of the buy now, pay later sector, points out that while Zip says it has slowed cash burn by being more selective on customer acquisitions in the US, its liquidity fell by $49 million when the $24 million proceeds raised through a share purchase plan were included.

‘Sezzle are hard asses’

Zip clarified that it has no covenants related to its equity, but having spent what one analyst said was “a significant proportion” of the $170 million raised to complete the Sezzle acquisition that never happened or delivered any of the touted synergies, it could face difficulty revisiting the market.

Brown is more bearish on Sezzle’s prospects as a standalone for the fact its warehouse funding is tied to equity.

“You need to be able to raise equity capital because the credit warehouses that support these things need that as a backstop. Sezzle – one of the reasons I’ve been so negative is their two credit warehouses, one with interest rates of 12 per cent or more – are hard asses,” he says.

Putting profit before growth is a huge turnaround for a company that was predicated on a scale then profit model. But Diamond is adamant that this is only temporary.

“What we’re doing is consolidating our efforts to drive profitability before we look to scale, more broadly, globally, and that’s really a function of the capital markets,” he says.