Zip banks on interest rate cuts as transaction volumes soar

The chief executive of Zip Co says interest rate cuts will help push earnings even higher, with the buy now, pay later giant performing better than expected in the first quarter of the financial year.
Cynthia Scott said the company’s prospects in the United States – where sales have accelerated sharply – were particularly strong, with rates starting to come down, employment high and consumers “resilient”. “If we move into a [lower] interest rate environment [in Australia], we may well see what we have seen in the US – that lower interest rates can be a tailwind for our business,” Ms Scott said in an interview.

Cynthia Scott has navigated Zip Co back towards growth after rising interest rates in 2022 crunched the company’s valuation. Kate Geraghty, Zip products let customers pay in four instalments. In the US, it was used by almost 4 million people in the last quarter, the company told investors on Tuesday. Transactions across its platform in the country were up almost 43 per cent compared to the same quarter one year earlier. Overall, Zip processed $2.8 billion in transactions over the three months to September 30, up 22.8 per cent on the first quarter of last year. Related Quotes ZIP Zip Co$3.120 11.83%1 year1 day Oct 23Feb 24May 24Oct 240.0000.8001.6002.4003.200Updated: Oct 30, 2024 – 9.53am. Data is 20 mins delayed. View ZIP related articles SQ2Block Inc.$113.530 1.77%Oct 23Feb 24May 24Oct 2460.00080.000100.00120.00140.00Advertisement

Zip has pulled off a remarkable comeback after rising interest rates in 2022 created an existential threat to a company born in the cheap money era. The stock has more than doubled over the past six months and is up 350 per cent year-to-date, catapulting it into the ASX 200.It was languishing at 30¢ a share this time last year.Zip’s revenue of $240 million for the three months to the end of September was up almost 19 per cent on the previous first quarter, while cash earnings of $31.7 million were 234 per cent higher, beating market expectations. Zip shares were trading 11 per cent higher on Tuesday morning at $3.10.The buy now, pay later sector is seen as a bellwether for online consumer spending, especially among Millennials and Gen Z shoppers, many of whom prefer using apps over credit cards.

In Australia and New Zealand – where consumer sentiment has been depressed amid a cost-of-living crisis – transaction value was down by 3 per cent to $871 million for the quarter, but up 2.7 per cent in the fourth quarter of 2024. The number of active customers in Australia and New Zealand fell by 7 per cent to 2.1 million, which remains a key concern for analysts. Zip is signing up new retailers where consumers typically spend more on each transaction such as airfares and jewellery. “We have also seen strong growth in online marketplaces, especially when they have discounts, while there is plenty of spending in preparation for summer, particularly on BBQs and air conditioners,” Ms Scott said. Some analysts agree falling interest rates could support consumer spending, credit quality and confidence. “The broader macro trends have been positive, and we suspect seasonality, alongside broader environment acceleration, into the second quarter,” said Jonathon Higgins, the head of research at Unified Capital Partners and a long-time backer of the sector.

The Zip result kicks off a flurry of buy now, pay later reporting over the coming weeks. PayPal will report third-quarter earnings on Wednesday morning. Afterpay’s parent, Block, will provide a quarterly update on Friday next week. Affirm will follow the week after next.

James Eyers writes on banking, payments and fintech. He is a former legal and investment banking editor at the AFR, has degrees in commerce and law from UNSW, and is co-author of Buy now, pay later: The extraordinary story of Afterpay Connect with James on Twitter. Email James at jeyers@copyright link.au