Getting to Know Zip

Speaker 1:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Speaker 2:
I'm Moshe Orenbuch, joined by my colleague Hoang Nguyen. We are the research team on consumer finance here at TD Cowen, and we're very happy to be joined today by Cynthia Scott Group CEO of Zip. So welcome, Cynthia.
Speaker 3:
Thanks, Moshe. Nice to be here.
Speaker 2:
First, could you talk a little bit about, give us an overview of Zip, the markets that it serves, and its focus on everyday consumers?
Speaker 3:
Absolutely. Thanks and thanks for having me. So Zip's a business that was founded in 2013 in Australia, and we're a responsible lender. And we describe ourselves as being a digital consumer finance or digital native consumer finance business. We operate at scale, so we have about 13, just over 13 billion of total transaction volumes, over 93 million transactions and 6.3 million customers. So we very much are a scale consumer finance business now. Today we operate in two regions. We've got a business here in the US as you said, really serving everyday Americans for their everyday needs and we've also got a business in Australia and New Zealand.
And the businesses are quite different, we offer different products. Here in the US we offer an interest-free installment product, pay in four and pay in eight. And in the Australian market we offer five different consumer finance products. Our customer bases are a bit different. Here in the US our customer is largely an everyday American living paycheck to paycheck. We've got 4.3 million customers here and our customers are aged between or skew between sort of 25 and 44. Predominantly more than 90% of our consumers are employed, whereas in the Australian market, the average age of our customer is 40 and it's much more of a prime customer. So two very strong markets, both of them growing very strongly but quite distinct.
Speaker 2:
Got it. And so in Australia, New Zealand, a little more of consumer finance. In the US, a little more of a kind of BNPL type aimed at those kind of everyday Americans. Talk a little bit about the pricing and the revenue streams to Zip.
Speaker 3:
Yeah, absolutely, and that's exactly right. I mean, as I said, we think of ourselves really as a digital native consumer finance business, and we do offer flexible finance to our customers. In terms of our revenue model, it is a little bit unique in that we have a two-sided revenue model. So we generate our revenue both from our consumers, but also from merchants. So here in the US for example, we have installment fees for customers. So the way the product is structured on a pay in four, if you undertake a transaction for say $100, which is very typical, our average transaction size is about $130.
But if you undertake a transaction for $100, you'll pay $25 upfront and then you pay three more installments of $25 spread over the next sort of three fortnights, and then there's a $1 installment fee on top of that. So the customer actually pays $26 over each of the four installments. We earn installment fees from customers, we also earn a merchant service fee from our integrated merchants. We have then interchange here in the US and we have affiliate income. So as you can see, we've got a diversified revenue revenue stream, and that all comes together to generate around about a 7% revenue margin for our US business.
Speaker 2:
Let's maybe talk a little bit about the competitive environment and we'll spend a little more time on the US I think given that's where you mentioned that both markets are growing, but that's where I think the significant kind of incremental growth has been coming. So maybe talk to us a little bit about how you see the opportunity in the US and what the growth has been and what you're looking for going forward.
Speaker 3:
No, you're right. Absolutely. The US now represents 80% of our divisional earnings and in FY '25, our US business at both revenue and the TTV line grew more than 40%. So it is a very strongly growing business. And part of the reason for that is twofold. Firstly, the products. So these installment products at point of sale, it's still fairly early days of the penetration of these products. So it represents around about 6% of e-commerce in the US and that would compare to say, 15% in the market like Australia or 20 to 25% in Europe. So it still is really early days in the penetration and it's obviously a huge total payments market here. So we see significant growth as there's greater awareness from merchants and from consumers for the product.
But the second reason why, and this is more Zip specific, the second reason why we're confident in the growth trajectory of our US business is our unique customer base. So we referred earlier to Zip's customers as being everyday Americans, their paycheck to paycheck customers who are traditionally underserved by or underserved by traditional consumer finance in the US. And so we have think a differentiated ability to credit decision this customer, give them access to fair credit and that's one of the reasons why we're seeing such strong growth and also such strong engagement from our US customers.
Speaker 2:
And I believe you provide a certain credit limit to those consumers. Can you talk a little bit about how that works and how your customers kind of think about that and how they use that product?
Speaker 3:
Yeah, we do. So a couple of comments I'd make on that, Moshe. One is a customer comes to us and we would provide them, once we've undertaken an identity check and we do a soft pull of their FICO score, once we've undertaken that initial assessment, we'd provide a customer with a $200 credit limit. And then we have what we call a low and grow strategy. So as a responsible lender, we need to see our customers demonstrating positive repayment behavior and they can then earn the right, if you like, to an increased spending limit. The way we are finding our US customers are using our products is largely for non-discretionary.
And I think this is one of the reasons why our business has grown so significantly in the last 12 months, but also why we see our customers as very resilient and our businesses as resilient through the cycle. Because the majority of our TTV spend is on things like groceries, fuel, health, everyday expenses. And so our customers are really using their Zip account to manage their cash flows and to just undertake that sort of budgeting juggle that they have to do every day.
Speaker 2:
One of the issues that some have raised is, is it a wise thing for consumers to be spreading out the cost of the purchases of durables? And we've talked about this before. I think that... Well, maybe give us the perspective you think of your customers with respect to how they're using the Zip product.
Speaker 3:
Yeah, I will. And the way that I would, again, describe our customers is our customers are incredibly savvy about their finances, but their reality is that they're living paycheck to paycheck. So they do know where every dollar is and they do know what their upcoming expenses are, but they are juggling their cash flows. So they do use their Zip account to help them smooth cash flows and particularly to manage when they have expenses that are perhaps unexpected. So let me give you a really good example, because I think it brings Zip to life in how our customers use our products. We've got a fantastic customer called Jamal, and we met him through one of our immersion sessions. Jamal is a limo driver in Florida and he's one of our real loyalists in terms of using Zip. The way that Jamal would describe Zip and the way that he uses us is that he wants to keep the comma and that's become a bit of a catchphrase at Zip. By that he means in his bank account, he feels comfortable financially when he knows he's got $1,000 in his account.
So he really wants to keep the comma as a buffer to manage the ups and downs of his everyday expenses. So if you think about Jamal as a limo driver, when he has a good week driving the limo, he might make a couple of thousand dollars. When he doesn't have a good week driving the limo, he might make $500 and that's where Zip comes into play for him. So he's managing every week his expenses, he's got to put fuel in the limo, he's got a couple of kids, he may have to pay something for their schooling, he might get a flat tire. He obviously buys groceries. And so Jamal uses Zip to juggle those cash flows.
So in a week where he has a good week driving the limo and his income is higher, often he'll actually pay down his Zip account to zero, even though he's got time over which he can pay off his account. When he's got the cash, he will actually pay his account down to give him that access to credit for when he needs it. And then perhaps in a week where he doesn't have such a good week driving the limo, he'll use his Zip account to perhaps put fuel in the car or to pay for an unexpected expense.
Speaker 2:
And all of that with a very clear pricing and cost in terms of his understanding of the cost of using that credit.
Speaker 3:
Yeah, that's right. And when we do speak to our customers, that's some of the really strong feedback that we get. The customers really like the simplicity of the product. They know exactly what installments they have to pay, they know exactly what fees that they're going to pay, but also they know that there's an inbuilt protection in the product. So if you're a Zip customer and you miss a payment, we do lock your account, which means you can't continue to spend and you cannot get into a debt spiral. And so for a lot of our customers, that gives them the peace of mind to know, they know how much credit they've got available, they know what their repayments are, but they also know that there's this inbuilt protection that they can't get themselves into a debt spiral as can happen with other credit products.
Speaker 2:
And maybe talk a little bit about how you help that customer rehabilitate after that. What's that process like?
Speaker 3:
Yeah, one of the pieces of feedback that we get and certainly something we're really proud of is there is a high degree of trust between Zip and our customers. And our customers do trust Zip. And that's because in an instance where a customer may miss a payment, we will work with the customer, as you said, to rehabilitate them to help them work through when they can make that payment and when they can catch up. So while we would lock their account if they miss a payment, over time, if they catch up on the account, we will open the account again for them.
And I've sat in immersion sessions where I've heard directly from customers how much that resonates with them and how important it is that they feel seen and heard and trusted. That even though they may have had lumpy income perhaps and missed a payment, that when they catch up, we'll let them access the account again. And so often we feel that in the payment hierarchy, that Zip may sit a little bit higher for some of our customers because there is that strong degree of trust between us and our customers. And because provision or access to this line of credit or this line of credit is so important for our customers.
Speaker 2:
Maybe if you could bring that to at a high level how you think about credit losses in, you mentioned about a 7% revenue margin, like how you think about credit losses in that context of your profitability model.
Speaker 3:
Yes, will do. And I think also I might just, just to contextualize, these are small credit facilities. So we're talking about a transaction size of $130 on average and a credit loan size of say, five or $600 on average. And they are very short duration. So with a pay in four product, the duration is about six weeks. So the book turns over every six weeks, there's high velocity, and as I said earlier, a customer has to pay 25% of the transaction amount upfront as well. And we get a really good read on our customer's credit because 14 days after they make their first transaction, we'll know whether or not that customer is going to repay. So if you think about the 93 million transactions that happen over our books or over our portfolio every year, every day, we've got a great insight into what's going on with the credit in our portfolio.
That being said, the way we think about performance of the business is top line growth is really important. So the fact that we've had TTV and revenue growth north of 40% in FY '25 is very solid performance, we're pleased with that, but we want the performance to be profitable. And so to really drive profitability and to drive the revenue margin we were talking about earlier, we've also got to make sure that we keep our losses within a target range. So we have a target loss range of between one and a half and 2% of TTV. That's exactly where our US business is tracking at the moment. For the last three months of FY '25 losses, we're about 1.7% of TTV before recoveries. And so we're really pleased with seeing the portfolio growing north of 40% last year and then the loss is well and truly within our targeted range, and that's driving the strong profitability in our US business at this point.
Speaker 2:
Maybe to kind of think about that growth, obviously you've got benefits from growth of customers, you've got benefits in terms of the size of transaction, the ability to use it in more places. And I would assume that the fact that as you have more customers that become repeat customers, you're willing to grant them, as you mentioned, higher spending limits over time, that low and grow type of strategy. Do you have a perspective as to how each of those kind of contributes to the way you think about the growth rate for Zip?
Speaker 3:
I do, and the answer is we want all of our growth leaders to be firing at the same time ideally. So if our US CEO is here, he'd say that's the sort of KPR that I would give him. That actually what we're really seeking to drive is profitable sustainable growth. So it is growth in customer numbers and our US customer numbers grew for the first time actually since FY '22. So we grew 11% last year of net new customer growth. We also grew engagement as you mentioned. It's also really important that existing customers and new customers increase their frequency and their engagement with us.
So engagement in the US now is over 10 and a half times per year. We do see significant growth or significant opportunity for engagement to continue to grow. And the way that we drive engagement, as you mentioned, is not only where a customer demonstrates responsible behavior, we will give them an increase to their estimated spending limit, but also as we have more merchants on the platform and as there are more places that our consumers can engage and use their Zip account both online and in store, that drives engagement, but it also drives customer acquisition.
So just interestingly, by way of background for you, historically in the early days of installment products in the US, almost all customer acquisition happens through merchants and that's quite traditional. A merchant, excuse me, a customer finds us at a merchant checkout, applies for Zip, and becomes a customer. Over the last 12 months though, we've really increased brand awareness in the US and as a result we've increased engagement of customers, new customers coming direct to the Zip app, so applying for Zip directly. So ideally we really want the flywheel moving on both sides where we've got new customers being acquired, existing customers engaging more with Zip, but also bringing on new merchants to drive that engagement as well both online and in store.
Speaker 2:
Could you talk a little bit about the strategy in terms of bringing those merchants online and what you've done, what you're planning for the future?
Speaker 3:
Absolutely. And again, I think Zip's a little bit differentiated from some of our peers in that we do think it's really important to drive both sides of the flywheel, strong merchant engagement and strong customer engagement. So on the merchant side, there's a couple of ways that we engage merchants. Firstly, we have integrated merchants. So some of our bigger merchants like a Best Buy or Major League Baseball is a merchant we've brought on recently or GameStop. These merchants, will have a direct integration with Zip. So we will appear in the merchants' checkout when a customer goes into their website or into their mobile app, they'll see Zip as a payment choice. We can acquire the customer at that point or the customer can just use their Zip account there if they're already a Zip customer. And that certainly drives transaction volumes, but also engagement. The other way we engage our merchants is through channel partners.
So we've talked a little bit about our relationship with Stripe. Stripe and Adyen are good examples of PSPs who will drive merchants. Stripe, for example, we've now just recently announced we've gone to general availability with Stripe. Stripe has more than 4 million merchants on their platform here in the US. And so what that means is rather than Zip having to do a direct integration with each merchant, the merchant can just turn Zip on at their checkout. So actually, it's very light touch from a technology perspective and it means that the sales cycle goes from about 12 to 18 months down to about six weeks. So we do see the increase in our relationship with Stripe as a real positive for driving merchants. And then the final piece in the merchant opportunity is we also announced in our most recent results that we've just gone live with Google Chrome.
And so what Google Chrome will do is that if you're using Google Chrome as a browser to search and you go into Google Chrome and you identify a merchant and you undertake a transaction, when you're in your Chrome browser and you hover over the credit card function, it'll bring up an option that says pay later. If you click on pay later, it'll bring up Zip. If you're already a Zip customer, you can put in your credentials and you can undertake the transaction. If you're not a Zip customer, then at that point you would go through the normal acquisition flow and we'd acquire you as a customer.
So we are really optimistic about the Google Chrome opportunity as a way of acquiring new customers. But the real magic with Google Chrome and the reason why we're so confident in the ability to scale is that Google Chrome remembers your credentials. And so if you've become a Zip customer and you've undertaken a transaction using a Chrome browser, every time you subsequently open up Chrome and you go into any checkout, it will remember Zip as your preferred payment choice and it will remember your credentials, so it will auto-fill your credentials. So it's just a great customer experience and something that we're really excited about for FY '26.
Speaker 2:
Got it. And you had mentioned that in the US, BNPL right now is about six or so, maybe a little more than 6% of e-commerce, but you've recently launched a physical card and I think you had mentioned before that a growing percentage of your transactions are in store. Could you talk a little bit about those two phenomena, how the consumer uses that card and the potential for growth in in-store commerce?
Speaker 3:
Yeah, absolutely. I mean, 84% of all payments happen in-store while installment or BNPL was born online. What we really want is for our customer to seamlessly be able to move between an in-store environment or an online environment and use Zip wherever they are. In the US it's a little bit more difficult because in-store your payment technology is not ubiquitous. So in other markets, actually we can encourage customers to load a virtual card into their wallet in their phone and then they can just tap in any physical store where Visa is accepted. Unfortunately, it's not quite as smooth here in the US. And so to replicate that frictionless or near-frictionless experience for customers in the US, we've had to launch a physical card. So as you said, about 18 months ago, we started to give customers a physical card. And what this means is it unlocks that in-store experience.
So in-store grew by about 65% last year for us. It now represents 23% of our total transaction volumes. So as you can see, if it's 84% of payments and 23% of our volumes, then we do see that there's quite significant growth still in unlocking in-store. But it is one of our fastest growing channels. And the way that it works now is our customers who have the card can now go in-store and they can actually use the card to undertake a transaction with Zip rather than the alternative. So about 30% of our in-store volumes now happen on the card. The alternative is that when they go in-store, they need to open the app, they need to then provision a virtual card and undertake the transaction. So 70% of our customers are still doing that, but it's just not as seamless or as frictionless as having the card. So we are really excited again about the card as a way of growing engagement.
Speaker 2:
And given the types of purchases that your customers, the everyday Americans kind of tend to do, seems like this would be even more important for a provider like Zip than perhaps some of the other BNPL providers?
Speaker 3:
Yes, it is absolutely for everyday Americans who are using our products for grocery, fuel, everyday expenses, actually having that physical card has real utility for our consumers.
Speaker 2:
You mentioned that you've got pay in four up to kind of pay in eight. You talk about what types of transactions go into the pay in eight, did it create any different kind of risk from a consumer standpoint and maybe also talk a little bit about whether you're thinking about shorter duration pay ins?
Speaker 3:
Yes, absolutely. So we have launched and we have built the technology platform we refer to as Pay in Z, which will ultimately allow our customers maximum flexibility so that they can use Zip wherever they need to in whatever installment frequency suits them best. But you're right, the product started as a pay in four, and that was the original use case. To drive higher average order values for our customers who had higher estimated spending powers, we wanted to be able to give them a longer duration product, and that was really how pay in eight was born. So pay in eight is a product that we were piloting over FY '25 and then rolled out to our whole eligible base during FY '20, excuse me, FY '25. It now represents about, well, over the year it was 12% of our transaction volumes, but in Q4 it was 18%. So we've seen really strong growth in pay in eight, the structure is the same, customer still makes an initial upfront payment, but instead of the payments being made over four payments, it's made over eight payments.
Now, when we first launched pay in eight, as you would expect any rational consumer to do, they wanted to split every payment into eight rather than into four. And so we realized that obviously smaller volume ticket sizes, we didn't want a customer to split it over eight payments. And so initially we put a minimum transaction size of $300 on the pay in eight, but we've now lowered that to $200. So we're seeing really strong engagement from pay in eight for eligible customers. And I will say, to be an eligible customer, you have to have already been through one full credit cycle with us. So we need to know what your, understand your credit behavior and your repayment history before we would unlock pay in eight for you. But what we're now really excited about is in Q1, this financial year, we're launching pay in two, which is the next iteration on our Pay in Z platform.
Pay in two was really born from the idea that we want to really follow our customers to where they're using Zip. And so I'll tell you, Moshe, an interesting story. During Black Friday, Cyber Monday last year, when we looked at our top 10 non-integrated merchants, so where our were creating a virtual card and using Zip over the Black Friday, Cyber Monday weekend, one of our top 10 merchants was a utility. And so if you think about that over what is the busiest shopping weekend, our customers were using their Zip account to pay their bills. And that's a really good indication of how our customers use Zip. They use it to juggle their expenses when they have them. And over that weekend, utilities was a really popular use case, and that got us to thinking about the utility of a pay in two and how that would very neatly fit a bill payment.
And so having done some customer testing, we're now going to be launching a pay in two this quarter, and we're also going to be launching a bill hub where in the app a customer can load in their utility bill, for example, and then they can elect to split, say a monthly bill into two payments rather than having to pay it once upfront. And we think that that's going to do a couple of things. Not only will it drive strong engagement because you've just got an increased frequency then of it's a shorter duration product, the book is turning over faster, customers are using the product more often, but also bills is a big part of our customers' spend needs. And so we do think that it's going to be really well received by our customers, and typically bills are recurring, so that again, will provide more of a recurring revenue for us.
Speaker 2:
And matched to likely the period over which they're getting paid.
Speaker 3:
Exactly. And actually one of the things I will just touch on is we've launched our innovation lab called Fearless Frontiers, and in the US the first product that's going to be coming out of Fearless Frontiers is an AI powered money coach. And the money coach is exactly going to fulfill that opportunity where our customers can elect a money coach. There's six different personas for the money coach, and they can elect a money coach to effectively be their wingman or their financial support to help guide them. And that's a really good example of where we can actually support a customer and say, "Well, we know that your income is coming in two weeks and we know that you've got an expense coming up, so how about you think about managing that upcoming expense using a pay in two or ultimately a pay in three or a pay in five?"
Speaker 2:
And again, I think it's just important to stress, I know we've said it already, but to just stress that this is with a clearly defined cost that doesn't compound it.
Speaker 3:
Yeah, no, that's exactly right. So the simplicity and the clarity and the transparency of the fee structure is something that really resonates with our customers
Speaker 2:
As we've talked about, I mean, there are other forms of credit that those everyday Americans might have an opportunity to opt into some of whom may not have that degree of simplicity.
Speaker 3:
Yeah, that's right. And often we are finding our products are being substituted for cash, prepaid debit cards, borrowing from friends and family, or as you've suggested, there are other forms of credit that are much more expensive for consumers, and the simplicity and the transparency of fees is something that really resonates with our customers.
Speaker 2:
You had mentioned that some expanding from a Pay in Z standpoint to other terms, if you will, of payment. Are there any other products that you're thinking about launching over the coming year?
Speaker 3:
Yeah, so in the US business, absolutely, the Pay in Z platform that we've now built and launching the pay in 2 product this quarter and the bill hub this quarter is something we're really excited about. Launching the money coach at some stage in the first half is something that, again, we're really excited about just because we see a lot of customer opportunity or a lot of opportunity to engage with our customers through the money coach. And then in our Australian business, we've also just recently launched personal loans, which is going really well. And this year in our ANZ business, we'll also be launching some capital light opportunities for incremental revenue generation too.
Speaker 2:
Are there any regulatory issues that you think that Zip has that either could be something you'd need to deal with or something that could actually help spur growth in the business? How do you think about the regulatory environment in the US?
Speaker 3:
Yeah. Well, we certainly, I guess I always say we focus on what we can control and we have a good relationship and we are a supporter of fit-for-purpose regulation. The regulatory environment in the US is fairly benign at the moment, and we've got a good engagement both at the federal and the state level, but there's nothing on the horizon that would cause us concern from a regulatory perspective. And I think as we've talked about before in the US, we still operate under the CFPB's interpretive rule notwithstanding what subsequently happened with it, because we do think that having a consumer-friendly business is something that's really important to us.
Speaker 2:
And you mentioned on the most recent earnings call that you're starting the process of working towards a US registration. Obviously the US you had mentioned before is 80% of operating profit. Maybe talk a little bit about what needs to happen for that listing and any thoughts about timeframes and the like.
Speaker 3:
Absolutely, yeah. So we have announced an intention to pursue a dual listing, ideally on the Nasdaq. As you said, yes, the strategic rationale for this is because the US now represents 80% of our divisional earnings, and we do want to demonstrate a commitment to both our Australian market, where is our home listing, but also to the US just because of the scale of business we have here and the growth opportunity that we have in the US. I will also say that there's a couple of other contextual reasons why having a US listing is important to us. We've got about 16% of our equity registers held outside Australia at the moment, and the majority of that is US investors and our natural peer group are here. So the likes of Affirm and Klarna and so forth is really who we are compared against. And so there is a more natural peer group for us, and we have had quite a bit of interest from US investors, but who would have a strong preference for us to have a listing.
So it certainly makes sense for us to consider a dual listing as we are. There is a process that we need to go through and there's a process with respect to the SEC registration. So there's a lot going on at the moment across Zip with respect to on the accounting and finance and risk sides in particular. So it will not be this calendar year, it'll be a slightly longer process than that, but we'll be in a position to update the market early next year just on the progress. But we are really excited about the opportunity.
Speaker 2:
Good. Any other things that I haven't asked you about that you would like to mention about Zip?
Speaker 3:
One thing just, I know we've talked a bit about the differentiation of our customer base and why we feel that our ability to credit decision this customer through the cycle is a really strong strategic differentiator. I do just want to highlight that the competitive landscape in the US, we want to see strong competitors because the penetration of the product from 6% to closer to where it's in other markets will happen fastest when we've got a really strong competitive landscape. The nice thing about the competitive environment in the US now is that everyone's behaving rationally because everybody wants the whole market to grow, more merchants to adopt the product, more consumers to adopt the product.
But where we sit now is there is a very strong differentiation between the customer that Zip would bring to say, an Affirm or a Klarna. And so we very happily sit alongside Affirm and Klarna at a register or at a checkout because we can demonstrate to a merchant that we do bring a differentiated customer and we will increase conversion on a customer that they may not otherwise get access to. So I'm really pleased that we've got a rational competitive environment and that the whole market is growing for everyone who's participating.
Speaker 2:
So with that, I think we'll wrap it here. Cynthia, thank you very much and thanks for your perspectives on Zip and the market.
Speaker 3:
Thank you. Thanks for having me.
Speaker 1:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.