Is Zip Co A Creditor Or Not?

ZIP Co Limited (ASX:Z1P), formerly ZipMoney Limited, is one of the front-runners in Australia’s financial technology industry, engaged in offering online and in-store payment and finance solutions across different sectors such as health, retail, education, and travel industries. The company offers a high-tech, Big Data-leveraged, cloud-based platform to retailers and consumers to enhance the proven fundamentals of promotional finance, particularly interest-free offerings.

The company targets on acquiring prime, near prime and emerging prime borrowers by providing them with a revolving line of credit to finance their retail purchase. The company’s business strategy revolves around delivering transparent and reasonably priced consumer credit products.

Product Line: ZIP offers point-of-sale and digital retail payment services via market leading products namely PocketBook and Zip (now constituting both ZipPay and ZipMoney). PocketBook is a free personal finance management mobile application which assists users in managing finances, savings and thereby achieve financial goals. PocketBook reported ~540K users in FY18. Zip is an interest-free digital account offering buy not pay later services to the client. ZipPay accounts are offered for up to $1,000 spending and Zip Money for up to $30,000 spending. Zip reported ~740K users in FY18.

Financial Performance (FY18): The company’s user base was largely expanded to over 1.3 million. The company entered into over 10K retail partnerships including nation’s renowned brands as well as small business segments. A whopping $750 million plus annualized transactions were reported for FY18. The group’s revenue stood at ~$40.4 million, representing an impressive upside of 138%. The company posted Net Bad Debts of 2.6%, below the industry’s average. The company was able to strike a Cashflow break-even on a monthly basis.

Business Performance (FY18): The company was founded in 2013 and listed in September 2015. Since then ZIP has taken a leap in establishing strong market presence via PocketBook, ZipPay and ZipMoney offerings. FY18 was a crucial year for Zip with the company achieving several key milestones. The company raised $ 40 million in equity from Westpac in a private share placement scheme. It was successful in rebranding Zip Pay and Zip Money into single brand- Zip. It also launched its Zip Native App in August 2018.The company boarded some of the country’s largest retailers to the Zip payments platform namely Target, Officeworks, Super Retail Group, Tigerair, Spotlight, and Virgin Australia. Besides, post a positive beta trial, the customers can now use Zip to pay bills through BPAY, interest-free.

Business Performance (FY19): As announced on 7 January 2019, Zip Co reported achieving a key milestone arising from the original acquisition of ZipMoney Holdings Pty Ltd in September 2015, of achieving Pre-tax breakeven over three consecutive months within three years of relisting. The other two performance targets set as part of the acquisition were recording $10 million in aggregate transaction volume within a year of relisting and $20 million in aggregate transaction volume within two years of relisting.

On 22 January, Westpac-backed buy-now-pay later financial player, appeared before the Senate for Financial Services Inquiry in Brisbane. Zip supported the Committee for sector-specific regulation and ensuring meeting minimum standards. The company stated that it had conducted substantial due diligence on credit and identity checks while onboarding clients and have relied on authentic bank statements for background verification purposes. Zip also recommends that new regulations should support continued industry innovation while ensuring Buy Now Pay Later (BNPL) products remain a viable alternative to credit cards.

Philip King, Chief Investment Officer of the renowned Regal Funds Management, greatly values Zip over its competitor Afterpay, crediting the company for the impressive transition from start-up losses to substantial earnings growth. Regal Funds with 6.4% stake, is the third largest shareholder of Zip after Larry Diamond (co-founder and chief executive) and Westpac.

Stock performance: Zip’s stock has witnessed a strong performance growth of ~30% over last one year. The investors have gained over 21% over last three months as on 22 January 2019. The shares are currently trading around levels of A$1.1- A$1.2 with a market capitalization of A$360.72 million and 315.04 million outstanding shares as on 23 January 2019.

Outlook: With a spurt in credit card volumes, consumers are increasingly relying on debit cards, digital wallets and Alternate Payment Methods (APMs). A disinterest has been observed for banks and credit card finance solutions. Zip Co leverages this paradigm preference shift in offering products with a strong focus on financial wellbeing and responsibility. The company’s offering and business model stands exclusively in the market when placed alongside credit cards and other Pay Later providers. Zip is currently processing annualized transaction volume of $750m+, less than 0.1% of the addressable market. Given the company’s diverse business model, it seems uniquely placed to penetrate across all verticals.

The group considers itself to be a credit provider and emphasises to have a fit for purpose regulating in terms of lending. Thus, ZIP’s strategies and business model more or less fall in line with what is envisioned at a broader level.

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