"We haven't met the people that we've just poured millions of dollars into, which is crazy. All from a Zoom screen, we've actually gone global," says Zip Co CEO and co-founder Larry Diamond.
Over the past 12 months Zip Co (ASX: Z1P) co-founder and CEO Larry Diamond has been coordinating the global rollout of his buy-now pay-later (BNPL) platform - all without taking a step outside of Australia.
On the back of two capital raises totalling more than $500 million, Zip has been completing acquisition after acquisition - making a splash in North America with a $400 million acquisition of fintech QuadPay and moving into the EU and the Middle East.
However, the CEO says it took the board some serious convincing to make these transformational and capital-intensive purchases.
"If you actually look at what's happened from February last year to now we have acquired four or five businesses, we're in 10 additional countries, and it's all from a Zoom screen. We actually haven't met anyone!" Diamond told delegates at The Entourage's Unconvention event in Sydney this week.
"We haven't met the people that we've just poured millions of dollars into, which is crazy."
This is all happening against a backdrop of regulatory catch-up, not to mention the emergence of new competitors, whether they be incumbent financial juggernauts or "copycat" challengers.
So Business News Australia sat down with Diamond for his take on Big Four bank forays into his space, and the long-term implications when interest rates eventually do rise.
You're currently on a massive expansion path at the moment. Can you tell me what's going into this and how it's tracking?
As we tell staff, no matter what role you're in, you have to be focused on growth. The growth mindset permeates throughout the whole company.
For us Australia is still a huge opportunity, mostly on the consumer side, but a big focus is on small business because we think that they're not being given a fair go. We're about levelling the playing field and democratising access to credit.
And equally, how we can take Zip global? This phenomenon around credit card disruption is appealing globally, but there's also a big focus on the emerging markets where it's not actually about disrupting credit cards, because places like the Philippines have 3 per cent credit card penetration. It's actually about access to affordable credit.
The banks actually don't know how to underwrite and understand the customer - they can't work with the datasets. We have a lot of experience in utilising conventional datasets like credit and identity, but also non-conventional data. And together, you can actually understand the customer better.
Why is your approach expansion via acquisition, rather than just pushing the Zip brand into new markets?
Our approach to going global is a coalition-of-founders model, which is that if we do want to build a truly global payments powerhouse and compete with the big dinosaurs, a traditional approach is probably not going to get us there.
We actually need founder-led minds in local regions who have the speed, the passion, the innovation, the hustle, with our balance sheet to propel forward. If you look at certain regions, they've more been acqui-hires.
In some markets it might take three years to get in, and we need critical mass immediately. If you wait three years, the game is going to be over so you have to think creatively.
We've built this new markets function with extremely talented people that can handle extreme complexity. They can do a greenfield rollout, we can move with a merchant, we can move with a financial services player, we can do JVs, we can do acquisitions and re-integrations, and we can do acqui-hires. Ultimately, the technology platform is coming with it.
So this is not a multi-platform strategy; it's really a single platform strategy. It's that growth mindset - we fly while we build.
Often do small investments to get to know them, see what they're like, how they make decisions, and see if they can also shift the business plan in line with our long-term aspirations. If that's interesting, then we consolidate.
You don't often hear about Australian technology companies going into the Middle East. Can you tell me a bit more about the region and what you expect from that market?
The Middle East, which is part of the MENA (Middle East and North Africa) region, is showing some of the highest e-commerce growth rates globally; 20 to 30 per cent annual e-comm growth with a very low median age - in that sort of millennial and post-millennial segment.
There's a lot of factors that actually are at play. We've got a lot of pipeline behind the scenes that we're going to be rolling out in the region - the big retailers.
We actually try and be retailer-led. Often they're looking for a global BNPL solution, and certain markets are actually quite important to them. So we are opportunistic and strategic in how we move. In this particular case we were doing a lot in the region already, and we were looking for a strong team on the ground.
I want to talk about the regulation of BNPL. I feel like at Zip you've always been more open to it than many competitors. Why is that? And what sort of regulation would you welcome?
We've got to take the responsibilities that come with issuing microcredit in in real time. It's permeated into how we designed the business right from the beginning, not just in the product construct, which is about paying back in weeks and months; not years versus the credit card. It's interest-free versus interest-bearing.
Equally, even though it's incredibly fast to bring customers onto our platform, it doesn't mean that we cut corners. When we were building our underwriting engines, it was working out how can we actually identify customers quickly but also make sure the right customers come onto the platform. For those customers who aren't eligible we have alternative products and solutions like Pocketbook.
We've always been a big believer in fit-for-purpose regulation; a mortgage is different to a car loan, it's different to a credit card, and it's different to BNPL. We also believe it's important to safeguard the industry and safeguard the customers.
If you look in Australia, one in 100 Zip customers are late in any given month, versus credit cards where it might be one in six. And we've got some of the lowest loss rates. So it's a big focus for us, because we are in the business of issuing credit and you have to do it responsibly.
What are some of the biggest threats that could blindside BNPL as a sector generally?
Well, what is the product being worked on right now, in the garage that you can't see? It's going to come out tomorrow and be 10 times better than BNPL. I think that's what we have to be worried about.
We have to be continuously innovating, talking to customers, feeding customer feedback back into our product development cycle. Competition is there, but it's really always been there.
For us, I think execution is the greatest risk, our ability to scale the company, but still preserve all the elements that got us here, and doing that at scale.
What happens to the business model when the day comes that interest rates rise? Money is dirt cheap right now, and that's the financial environment BNPL has thrived within.
It's a big problem more for banks that work on a net interest margin.
You've got to look at both sides of the coin. One is how we borrow, which is related to interest rates. But then equally, how we earn is not - we derive income from merchants and customer fees are flat. So on that side we're less susceptible to interest rate movements.
I think we're also in the unique place that the cost of credit has two parts to it. There's the bank bills, the swap rate, and there's the credit margin. Now, we are at the lowest levels for bank bill swap rates for a very, very long time, but our credit margin is coming down as our experience and tenure and track record gets better and better. It will take quite a while for the true cost to expand, but the model is less susceptible to movements in interest rates.
And the other question you could ask is what would what would drive large losses? What would be macro catalysts for credit performance? I think the pandemic was a real test for the sector. We were very concerned at the outset of COVID in March for two reasons: one is around credit behaviour and ability to pay back, and two is consumption.
Obviously the market expected certain outcomes and these sectors are incredibly resilient. Why? The flight to online. There's been studies that have been done recently that actually have shown that customers will pay back BNPL over other credit cards. We're more front of mind which means that you have higher preference.
Are you threatened by banks that are coming up with their own BNPL platforms? Particularly ones that aren't charging merchant fees?
I think the model is completely different. This is a bank trying to remain relevant to their customers. If they surveyed their customers, understood what their customers were saying and then designed a product based on that customer feedback, and then iterated and iterated to come up with that...great! I think then we should all be incredibly proud, right?
I think what's happened is there's just been a copycat. They've looked at models like us and our friends, and they've just copied them. I think that's never going to get you in; you're always going to be a follower rather than a leader.
The second piece is, they're not really building the two-sided payments ecosystem. They don't live at the checkout, where we live. They don't live on product pages or on in-store windows, so we have a very different relationship with retailers.
We sit at the intersection of retail and credit and payments. It's a very different business model.
Finally, do you think Zip and Afterpay can co-exist in the long term?
Absolutely. I think we have great respect for Afterpay.
The payments ecosystem is a huge ecosystem. What you will see is that over time, while many of us are put in the same box, we will actually end up in very different places.
I think based on total addressable market (TAM) there is place for multiple payment wallets, with different customer segments solving different customer needs.
This is not necessarily a winner takes all scenario. I think we've seen many industries where there can be multiple winners, and I think payments probably has the space for significantly more, particularly on a global scale.
As payments become globalised, commerce gets globalised, retailers are looking for more global solutions, and it means the TAM actually increases.
Help us deliver quality journalism to you.
As a free and independent news site providing daily updates
during a period of unprecedented challenges for businesses everywhere
we call on your support