Zip reports record second quarter revenue as bad debt situation improves

The share of bad debts as a percentage of total transaction volume (TTV) for buy-now pay-later (BNPL) player Zip Co (ASX: ZIP) has improved in the second quarter of FY23, during which the company achieved record financial results on multiple metrics.

After being plagued by unrecoverable debts from customers falling short of repayments, the company has reported record quarterly revenue of $188 million - up 12 per cent year-on-year.

Further, transaction volume for the quarter was up 4 per cent on the prior year to $2.7 billion, while transaction numbers lifted by 1 per cent to a record 22.6 million. Zip's US business also delivered positive cash earnings in November and December 2022, propelled by strong seasonal performance.

Of particular note was the group’s reduction of bad debts, labelled by Zip as credit losses. Across the group, net bad debts as a percentage of TTV fell from 2.38 per cent to 1.49 per cent, or $40 million. The group’s Australian bad debts fell to 2.10 per cent of TTV, while the US business’ net credit losses fell to 1.07 per cent of TTV.

The company says it has been pursuing the reduction of credit losses, with improvements achieved by proactively managing risk settings and optimising repayments and collections.

“We are very pleased to deliver another strong quarter of record volumes despite the challenging external environment and adjustments to our risk settings,” Zip co-founder, global CEO and managing director Larry Diamond said.

“During the quarter Zip continued to make great progress on the strategy to deliver sustainable growth, right-size our global cost base and accelerate our path to profitability.”

Other highlights for Zip included onboarding new enterprise merchants, with the AU business adding Jetstar, Uber and eBay AU, while in the US users can now pay with Zip at Barnes & Noble College across all campus stores.

“It was very exciting to onboard great brands such as Uber, Jetstar and eBay to our payments platform in Australia and deliver positive cash EBTDA for the US business in November and December, including very strong results on credit performance,” Diamond said.

“We continue to provide increased benefits to both customers and merchants in today's high cost environment and are well-positioned for any potential future regulatory changes.

“The underlying business remains strong, and we are pleased with the benefits and reduction in cash burn from the ongoing simplification of the business footprint and focus on core products and core markets.”

Zip says it will continue to focus on delivering sustainable growth in its core markets, unit economics and cost management, and is on track to deliver group positive cash EBITDA during 1H FY24.

During the quarter, the company also completed the closure of its business in the UK and Singapore, started the process to close its business in Mexico and earlier this month commenced the wind down of operations in the Middle East.

Zip addresses review of BNPL regulation

In the quarterly update, Zip addressed a report released by the Australian Department of the Treasury in November 2022, which identified three potential options for regulation of the BNPL sector.

Of the three, Zip says it ‘strongly advocates’ for ‘Option 2’, which would require BNPL providers to hold an Australian Credit Licence (ACL) and comply with modified regulations under the Credit Act including conducting credit and affordability checks on all applicants.

Option 1 proposed a government-industry co-regulation regime, whereby the current BNPL Code would be strengthened to address gaps in coverage, supplemented with a bespoke ‘affordability test’ legislated under the Credit Act.

Meanwhile, Option 3 would regulate BNPL products under the Credit Act, treating them similarly to other credit products, and would require companies like Zip to comply with regulations including Responsible Lending Obligations.

Zip already holds an ACL, and noted it conducts identity, credit and affordability checks on all customers.

“Zip is supportive, and always has been, of simple, fit-for-purpose regulation and has proactively engaged with Treasury regarding the potential regulation of BNPL products in the Australian market,” Zip said.

“Zip believes that amending the Credit Act to require BNPL providers to hold an ACL will ensure the right obligations for internal and external dispute resolution, hardship provisions, compensation arrangements, fee caps and marketing rules.

“Zip also believes Option 2 would achieve an appropriate balance, protecting consumers and building confidence in the sector, while encouraging and supporting innovation and competition, providing access to simpler and better financial products for millions of Australians.”

Treasury will undertake further targeted consultations with stakeholders to refine the three options ahead of any government decision or intervention.

“Zip conducts identity, credit and affordability checks on its customers, and is well-placed for business as usual no matter the outcome of the Treasury review process,” Zip said.

Shares in Zip are down 6.59 per cent to $0.79 per share at 111.33am AEDT.