Visa and Mastercard won't kill buy now, pay later businesses, Zip says – but it admits the sector is in desperate need of regulation

Zip Co co-founders Peter Gray and Larry Diamond (SMH, Dominic Lorrimer)
  • Buy now pay later company Zip has told Business Insider Australia that the obstacles preventing Visa and Mastercard from competing in the hot sector are greater than they appear.
  • Co-founder Peter Gray has argued some incumbents are too well-established with customers to be easily disrupted, but admitted that copycats will face a day of reckoning as the sector consolidates.
  • Gray also called for greater regulation to be introduced to prevent sub-par customers being burdened with a glut of credit.

Apparently, someone needs to tell NYU professor and corporate soothsayer Scott Galloway he’s made a terrible mistake.

One of Australia’s largest buy now, pay later (BNPL) lenders has rebutted, for the first time, Galloway’s claims there are few obstacles or ‘moats’ to large financial service companies like Visa and Mastercard upending the industry.

“These buy now pay later disrupters have puddles rather than moats, which credit card companies can likely breach and step over,” Galloway said in a video outlining his argument.

But it’s not quite so easy for the disrupters to be disrupted, according to Zip COO Peter Gray, who along with Larry Diamond co-founded the payments company out of North Sydney watering hole The Commodore Hotel.

“Visa and Mastercard don’t have a relationship with the consumer and they don’t have the ability to acquire them at checkout,” Gray told Business Insider Australia. “Meanwhile they find us when they buy online, and we do all the accounting in real-time. The fact those companies – which are really just the rails on which transactions happen – can’t do that has a whole set of consequences.”

“If they did try, it would probably only work for cards provided by them, and then they would have to work with all the different credit providers provided at that checkout themselves,” Gray said.

While those challenges might not constitute true ‘moats’ — it’s doubtful Galloway would be convinced — they do make it more difficult for institutions to disrupt the disrupters, Gray argues.

“The relationship is between the customer and the bank issuing the Mastercard or Visa card so how could they then offer an instalment-based product to that customer? They would need to sign up all the credit providers which is no small task,” he said.

“Even if they did that, they still can’t acquire customers in real-time at the checkout and then run the checks required. So there are a few big things those companies are missing.”

More immediately, Gray believes Zip is a different product to its current competitors

But what about the growing list of existing players, from Afterpay to Sezzle, jostling to compete?

“We actually can co-exist. We have one and a half million customers, Afterpay has two and a half, and there’s not a huge overlap between our customers, maybe 25-30%,” Gray said. “That’s because we are offering fundamentally different things.”

To Gray’s mind, Zip is essentially a digital wallet. It’s reminiscent of other language used by competitors wanting to be known as anything but a credit company – Afterpay, for example, claims to be a marketing company.

In Zip’s case, users collect a single balance, not dissimilar to a credit card, which they control and over time repay. That’s different to Afterpay, and many of its copycats, which divide single-purchases into four instalments and charges them over a period of months. The glut of companies offering identical versions has a day of reckoning coming for them, according to Gray.

“They might win some of these retail relationships, they might undercut on price, they might write a cheque to exist at checkout but how they’re actually going to acquire the customers? Their numbers are spiking but they’re going to struggle to differentiate themselves from Afterpay unless they change their business dramatically.”

It’s an opinion shared by some analysts. There has after all been an explosion of new entrants in a short space of time with incumbents trading at sky-high stock prices. Meanwhile Galloway sensationally predicted Afterpay’s stock price would halve in 12 months.

It’s differentiation, Gray argues, which will hold Zip in good stead. It will need to given the crowded market probably isn’t even full yet. Australia’s largest retail bank CBA took a stake in European giant Klarna earlier this year – presumably with plans to bring it to our shores.

Zip believes the buy now pay later space could do with some more oversight

It’s another reason why Zip has gone after a different market segment. It’s one that is a little older – one in five users are part of Gen X
and more financially savvy.

“We have one in 100 customers make a late payment, whereas other BNPL and credit card companies are one in six. Those standards are a competitive disadvantage but we stand by them.”

Rather than water those standards down, Gray believes the greater market could do with greater regulation.

“We think it could do with a cut down version of responsible lending where we lift the minimum standards in the industry,” Gray said. “We do credit checks on every single customer so I think what we would like to at a minimum is customers checked at the point they’re signed up, so other providers actually understand the income and expenses position of their customers.”

“We think card repayments should be limited to debit cards to ensure people aren’t paying off debt with credit.”

No arguments here, but where Zip and others aren’t so welcoming is when it comes to the sore spot of the sector – surcharging.

Seemingly out of nowhere, the Reserve Bank of Australia (RBA) announced it would launch a review of the BNPL sector and the inability of retailers to pass on surcharges to customers. While some argue it would make the industry more sustainable, extra fees could see customers, particularly cash strapped ones, flee the sector.

Gray stand by what he says is a “very robust revenue model”, and argues that the benefit the company offers is greater than its cost to merchants.

“It’s a matter of choice. If the retailers couldn’t absorb the margin into their price, then they wouldn’t accept our solution.”

The future of BNPL

So where does the sector go from here?

“Two or three years ago, we definitely saw a big land grab, in terms of the real estate, and the merchant relationships that are so critical to the business model,” Gray said.

The period spurned the kind of explosive tech growth that isn’t often seen on Australian shores. Zip has already exhausted the space in its current office just 18 months into a five-year lease.

The race hasn’t entirely abated though. Just last week, Zip became the first, and only, BNPL provider on Amazon Australia. Not to be outdone, Afterpay announced just days later it had hooked its own white whale, eBay.

Clearly, their differences aren’t sufficient to quell any competitive spirit. Given retailers are about offering choice however, it’s unlikely both companies won’t end up being accepted by both eCommerce stores in Australia.

The land grab however now looks to be moving overseas somewhat with both major companies racing to snap up retailers and customers in previously untapped markets. Zip’s acquisition of PartPay and stake in QuadPay will go some way to establishing itself in the US, the UK, South Africa, and New Zealand. It’ll again encounter Afterpay and others over there as they try to outdo each other.

In the meantime, the focus is on retaining customers and increasing usage amongst the existing ones.

“Globally the opportunity is still in its early days. Everyone’s having a crack but the market is only getting bigger and bigger every day.”

Just how long that can last is another matter.

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