The New Consumer Finance: Larry Diamond from Zip Co. Ltd talks to Techboard

Techboard correspondent Matthew Parker from MitchelLake recently spoke with Larry Diamond, CEO and founder of Zip Co. (ASX: Z1P) (formerly Zipmoney). They had a broad-ranging discussion covering issues including their Backdoor Listing on the ASX, their growth and recent acquisition. Zip Co. has performed very well in the monthly Techboard Ranking, was a finalist in the inaugural Techboard 2017 National Awards and came in 4th in Techboard’s Annual 2017 Ranking.

Matthew Parker (MP): There have been a few new “buy-now-pay-later” businesses launch over the past 2 years, why is this happening now? What has created the right circumstance for this to occur?

Larry Diamond (LD): This isn’t necessarily a new concept, Lowes back in the 1950s were probably the pioneers of consumer finance in Australia - they had a super engaged audience that visited their stores for all their schooling needs and were incredibly loyal. Offering ‘terms’ to their customers, sort of like “putting it on my account” was a great value-add. The second incarnation was Harvey Norman with interest free purchases and they really educated the market. So as a concept, interest free has been around for the last 50 years and really strong for the last 10.

More recently though, the emergence of additional players has been down to technology as an enabler. Onboarding a customer in the consumer finance world has become much more streamlined on the backend. In order to do this, you need to build a real time decision engine that allows you to assess fraud risk and credit risk when extending credit to a customer. The real-time APIs and data availability has only really existed over the past few years.

We’ve also seen these models be really successful overseas, with Klarna arguably the pioneer in this space. They now handle around 50% of all online payment volume in certain parts of Europe. Where we’ve seen buy-now-pay-later be really successful is where it’s broadened beyond bulky, offline purchases, to online purchases from many different categories and a bigger variety of purchase value.

The emergence of ecommerce in Australia and around the world has of course had a big impact. It’s definitely harder to scale these products offline; you have to go in store, train staff, coordinate POS rollout etc. So e-commerce on both the consumer and the merchant side has enabled us to scale much quicker through creating fantastic and simple APIs that can plug into existing checkout systems. The ability to on-board merchants offline would have been a long sales cycle, but now we’re able to plug into off-the-shelf checkout systems. For example, if you use a Shopify checkout, we can get you up and running with Zip in 30 minutes. Stripe really led the way here and we adopted a similar approach to market.

MP: There’s been some concerns of individuals over-purchasing with these new lines of credit being afforded to them. What do you feel is the right way to manage lending to your customers to ensure this doesn’t happen?

LD: It’s an excellent point, at a high level we see ourselves as a financial services player, initially extending credit at the checkout, but then building a long-term financial partnership with the consumer. So anyone who signs up with Zip is ID-checked and credit-checked and then we only extend to those who can afford the repayments. We focus on the financial well-being of the consumer - it’s also one of the reasons we acquired Pocketbook which helps people get on top of their finances.

When we started Zip, we looked at the entire market, $300 billion in retail spending, $52 billion credit card receivable balances, and this had been flat year-on-year. Drilling down even deeper, the average credit card balance is $3000 and average balance accruing interest is $2000. So almost 2/3rds of all balances are accruing interest. So the question here is why!? Part of the answer is that when you look at your statement, it tells you it’s going to take 18 years to pay off your balance, they keep you on the minimum monthly payment, and people just leave it. There is no concerted effort to help people pay back. So when we started Zip we saw a great opportunity to provide interest-free consumer finance options to retail purchases, but also an opportunity to disrupt the credit card market. Credit cards have hard signups, offer low flexibility and tend to encourage interest-bearing payments.

The way we designed Zip is essentially a revolving line of credit, as part of the on-boarding process we go through credit checks, identification checks, pull banking transaction data, and look to deeply understand the profile of the consumer, to see if it’s responsible to lend. A certain percentage of candidates get declined. Getting access to data in real time is really what differentiates us from the likes of a credit card issuer.  Our Pocketbook acquisition has also been a key part of this decision engine.

As we become further integrated, when customers are not eligible for credit, we won’t just move on… as I said, we’re really focused on the financial well being of all Australians, so we will encourage them to use Pocketbook and continue to build a relationship with them.

In comparison to credit cards, it could take you 20 years to pay it off using the minimum balance, but we make that 5 years regardless of the limit. BUT in fact most people clear their balance in only a few months.

MP: How do you separate yourselves from the other buy-now-pay-later businesses?

LD: We are actually quite different to ‘The Pays’, being OpenPay, AfterPay, OxiPay and OurPay. We see ourselves as disrupting the physical, plastic credit card. We offer a digital line of credit whereby customers are approved for an account limit (between $1k-$30k) and they can transact as often as they like, interest free. We focus on flexibility, transparency and simplicity.

We see ourselves having a mix of peers in both the low and high dollar basket categories - but believe we are uniquely placed, in that we can cater for any dollar value. Our peers include The Pays’, who offer instalments from an existing card and typically focus on lower dollar spends and then you have the more well-known guys like HSBC, Flexigroup, Latitude, who have been successful with higher dollar baskets and mainly offline.

MP: Do you see your two businesses ultimately coexisting or can there be only one?

LD: If you look at e-commerce payment trends, credit cards are falling out of favour with millennials. Other payment solutions like PayPal have a very different appeal to what they did when they first started. 10 years ago, PayPal differentiated itself for its ease of use and security, and now those differentiators are less prevalent as the market has caught up. As a retailer, offering the right payment choice is absolutely critical. We see a checkout where Zip lives very happily alongside other payment methods as we appeal to different transaction values and different segments of the market. There is definitely a coexistence there. In the larger ticket purchases, we don’t really see our competitors as payment solutions, they’re more of credit issuers which is not really a payment type.

The other piece that retailers are really interested in is getting a single view of the customer, both online and in store. So using a product like Zip you can create better engagement with the customer across multiple channels.

MP: What are the key drivers for merchants to sign up with Zip?

LD: For retailers, it helps convert browsers into buyers, it lifts the basket value and it brings back customers. So it’s incremental revenue for retailers, and they’re happy to pay this, it’s almost like a digital marketing cost. For some of our retailers we can be anywhere from 20-40% of their checkout and average order value uplifts from between 10-50% depending on the category. We’re also referring lots of customers to stores by our customer marketplace with over 400,000 customers who are looking to use their Zip wallet with new retailers.

In terms of how retailers choose, they look at the technology, can you service online and instore? Even though 92c of every dollar happens offline and 8c happens online, browsing online may be 50/50, so your ability to address the journey earlier is very important. They also look for brands that align and have the same ethical values. Lastly, how we can add value after they sign as well to provide services throughout their engagement. We recently signed Kogan and Catch group, two of the largest pure play ecommerce businesses in Australia. We’d love to move into the billion dollar category, companies doing billions of dollars in transactions a year. We can now service these businesses and are excited by the categories such as travel, electronics, healthcare. A few great businesses to add would be Harvey Norman, Iconic, Qantas and Sonic Healthcare.

MP: Why did you decide to list so early vs traditional VC funding?

LD: We raised a seed round of 250k in 2013, there were only 4 of us that kicked things off and we bootstrapped this for about 2 years. We then went and spoke to quite a few VCs and we couldn’t really get them over the line. It was a very different investment market back then, there weren’t that many Series A investments happening locally, and a friend of mine pointed out that we should look at a backdoor listing on the ASX. Initially we decided not to do this, so we kept pounding the pavement, we got a really strong offer, but it would have wiped the equity for all the founders.

So we literally went back to the drawing board and spent 3 hours on the pros and cons on going public. Things like - competitors can see you, retailers can see your profitability, lots of overheads from regulation and board members, it’s expensive!

Ultimately, we took the leap and went public. But the benefits like access to capital, now and in the future, lifting our profile and adding credibility to Zip by being publicly listed, were all positives.  

We actually reverse listed into a hard rock gold miner, which was a bizarre experience as we had to do due diligence on them as we were effectively buying them. But it also means that we could be sitting on top of a literal (and metaphorical) gold mine! Without listing on the ASX we would not be here today.

MP: Why did you decide to acquire Pocket Book?

LD: For us it was a great acquisition.  It was actually the merger of equals. Pocketbook enabled us to create a deeper engagement with millennials and get better insight into their decision making. Some may prefer using debit, to credit for example and some won’t be eligible but regardless we want to continue our engagement with them. They also have a big focus on financial well being which is a great cultural alignment.

Also our decision tech being powered by their IP is super powerful, and if you look at where open banking is moving towards and the use of data, we wanted to make sure we were at the forefront as this emerged. Pocketbook has close to 400,000 users, and is one of the largest non bank apps in Australia. It is at the forefront of open-banking.

MP: You’re now over 150 people, what have been some of your key learnings through this period?

LD: The business sort of breaks every step of the way. When there were four of us, Mike, Adam, Pete and myself, we all did everything. That worked really well!

You then scale to 30 people and it still works really well, but things start to break down. We each may have had 10 hats, and you then start to hand over those hats, and gaps emerge as functions don’t overlap. So as these things started to break, one of the things we started to do was in any meeting you go into, establish who’s the owner, what’s the process, and own the outcome, regardless of the function it falls into. This did break a couple of times, but it empowered everyone to own the outcome.

We then scaled to 100 people and at first it broke hard. It was even more complicated, the organisational design, the hierarchy, it was really challenging and quite chaotic. So we aim hire people who are generalists, solutions orientated and can get their hands dirty. We’ve lost a few people along the way who haven’t been able to calibrate to that type of environment.  

Hiring the right people is super important. What we’ve also realised is having the brand names on your resume may not mean anything, it’s more about your attitude, are you a generalist, and can you get your hands dirty?

MP: If you were to do it again, what would you have done differently?

LD: There’s probably a few things… For the first round we raised, I would have have built a prototype instead of just giving them an investment banking presentation. It doesn’t need to have any backend, just purely front end screen, then go raise some money. I think we probably would have got a better valuation as people can touch and feel the product.

Hiring the right people sooner as well. As problems have surfaced in the business, you knew that if you had the right leader in that part of the business, the problem could have been avoided. We focused initially on building bottom up, but in certain cases, hiring the leader first would have been the better approach.

Marketing was also a function we never invested in early on, we were acquiring customers from our retailers and we didn’t think about the direct to consumer conversation early on. If we had done that we could have scaled better and earlier.

Lastly, we could have shipped products even quicker across our various work streams, getting customer feedback and iterating rather than releasing chunkier versions thinking it’s ready to go. If you can’t ship product out and listen to your customers, you will ultimately lose the war. We’ve had too many executive priorities thinking we know what’s best instead of listening to the customer.

MP: So in 2017 you were nominated for the FinTech top 50… What can we expect from Zipmoney in 2018?

LD: Hopefully a lot more! Actually, we recently learned that we ranked #7 in the Tech Fast 500 APAC. We want to grow our user base into the millions so getting Zip into as many checkouts as possible through winning business and doing awesome strategic partnerships like Westpac. We also want to do more customer engagement and evangelism, and get customers engaging with us on a more regular basis. Listening to our customers will influence our product roadmap so having an active community will have big impact on our journey. We’d like to bring Pocketbook deeper into the fold, bring everything together under one roof.

It would be great to look back and say we’ve processed a billion dollars on our platform, have a million customers use our services and also sign up a billion dollar retailers on our platform.

As a final note to any potential entrepreneurs, anyone with the right passion could do this. I didn’t know anything about payments or credit 4 years ago, but I had a thirst and a passion. You don’t need to have gone to university, or worked in an investment bank, anyone with the right passion can become a startup junkie with perseverance. The process makes us who we are. Winning that first retailer isn’t the milestone, it’s the process that gets us there. What I’d love to see is more of those people at banks and accountancy firms go and start-up. The environment has never been better for people to start up, so quit now.

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Matthew Parker is a Senior Consultant at MitchelLake Group in Sydney. Matthew connects great people, with great stories, with great businesses.