Zip has a lot of potential if it gets it right. Zip Co. (Z1P) provides consumer finance in Australia through its two main products:
- Zip Money, an interest-free product that competes against FlexiGroup’s Certegy and HSBC’s interest-free offerings; and
- Zip Pay, a short-term instalment lending product similar to Afterpay.
The real opportunity is a product that can tightly integrate with the online shopping experience and fit the mobile economy. Credit card as a product is cumbersome to use online and on mobile. Furthermore, since the GFC, funding costs have reduced significantly while credit card interest has not, this creates a high profit margin ripe for disruption.
The biggest potential for Zip (and Afterpay) is therefore to become a credit card replacement.
To capture this credit card replacement opportunity,
Afterpay and Zip need to change their current products, pass the current ASIC review, launch new products and undergo more future scrutiny. But the price is worth it, Australia’s annual credit card spending is more than $300B, with $30B plus interest-accruing balances each month. If credit card replacement products can capture 10% of that, it is a $30B volume opportunity.
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Based on various operational metrics,
Zip the business is about 25-50% the size of Afterpay, but its valuation is only 10-20% the size.
This opportunity reminds us of Xero in the accounting software industry. Starting out as a lightweight entry-level solution, Xero was not taken seriously by the incumbents. But through solid execution, changing industry dynamics, and incumbents’ ignorance, Xero has become a globally significant business.
At this stage, Afterpay and Zip are considered niche products by the credit card incumbents, while the incumbents are embroiled in a Royal Commission investigation.
