The chairman of Zip Co, an Australian buy now pay later (BNPL) company, says that for the BNPL sector to regain investor confidence it needs to focus on reducing bad debt and improving profitability. Zip Co's share price has dropped significantly in the last year from $12 to 90 cents due to concerns about growing bad debts. The chairman says BNPL companies need to move beyond just growth and focus more on managing risks and becoming profitable businesses.

1. BNPL

2. BNPL
• The chairman of one-time market darling Zip Co says the buy now, pay later sector needs to focus
on reducing bad debt numbers and improving margin growth to win back investor confidence.
• Diane Smith-Gander told a conference in Melbourne on Monday that buy now, pay later (BNPL)
groups had to look beyond customer growth numbers and focus on profitability and reducing bad
debts as the economic headwinds such as inflation and the change in e-commerce spending habits
changed post-COVID.
• “The industry as a whole, which has seen bad debts spike, really missed that moment. And we are now
going to have to dig our way out of that.
• Zip had positioned itself as one of the main rivals in Australia to BNPL juggernaut Afterpay. But over the past
15 months, Zip’s share price has withered from a height of $12.35 to just 90 cents per share on Monday. The
share price fall has been mainly driven by investor concern about the growth in bad debts from customers.
The Age and Herald revealed last month that bad debts were growing in part because the average transaction
per customer was so low it meant that for many groups it was too expensive to chase the debts from
customers.

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• Smith-Gander, who is a leading non-executive director in Australia and took up the chairman role at Zip only
a year ago, said the industry had been too accepting of bad debts as part of its growth story. “In the industry
there was a bit of a feeling that well these are small amounts of money, so the payback for recovery and
collection activity is not the same as if you’re collecting mortgage that’s gone bad.
• “ I refute all of that because I think we use technology and you are able to be much clearer about what your
book is like.”
• Zip has been criticised by analysts at UBS, Macquarie and by payments industry doyen Grant Halverson for
burning through too much cash and for pushing out its forecasts on when the group will reach profitability.
Other analysts at groups such as Shaw and Partners and Morningstar have a more rosy outlook for the group
which they see as a key disrupter to the credit card market and support the group’s take over of rival, US-
focused group Sezzle.

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• Smith-Gander said Zip was focused on becoming a profitable business and urged investor to stick with the
company for the long term, highlighting its growth prospects particularly in the US. “While we are having some
very tough times in the market, we are working very hard to be cash flow positive across all of our businesses.
• “But in Australia, we have a business that is cash flow positive, and very loved by consumers. We’ve
disrupted the traditional credit card model now where I think many consumers were quite distrustful.
• “It is about seeing through the cycle, looking to the future and I wish all of you who have the intestinal
fortitude to be involved in tech stock investing the very best of luck.

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• As the top brass at buy now, pay later upstart Zip Co gathered for the group’s 2020 results in February last
year, the mood was light. Larry Diamond, the chief of the group which pitches itself as a rival to dominant
provider Afterpay, had just revealed a 130 per cent increase in revenue to $160 million and business was
booming.
• “Before we kick off, I’d also like to thank the hard efforts of the entire Zip team, our Zipsters, but also like to
thank retailers and of course our customers and loyal shareholders for what has been a bumper half,” Diamond
told analysts.
• But the good vibes were short-lived. As investors digested the group’s $453.8 million second half loss, Zip’s
share price began to tumble. After initially touching an intraday high of $12.46, the group closed the day at
$10.73.
• Over the next 14 months Zip would continue on its share price rout as investors grew nervous about the
company’s chances of reaching profitability. By this week its shares were trading at just $1.46 and its market
capitalisation had withered from as much as $7.7 billion in February 2021 to just $976 million on Thursday this
week. It’s now pursuing a merger with rival Sezzle, which has an equally subdued share price to build its
customer and merchant base and to move to profitability by 2024.

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• Zip is just one of the buy now, pay later (BNPL) groups listed on the ASX to have suffered share price plunges over
the past year. Many of the other groups that joined the rush to list on our market following Afterpay’s success have
been similarly impacted.
• Most of these groups recorded phenomenal share price growth between 2020 and early 2021 as investors looked
for stocks that could replicate the success of now Block-owned Afterpay’s early investors. At the height of this market,
the ASX had 12 buy now, pay later groups while the rest of the world combined had just four listed players.
• But over the past six-to-12 months the bubble has burst. There is now fear in the market that the twin trends that
fuelled these businesses – the environment of near-zero interest rates and a two-year period where online sales grew
at enormous rates thanks to pandemic restrictions – is now over. Other concerns include the entrance of established
payment companies such as PayPal into the instalment payment market and the prospect of regulatory intervention
in the US and UK amid ongoing warnings from consumer groups that firms are not lending responsibly.
• At the same time bad debts – that is money unlikely to be repaid by customers –have blown out and the groups
have little recourse to collect these debts from their customers. These bad debts are expected to grow at an even
greater rate as the firms move from targeting customers wanting out-of-reach discretionary purchases to people who
are struggling with the cost of living and need an instalment payment product to fund purchases of fuel or food.

7. Thank you