Finview takes you through this market. Various topics are covered > Market size > Competition > Business model > Valuations > Considerations

1. FINVIEW
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William Vermont | Investor @ ISAI
Installment
Payment

2. Market overview
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3. Tremendous market opportunity in the USA & Europe
[1] The fashion market includes apparel, footwear, bags, accessories which are the largest categories in installment payment.
This payment solution is not restricted to fashion, it is also relevant in various other industries: mobility, travel etc
[2] In the USA, the fashion market is estimated to be c.$550bn & c.$435bn in Europe.
[3] The ecommerce penetration is c.20% and may reach 25% by 2022
[4] The millennial generation (born between 1980 & 2000) represent 60% of the fashion ecommerce shoppers. This generation
is aligned with new installment payment solutions: transparent pricing, get it now but pay later / immediacy
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FASHION MARKET IN THE USA FASHION MARKET IN EUROPE
$440bn
$110bn
$348bn
$87bn
Source: Fashion, Statista,
Goldman Sachs, Millennial

4. This market is segmented into (i) legacy players (ii) tech companies (iii) PSP
[1] Legacy players (Fr) tend to mostly trust the offline market, partnering with large franchises. They have a relatively poor user
experience which requires to fill paperwork at the cashier. Some of them have an unclear pricing and charge some interest
rates. Additionally, for their online products, it is not instantaneous as one needs to create an account etc
[2] New tech players penetrate the installment market by focusing on online merchants, with a clear & transparent pricing (most
are free for the end-client, some charge an APR) and offer an instantaneous solution at the checkout
[3] Full stack PSPs could compete as they already have strong relationships with their merchants. As a result, offering such a
product ‘buy now, pay later’ would make sense
Legacy players (Fr only) ● Oney, Cofidis, Cetelem, Cofinoga, Banque Casino
New (tech) players
● Alma, Pledg, Klarna, Affirm, Afterpay, Quadpay, Zip, Splitit, Bread, Viabill, Etika,
Divido, Sezzle, Paypal Credit
Full stack PSP ● Ayden, Square, Stripe
COMPETITIVE ENVIRONMENT BY SEGMENT
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5. Specifically, there is an intense competition in the tech segment
[1] Across all these players, $5bn (Paypal is excluded as it did not start in this market) have been raised on the private market,
including $2.1bn in the USA (driven by Affirm, 71%), $2.1bn in Europe (Klarna making 95% of it) and $650M in Australia
[2] Among the exited companies (excluding Paypal), there has been 4 years between the founding date and liquidity event
(acquisition or public debut), which is unusually quick for a vc-backed business as the average of the market tends to be c.7/8
years
Alma 2018, Fr €13M: ISAI, IdInvest
Pledg 2017, Fr €1M: BAs
Viabill 2010, Den €60M: Blackfin, e.ventures
Klarna 2005, Swe $2bn: Northzone, Ant
Divido 2014, UK $19M: Dawn, DN Capital
Afterpay 2014, AUS
Listed: ASX | Previously
raised (AUD)$450M
Zip 2013, AUS
Listed: ASX | Previously
raised (AUD)$420M
Affirm 2012, USA $1.5bn: Spark, Thrive
Quadpay 2017, USA
Acquired (USD) $300M by
Zip | previously raised $50M
Splitit 2012, USA
Listed: ASX | Previously
raised $115
Bread 2014, USA $200M: Bessemer, Kinnevik
Sezzle 2016, USA
Listed: ASX | Previously
raised $270M
Paypal 1998, USA
Listed: Nasdaq | Previously
raised $216M
COMPETITIVE ENVIRONMENT COMPETITIVE ENVIRONMENT
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Source: Crunchbase, CbInsights
COMPETITIVE ENVIRONMENT IN TECH SEGMENT

6. Economics
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7. Merchants see significant improvements using installment payment solutions
[1] Most of the companies charge the merchant a fee (following slide) that is largely offset by an increase of the conversion
rate, sales and avg basket
[2] Some companies do charge the end customers an interest rate (Affirm, Bread etc) which makes it free for the merchants, yet
the impact on the conversion rate, sales etc is lower
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20% 20%
60%
80%
Conversion rate &
top line sales up
more than 20%
Avg basket size up
more than 20% &
as high as 60%
It can increase the
repeat rate up to
80%
BENEFITS FOR THE MERCHANTS
Source: Quadpay, Viabill

8. Installment payment companies have a ‘low’ margin and will likely decrease as
long as the competition increases
[1] At scale, companies improve (i) processing cost and (ii) cost of debt as they have a higher power to negotiate with their
respective partners. However, their loss ratio may increase resulting in a higher loss cost
[2] Ultimately, in order to make money, players need to generate a high volume of transaction processed (TPV) while constantly
optimizing their processing & debt costs.
[3] Another risk is that the transaction fee may decrease over time given the (i) rise of competition (ii) the money raised by
direct competitors, especially to win large accounts/markets
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Transaction fee 4%
Processing cost 0.5%
Loss cost 1.5%
Debt cost 0.5%
Margin 1.5%
UNIT ECONOMICS

9. Valuation
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10. Valuation seems to vary widely between private & public market. 1-1.5x TPV may
seem to be a decent proxy
[1] Limitations: EV multiples may be impacted by other factors not taken into considerations in this high level analysis (markets
in which they operate, operating margin, historical growth rate, offline presence etc)
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KEY FIGURES PER LISTED OR ACQUIRED COMPANY MULTIPLES
Source: Yahoo Finance, AFR
Afterpay* Zip* Quadpay
EV/TPV 2.5x 1.5x 0.4x
EV/Revenues 54x 19x 10x
YoY growth rate
v.s n-1
100% 100% 200%
* Stock price from 06.11.2020

11. Considerations
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12. Despite a large market & strong growth rates observed among the tech players,
there are 4 main challenges that arise
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Access to
debt
● It is key to sustain a strong growth. Yet, an early stage company is not significant enough to attract institutional
debt investors. From c.30/40M€ monthly TPV onward, one can start discussing with the latter. Until Series A/B,
it is quite common that companies issue private bonds to high net worth individual investors, yet the terms for
the company are not optimal (c.8/12% interest rate/year).
Competition
● It is likely that competition will drive prices down (i.e fees on the merchants’ side) to win new
contracts/markets. To counterbalance this effect, economics can be optimized (cost of debt & processing
costs) once a significant TPV volume is reached. Will build-ups be the next phase of optimization for the largest
players (i.e Klarna, Afterpay etc)?
Scoring
● Outside the USA (which has a FICO score), these companies have close to zero information on the end
consumer. So how do they score them instantaneously? On the end-client side, a few data points are available
such as the mobile number, the type of credit card (prepaid cards for example are a red flag), use the history of
transactions (for repeat customers) or access to specific DB containing subprime people. For merchants, it is
mostly done through a thorough KYB, online presence assessment etc. On top of that, it appears that there is a
correlation between the ‘quality’ of merchants and the default rate of their clients (Club Med’s clients may be
less likely to default compared to a low-cost travel agency). As a result, some players adjust their pricing based
on the later (lower risk => less defauts => lower fees for the merchant).
Offline market
● The offline world still represents c.80% of the €/$ volume in fashion (slide 2). Some players launched offline
products. Quadpay launched Quadpay in-store which only requires (i) end-clients to download the app & (ii)
merchants to accept Visa at the POS but there is no need for any integration. Other players also leverage
payment terminals to keep the usual offline payment flow while offering installment solutions.

13. FINVIEW
William Vermont
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13.11.2020