News that Zip, an Australian company that buys now, pays later (BNPL), plans to buy Sezzle, a similar US company, we noticed this morning. Both concerns are public in Australia, meaning the deal provides a fascinating insight into the true value of this particular type of fintech revenue.
Marketingwithanoy has covered more BNPL seed funding rounds than I can keep in my head. The global fintech boom has seen in recent quarters a series of checks for startups building installment credit options under the auspices of BNPL, meaning our keyboards have been busy.
For example, MarketForce raised $40 million last week, Alma raised $130 million earlier this month, Ascend raised $280 million in equity and debt at the end of January, BillEase raised $11 million in mid-January, ThankUCash raised $5.3 million for its fintech work that includes BNPL, and Lipa Later is targeting new markets for its BNPL services after raising $12 million. And that’s just what I found with a quick scan of Marketingwithanoy this morning.
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Clearly, the venture interest in BNPL-focused startups remains incredibly active. But as The Exchange explored earlier this month, the value of some public companies in the sector has suffered. For example, the value of US BNPL giant Affirm has suffered tremendously in recent quarters, losing most of its value.
If we see a combination in space, it means we don’t see BNPL couplings at market heights; we see the Zip-Sezzle deal hitting the market at low tide instead.
Let’s analyze the terms of the deal and find out what the public markets say the BNPL earnings are worth. For the countless startups chasing what they hope to be big profits and valuable cash flows by offering installment credit, the news of the day is more than important; from a valuation perspective it could be existential for some.
What is the turnover of BNPL worth?
When we examined Affirm earlier this month, we found that the take rate, or revenue as a percentage of gross trading volume, declined over time. From a peak of 12.7% in the fourth quarter of fiscal year 2020 to 8.1% in the most recent quarter, the second quarter of fiscal 2022.
Zip is facing similar headwinds, with the “sales margin” declining from 7.1% in the second half of 2020 to 6.9% in the first half of 2021 to 6.7% in the last six months of last year.
Thus, BNPL firms appear to be losing their ability to claim a portion of their total transaction volume as income; this is no surprise given the competitiveness of their market. Seeing price pressure in crowded sectors is a good thing for consumers – and marks a maturation of the product in question.
With that as a backdrop, let’s talk about the deal.