The competition in the buy now pay later industry has grown significantly over the last 12 months. From pure-play buy now pay later (BNPL) providers to prepaid payment instrument providers and traditional banking institutions, most financial services-related firms have launched BNPL schemes owing to the growing popularity of the payment method among consumers globally.
However, with the entry of many players in the sector, customer acquisition has become a strenuous task for providers. This, coupled with growing regulatory scrutiny and a decline in online spending post-pandemic, many players have been retreating from their global expansion plans. Sezzle, for instance, has retreated from loss-making operations in India, Brazil, and Europe. Zip Co. (Zip), the Australian BNPL provider, is another firm that has adopted the same strategy to meet investors’ expectations.
- In 2022, Zip announced its exit from various markets, including Singapore, the United Kingdom, the Middle East, and Mexico. Despite recording strong growth in these markets, the firm has backtracked from its global expansion plan. In Mexico, for instance, the firm reported a growth of 210% month by month. With more than 350 merchant partners in the market and over 120,000 users, the firm also predicted growth of 600% in Mexico in 2023.
The unfavorable macroeconomic environment, coupled with the need to comply with investors, and the closure in these markets was an indication that the firm would adopt the same strategy in many of its other international markets from the short to medium-term perspective.
With the stock price plummeting approximately 95% over the last two years, Zip is also gearing up to exit more of its international operations in 2023. The markets include India, Turkey, the Czech Republic, South Africa, Poland, and the Philippines. It means that the firm would be selling or ending operations in 10 of the 14 markets globally.
- For selling the assets in some of these regional markets, Zip has partnered with boutique advisory firms. The process is projected to get completed by the end of June 2023 and is expected to drive significant capital inflows for Zip. The capital inflow would assist the firm to drive its growth in other operational markets, which include Australia, New Zealand, Canada, and the United States.
Zip is also expecting that the divestment process will enable the firm to become cash flow positive by H1 2024. PayNXT360 expects headcount cuts, coupled with the closure of loss-making markets, to aid net income growth for the firm.
For the global BNPL market, the last 12 months had been a difficult period. Valuations for some firms have dropped significantly during 2022. This includes prominent names like Strip and Klarna. Klarna, the most valued startup in Europe at one time, saw its valuation decline from US$45.6 billion to US$6.7 billion in 2022. Stripe, on the other hand, has also experienced a significant decline in its valuation over the last 12 months.
While the macroeconomic factors, including higher interest rates and a decline in consumer spending on online purchases, are projected to have a further impact on the valuation of these BNPL providers, adopting a different strategy can lead to significant growth for these firms. For instance,
- The same divestment strategy, as adopted by Zip, has enabled some of the other players to achieve net income growth in 2022. Sezzle, for instance, ended 2022 with the total income reaching US$38.3 million and is expected to see a further increase over the next 12 months. The firm, in February 2023, announced that it had identified other revenue sources that would bring in an additional US$10 million to its revenue.
In 2022, Sezzle and Zip has also called off their merger deal, which was initially announced as part of the Australian BNPL providers’ strategy to strengthen its foothold in the United States market. Despite the called-off merger deal with Zip, Sezzle achieved strong growth in Q4 2022 and indicated that the BNPL sector can be profitable.
Notably, several firms are eyeing profitability amid growing investor pressure in 2023. Klarna, for instance, has announced that it plans to reach profitability in H2 2023. While the firm posted US$1 billion in losses in 2022, the losses were reduced significantly in the last quarter. Headcount cuts, along with the launch of other features such as browser extension, have enabled the firm to drive its revenue growth in Q4 2022.
Like Klarna, Affirm is another BNPL provider that has adopted the strategy of improving product features. For Klarna, the browser extension feature is driving over US$6 billion in volume. For Affirm, the launch of a super app and Debit+ card feature has driven the retention rate, thereby aiding gross merchandise volume growth.
This is a clear indication that the path to profitability is different for each of the BNPL providers. However, all of these growth strategies are centered around a customer-centric approach. For Klarna and Affirm, offering more value to their customers is driving gross merchandise volume. For Sezzle, building a premium offering for its customers in the domestic market, coupled with the renegotiation of merchant fees, has driven net income growth.
With Zip cutting down on its loss-making operations and focusing more on the domestic market, along with other markets with high-growth potential in the United States and Canada, PayNXT360 expects the firm to build products and services that create more value for its customer. The significant cash inflow from asset sales will enable to firm to invest in more customer-focused products, thereby aiding customer retention and revenue growth.