Zip buying Sezzle as pressures on BNPL fintechs mount

With buy now/pay later fintechs under economic and legal pressure, the Australia-based BNPL fintech Zip has agreed to buy rival Sezzle, a move Zip hopes will add scale and a path to profitability in a market facing more headwinds.

Zip on Monday announced a deal to acquire Minneapolis-based Sezzle for $356 million, contending Sezzle's customers, merchant network and technology would speed its path to profitability as early as 2024.

The BNPL market is still expanding, with most firms reporting strong transaction volume growth and rising revenue.

But fintechs that offer BNPL face regulatory pressure from the Consumer Financial Protection Bureau and declining financial performance. Zip will need to use the combination with Sezzle to produce products that differentiate from other lenders as BNPL becomes commoditized, according to Brian Riley, director of credit advisory at Mercator Advisory Group in Maynard, Massachusetts.

"BNPL is no longer novel, and with the CFPB looking at pricing, transparency and implementation, the new company will have to do more than compete with top players like Affirm, PayPal, Mastercard and Visa, to name a few," Riley said.

The stock price for the largest publicly traded U.S. based BNPL fintech, Affirm, has steadily weakened and Sweden-based Klarna recently reported a sharp uptick in credit losses. And stock prices for both Sezzle and Zip have been decelerating in the last few months.

Klarna revealed in its recent full-year report that its credit losses last year jumped about 500% to $737 million from $147 million in 2020. Klarna attributed the higher losses to risks from first-time buyers, noting that the company’s overall credit loss rate for returning customers has declined since 2019.

And Zip is one of the five firms — along with Affirm, Afterpay, Klarna and PayPal — caught in the CFPB’s inquiry into buy now/pay later industry practices.

Zip and Sezzle "will need to integrate perfectly or there will be stormy seas ahead," Riley said.

By combining forces with Sezzle, Zip would increase its total number of customers by 33% to 13.3 million and expand the number of merchants Zip reaches by more than 50% to 128 million, including some small-business operators. But there is likely to be some overlap of some customers and merchants.

Zip and Sezzle did not comment by deadline. Zip, which operates in 14 global markets, sees opportunities to expand Sezzle’s Pay in 4 solution for online and in-store purchases via interest-free loans repaid in four equal installments. Zip plans to offer Sezzle Up, the company’s credit-building service, to new Zip users.

“We are delighted to be bringing Zip and Sezzle together under a transformational transaction that is expected to deliver immediate scale and enhanced growth, which will support our path to profitability,” Larry Diamond, Zip’s CEO, said in a press release.

The BNPL industry got its start in Australia and Europe over the last decade, before beginning rapid expansion in the U.S. during the pandemic. Block in January closed its $29 billion acquisition of Afterpay, signaling potential consolidation among BNPL fintechs.

Zip, founded in 2013, said in its press release that the U.S. is its fastest-growing market, and by combining forces with Sezzle the U.S. will account for 60% of total transaction volume, up from 48% at the end of last year.

Zip’s biggest competitor in the U.S. is Klarna, which recently said the U.S. is soon to be its largest market, even as it works through rising credit losses from recent expansion.

The Zip-Sezzle combination “will be a great cultural fit for both our organizations and we’re excited to be part of Zip’s next chapter,” Sezzle CEO Charlie Youakim said in the release. Youakim would continue to operate Sezzle in the near term under the deal, which is expected to close in the third quarter.