Sezzle and banking partners go bigger with buy now/pay later

For fintechs in the expanding buy now/pay later lending sector, forming partnerships with merchants, payment card networks and lenders is critical for achieving scale, as evidenced by a recent frenzy of dealmaking.

In recent weeks Klarna announced a pact to extend BNPL services through Stripe, and Amazon has expanded a high-profile BNPL deal with Affirm. But many legacy banks and card networks are joining the fray by forming partnerships with BNPL providers.

The buy now/pay later fintech Sezzle, for example, in the last year signed agreements with Discover Financial Services, Ally Financial and private-label credit card issuer Alliance Data Systems to expand beyond its core product of short-term, interest-free installment loans for low-ticket purchases.

“Credit cards are broken for a lot of people — they don’t like the product — and with our app we’ve created a more consumer-friendly way to finance all types of purchases that we plan to significantly expand through more traditional banking partners,” said Paul Paradis, Sezzle’s president.

So far, Sezzle has been targeting mostly younger consumers who are wary of traditional credit cards or lack credit history.

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The Minneapolis company, which today focuses on purchases of less than $500, expects to see significant growth next year by expanding its consumer financing options through its latest pacts, and more partners may be announced, Paradis said.

“You can almost think of the new crop of installment lenders as carrying picks and shovels into the gold rush of BNPL, opening up opportunities for new players to become lenders primarily through partnerships," said Adam Hallquist, a principal with FTV Capital, which has $4 billion invested in fintech companies and other lenders.

Sezzle’s most recent deal was a strategic partnership with Alliance Data last month. The arrangement builds on the Columbus, Ohio, company's $450 million purchase of rival BNPL provider Bread last year.

Bread will offer its installment loan products through Sezzle’s merchant network and Sezzle will tap Bread’s loan-underwriting capabilities for bigger-ticket purchases, the companies said.

“We’ll give Sezzle additional installment loan capabilities through Bread so they don’t have to go build it, and Sezzle gives us easy access to 40,000 merchants via an API,” Ralph Andretta, Alliance Data's CEO, said in an interview.

Sezzle’s deal with Ally, signed last May, enables Sezzle to extend fixed-rate installment loans on higher-ticket purchases with terms stretching up to 60 months through Ally Lending, which specializes in consumer loans for medical bills and home improvement projects.

Paradis said that for merchants offering Sezzle directly to consumers, the fintech will route loans to its own underwriting engine, or to Ally Lending and Alliance Data, depending on the merchant and purchase amount.

“A consumer will be presented with options to make four interest-free payments on smaller-ticket items, but for more expensive purchases they’ll see installment options financed by either Ally or [Alliance Data], sometimes interest-free and sometimes with interest, depending on the merchant,” Paradis said.

But Sezzle expects its multifaceted deal with Discover to be its primary engine for growth in the near term, Paradis said.

Though Paradis declined to provide details of how Sezzle and Discover will share revenue, the two companies are becoming deeply intertwined. Discover has separately invested $30 million in Sezzle.

Sezzle, which earns about 80% of its revenue from fees it charges participating merchants for each BNPL loan it originates, has worked out a mutually beneficial arrangement enabling Sezzle and Discover to originate BNPL loans, depending on the merchant, Paradis said.

“Discover has created a unique merchant fee for its merchants, who can turn on Sezzle by extending loan offers through a virtual cobranded Discover card at the click of a button,” Paradis said, explaining that Discover reaps part of the fee while Sezzle gains exposure to millions of merchants that accept Discover. Sezzle underwrites all of its own loans and manages the receivables, using capital provided by Goldman Sachs, he said.

Sezzle, which has a market cap of about $850 million, is a small fish compared with BNPL giants like Affirm, which is valued at about $40 billion, and Afterpay, which Square purchased this year for $29 billion. But Sezzle’s advantage is the breadth of its reach to 40,000 small-to- midsize merchants, which is poised to significantly expand through its new partners.

“We started with small specialty apparel and beauty product merchants you never heard of, then moved onto e-commerce platforms like Shopify and Magento, and as our brand gained recognition, merchants started coming to us,” Paradis said.

Sezzle's biggest merchant partners are Bass Pro Shops, Cabela’s and Target, Paradis said.

“It’s still early in the BNPL evolution, and many merchants are going to offer multiple BNPL options," he said. "But ultimately the edge will go to providers that have multiple financing options and flexibility, I think the only way to get that broad reach is through partners.”