ZIP CO Business Case PDF

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Executive Summary Zip Co limited is a booming financial technology company based in Australia that essentially offers interest free digital wallets for consumers. They do this through their 2 offerings; zip pay for retail purchases under $1000 and zip money for larger purchases in excess of $1000. They also have a third product called Pocketbook that is a free app based personal finance planner which allows ease of finance management for users by linking multiple bank accounts which at the time of its inception was the first app to do so. Through all three product offerings, Zip Co has become one of the leading players in the Australian ‘buy now, pay later’ landscape giving consumers flexibility and ease of mind in providing a line of credit in everyday purchases. Zip Co has also been very popular as of late for investors as they have grown share prices substantially in the past 2 years and are looking to enter international markets, especially in the US. This case study intends to analyse Zip Co’s success through the lenses of behavioural finance. Zip Co has become a very attractive company for consumers and investors as they continually see growth since their inceptions. Behavioural finances has played a major part in their growth. This is exemplified through their: •

Revenue Stream o Zip Co capitalises on the consumer behaviours of sub optimal spending and present biased preferences to entice customers from more traditional lines of credit to make everyday purchases

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Acquisitions o Zip Co’s aggressive merger and acquisitions over the years is a sign of a board of directors that are making overconfident managerial decisions that can be detrimental in the future however has been proven successful in the past with the acquisition of Pocketbook.

Background Information Zip Co was founded as Zip money in 2013 by Larry Diamond and Peter Gray as a company that offered interest free financing. Since then it has grown from its humbled beginnings, partnering with around 18000 retailers and 2,000,000 customers to provide interest free financing and financial assistance through its 3 products: Zip Pay Zip Pay is their most popular product aimed at individuals to make every day retail purchases on credit with no interest. It works by having customers make an account and based on their credit history and Zip Co’s in-house algorithm, they are given a credit limit of either $350, $500 or $1000. From there they can spend however they like at all stores up their credit limit at any of 18000 retailers across Australia that accepts Zip Pay. Repayments for Zip Pay is flexible. Statements are sent at the start of each month to show purchases that users made in the previous month and users have until the end of the month to repay the balance or else a $6 account fee is added to the balance for the following month. The minimum monthly repayment is $40. This means that users have up to 60 days to repay purchases. Users can schedule repayments over the course of this time or make their own repayments as they choose. The balance is interest free and users choosing to delay their payments due to unforeseen circumstances must pay the monthly $6 fee. A late fee of $5 is charged if the monthly minimum is not met within 21 days of the due date. Zip Money Zip Money is their more large-scale product offering credit limits over $1000 interest free for 3 months. After the 3 month interest free period, the balance will be charged interest at the standard annual rate according to the signed contract. The application is a bit more vigorous, asking customers for their residential, employment and financial information, as well as their mobile number and email address. Due to the riskier nature of these loans, there are more fees and involved. According to their help centre: •

There is a one-off establishment fee to pay when you activate the account (between $0-$299, depending on your credit limit).

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There is a monthly service fee of $6.00 when there is an outstanding balance on your account.

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A late fee of $15.00 may be charged if you do not make your minimum repayment within 21 days of your payment due date.

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A bank dishonour fee of $5 may be applied if a scheduled payment was rejected/ dishonoured by the bank due to insufficient funds or incorrect bank account details.

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When paying Bills with Zip, there is a small processing fee of 1.5% for each bill paid.

Repayments can be scheduled either monthly, fortnightly or weekly in a way that meets the monthly minimum which is still the same as Zip Pay’s amount of $40. If not met then fees are applied.

Pocketbook Pocketbook is personal finance budgeting app founded by Alvin Singh and Bosco Tan in 2012 that was acquired by Zip Co in 2016. The app collates all the bank accounts belonging to the user and organises their spending into different categories so the user can know where their money is being spent. This enables users to easily visualise their cash outflows, analyse their spending habits and create budgets on one platform without the need to collate information themselves from different bank accounts. The app also alerts users on different aspects of their spending, notifying them on fees being charged and monetary achievements or misuse. Through these 3 products Zip Co as a whole has become extremely successful in the Pay now buy later Australian landscape. The company was first listed on the Australian Securities Exchange in 2015 and to date has raised $65 million with their share price currently at $5.22. They’ve also secured a $40 million equity investment from Westpac and $260 million from NAB in 2017. Zip Co is now looking to expand overseas with the whole acquisition of UK based PartPay limited and New York based QuadPay.

Revenue Stream Zip Co’s main attraction to consumers is that they’re an interest free line of credit for their customers. Being able to have debt and pay back the amount borrowed with potentially no interest or fees is very attractive for consumers in comparison to the more traditional alternative of using a credit card or getting a personal loan which both has interest. This can encourage suboptimal spending from the consumer which is advantageous for Zip Co. One way that suboptimal spending is incited by Zip Co is their business model taking advantage of people’s tendency to borrow too much. Australian’s on average have $3000 of credit card debt per person and as a whole Australia has a credit card debt of $45 billion (Bainbridge 2019) exemplifying how Australia likes to finance their purchases with debt. Furthermore, a large portion of this debt is incurred interest which adds further costs for the consumer. Zip Co capitalises on this consumer behaviour by having products that allows for easy borrowing without having the need to pay for interest and fees when paid back within 60 days. This coupled with their credit checks of potential customers to make sure only prime and near-prime customers are receiving the higher credit allowances minimises the potential losses from unpaid debt. Individuals using Zip Pay or Zip Money can also fall into the trap of spending too much. Even worse than credit cards, having a virtual wallet means that there is very little transparency when making purchases, where consumers do not see money changing hands. This is more apparent during the current Covid-19 pandemic where online shopping has become 80% of sales for Zip Co in comparison to in store (Kruger 2019) and with these transactions customers don’t even see the exchange of payment for goods straightaway. With the lack of transparency of using Zip Pay and Zip Money and its similarity to credit cards, it can be inferred that users of these products are more likely to underestimate their purchases (Soman 1999) and spend more than they initially planned for leading to higher chances of slowed down repayments and more fees they can charge on their users.

Another way that Zip Co is benefiting off behavioural finance to make revenue is through present biased preferences. Present biased preferences refer to the idea that humans are wired to usually settle for an immediate smaller reward instead of waiting for a larger reward in the future (Chakraborty 2016). Present biased customers are more prone to have present bias towards making purchases using their virtual wallet and depending on how much they spend and how they pay back their balance they may have to pay fees to Zip Co just like how present biased individuals are more likely to have credit card debt (Meier & Sprenger 2010). This is due to the way both Zip Money and Zip Pay set up where the customer can make purchases to gain the instant reward of getting their purchase that may incur a future fee without thinking of the better reward of saving up for the item to buy in the future without incurring debt and risk of paying fees. What they differ from credit cards however is eliminating interest which favours present biased individuals as it makes the smaller instant reward of using Zip Pay or Zip Money less risky thus making the ‘rewarding’ gap between Zip Pay and saving up equity to make purchases a lot smaller and hence more enticing for consumers.

Acquisitions Since its inception and initial growth, Zip Co has been aggressively acquiring smaller companies domestically and internationally in the hopes of broadening their reach outside the scope of Australia. According to their 2019 annual report, even though they are one of the leading ‘buy now, pay later’ companies, Zip Co only captures 0.2% of the Australian retail market and wants to gain more market share by growing their acquired business loan subsidiary Spotcap whilst also taking advantage of the infancy of the ‘Buy now, pay later’ model globally by integrating their acquired NZ and UK company PartPay and just recently their newly acquired US company QuadPay. The acquisitions of Spotcap, PartPay and QuadPay all coincided with substantially increased cash flow from operating and financing activities and increased recievables. Zip Co is raising a lot more capital through equity and making more revenue. This plays into the idea that managers overinvest when cash flows are available (Malmendier & Tate 2005) which can place Zip Co in a disadvantageous position in the future if their board becomes overconfident. The Zip Co board of directors may have decided to acquire all these companies due to the optimism bias that in comparison to their competitors like Afterpay they feel less likely to fail. Also, this shows that their directors may be experiencing overplacement where they feel that their products and abilities to market these products on a global scale is better than an average company. This overconfidence can lead to adverse knock on effects in the future where the board may have overlooked important details of the acquired companies which can be detrimental in the future when these underlying issues or even external factors surface causing massive losses making Zip Co fail. This is common in mergers and acquisition as exemplified when Time Warner and AOL merged which lead to a $45 billion write down in 2003 and then a $100 billion annual loss caused by the dot-com bubble burst (Blanchard 2018). However, with all this high risk that comes with overconfidence, higher returns are more plausible according to the risk-return trade-off (Chen 2020). This is exemplified in another one of Zip Co’s acquisitions; Pocketbook, that since buying it out there has been an increase of the number of users to 700000 (Ogg 2019) which is very impressive showing that Zip Co are capable of making acquisitions that are beneficial to the company.

Conclusion Overall, this analysis shows that behavioural finance plays a major role in why Zip Co partakes in certain actions and how it helps in dictating the consequences of those actions. This case study has shown that Zip Co takes advantage of consumer’s suboptimal spending tendencies by having a product that preys on the human desire to both spend too much and borrow too much. Users with a present biased preference are more likely to use this Zip Co’s products to make their everyday purchases instead of normal lines of credits and saving up and not getting into debt. Furthermore, their acquisitions also coincided with increased cash flow which is a sign of an overconfident board of directors that can be detrimental to the company if these acquired companies go bad or be beneficial to the company.

Reference List Zip Co 2020, Company Information, Australia, viewed 6 June 2020, . Browne, K. 2019. Zip Pay Review – How Does It Compare to Afterpay?, video recording, Viewed 6 June 2020, . Zip Co 2020, How it works, Australia, viewed 6 June 2020, . Zip Co 2020, Pocketbook, Australia, viewed 6 June 2020, . Uribe, A. 2017, ‘ZipMoney shares spike on $40m Westpac investment’, Financial Review, 7 August, Viewed 6 June 2020, . Thompson, S. & Macdonald, A. 2019, ‘NAB books investors for Zip Co debt deal ’, Financial review, 29 July, Viewed on 6 June 2020, . Ogg, M. 2019, ‘Fintech Zip Co cuts loss in half’, Business News Australia, 22 August, 6 June 2020....