Zip (ASX Z1P) is a digital point-of-sale & fast-growing payment solution, that operates in the buy-now-pay-later sector similar to Afterpay. Zip has two main products, ZipPay which is designed for individual use, and ZipMoney which is designed like a traditional credit card.
Ultimately Zip is focused on delivering an easy & simplified process of delivering a transparent, responsible, and fairly priced consumer credit-products.
Like AfterPay, Zip shares is leveraged to the fast-growing digitisation of the traditional lay-by offered by stores in days past, offering potentially phenomenal growth to early investors.
How ZipPay Works
ZipPay is the first main product that Zip is known for, it is designed for younger individuals and is nearly identical to Afterpay, offering a line-of-credit on a buy now pay later schedule for small purchases from $250 – $1,000.
This product is pitched to younger, more tech-savvy generations as a new version of credit cards, without the stigma that has been built-up against credit cards that millennials have.
ZipPay has a number of repayment options such as weekly, fortnightly or monthly which provides consumers with flexibility and choice. ZipPay also offers interest-free with no annual fees, and no establishment fees making it cheaper and simpler for consumers. ZipPay also has some great features for merchants as they don’t have to pay a set-up fee, no monthly charge, and no commitments. ZipPay instead charges a per transaction fee as well as a percentage fee based on volume.
Comparison between ZIP & APT (AfterPay)
|AfterPay (ASX APT)||Zip (ASX Z1P)|
|Cost||30c per transaction + commission||15c per transaction + Commission|
|Commission||Ranges from 4 to 6%||Ranges from 2 to 4%|
|Merchant Payment||Receive payment up to 48hours after the transaction||Receives payment every day at 4 pm.|
|Ongoing Fee||No Monthly Fee, and late fees ranging from $10 or 25% of the original order value or $68, whichever is less.||$6 if balance not cleared, and a late cap at $10.|
How ZipMoney Works
ZipMoney is the second main product of Zip and is designed around a traditional form of a line-of-credit. The platform is similar to ZipPay but has a larger credit limit and is mainly used for bulk orders from other retailers for items like furniture. It acts more like a traditional credit card, with an interest rate from 19.9% p.a., and a min $1,000 to a maximum of $30,000 unsecured.
When a company signs up, a credit limit tier will need to be established:
|Credit Limit||Minimum Repayment||Establishment Fee|
|$5000 to $30,000||$500 or 3% (Whichever is greater)|
ZipMoney also offers an interest free period of a minimum of three months for new customers.
Additionally, a debit card or bank account needs to be provided to ZipMoney which reduces the number of defaults compared to competitors like Afterpay which don’t have this requirement.
ZipMoney also allows a customer to keep their account open at no extra cost if the customer pays out the balance. However, a monthly fee of $6 is charged every month if there is an outstanding balance.
How is Zip (ASX Z1P) Performing?
From FY18 Results Investor Presentation, Zip added 6,000 new retailers including a number of bigger players such as Officeworks, Tigerair, Kogan, and soon Virgin. This means a greater exposure to new customers and more variety of products on offer. Zip also added 440,000 new customers.
Zip shares also managed to reduce operating costs from 14% to 9.6% and at the same time increased transactions revenue by 138% to $40.4M. This was all followed by great numbers with transaction volume up from $230.6M to $542.9M, customers up 145% to 738.1K, receivables up 108% to $316M, and retail partners up from 4.4K to 10.6K.
The only downside for Zip shares is bad debt, which is now running at 2.61% up from 1.33%, however, this was expected with the healthy growth of customers.
Overall this is a healthy performance from Zip shares as they have shown great growth and penetration into the market.
How Do Zip shares differ from AfterPay?
Unlike other industries such as social media where Myspace fell by the wayside when everyone started using Facebook, we believe there is plenty of scope in the market for both APT and ZipPay with merchants offering both products. It does not hurt for merchants to have a competitive market in a new payments sector.
Zip does appear to be at an earlier stage of development when compared to AfterPay. AfterPay clearly has more people using their product and recently became cash flow positive and is EBITDA positive. However, Zip is playing catch up and is offering merchants better terms to close the gap with APT.
Our view is that sustained profits from Zip are some way off as the company invests heavily to maintain its place in the fast-growing market. However, this does not discourage us from recommending the stock as a buy because of the growth potential.
Zip Shares as an AfterPay Alternative Investment
Fear of missing out buying has pushed the AfterPay share price to obscene levels, especially with their foray into the US markets. However, risks exist as an expansion into the US will mean more regulatory hurdles and with a new market, comes new problems to solve.
Zip shares are a fantastic alternative if you are looking for another APT without paying the price APT is going for. It shows great promise and as a second mover, will have the advantage of seeing what does and doesn’t work for APT in terms of the Australian market and potential expansion into the US market.
If ZIP were to emulate APT’s success in Australia and to the US market in the future, the upside for Zip could potentially be just as strong, if not stronger, than AfterPay.
Henry Fung is a Partner Managing Director and co-founder of MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.