• Buy-now-pay-later app Sezzle is set to launch on ASX in coming months.
• Competition in the sector is heating up, with some analysts saying first-in is key to market dominance.
• Sezzle’s CEO says USA regulation likely to be favorable.

The latest entrant to the buy-now-pay-later space in Australia is Sezzle. But it wants to be clear: it doesn’t plan to compete with Afterpay, the Australian darling of the space, and instead has its eyes firmly set on North America.

Charlie Youakim, co-founder of Sezzle, told Business Insider Australia the company plans to list on the Australian Stock Exchange (ASX) in the next few months. He believes it makes sense as Australian investors are already familiar with the business model and buy-now-pay-late space, whereas “the US investor doesn’t see it as active yet”.

Youakim believes there is a huge opportunity for apps that allow consumers to purchase a product or service and pay the cost over multiple instalments, in a modern twist of lay-by. The space in underdeveloped throughout the world, despite the large uptake in Australia.

“I think the opportunity is massive, I don’t think [the market] is crowded,” Youakim said. “If you’re looking at the Australian market on your sales base you could call it crowded, but the USA is greenfield, internationally it’s greenfield.”

The AFR reports the Minneapolis-based financial startup has already raised US$5.6 million (AUD$7.9 million) in pre-IPO fundraising, with a listing on the ASX planned for the next few months.

What are buy-now-pay-later apps and how do they work?

Sezzle is an app that links with a credit or debit card and allows users to buy something and pay for it over four instalments. Users fire up the app at checkout with participating retailers and pay 25 per cent of the purchase price. Fees of $10 are charged if a scheduled payment fails, and $5 fees are charged is users want to reschedule automated payments. Sezzle pays the merchant the full amount up front, minus fees.

Afterpay has a similar set up, but only requires a 25% upfront payment if you have signed up to the service in the last six weeks or if you are shopping in store. Otherwise, it requires a payment two weeks after purchase with the remainder paid back every 2 weeks.

Plenty of other payments apps work like this. Zip Pay works by linking a bank account to the app and users using the app to check out when buying through participating retailers. A customer can buy products or services interest fee and delay payment until the next month and beyond.

All apps will sting you with a varying range of late fees if you don’t abide by the terms.

Like Afterpay, whose late fees are now below 20 per cent of its income, Sezzle’s late fee revenue in March came in at 18 per cent, according to the AFR.

But for a majority of these platforms, the real money is in the merchant fees. Merchants who use ZipPay pay 15 cents plus a 2 to 4 per cent commission for every transaction, while on Afterpay the cost is 30 cents plus a commission ranging from 4 to 6 per cent. Sezzle charges 30 cents plus a 6 per cent commission.

A different approach for a different market

Unlike Afterpay, Sezzle’s greatest sector rival, Youakim said the company planned to focus on looking after US consumers. “Afterpay takes a stance against credit, while we don’t view credit negatively,” he said.

Just this week Afterpay’s Australian co-founder Nicholas Molnar told the Altfin conference in Sydney that its target market in the US had a “more pronounced” aversion to debt than millennials in Australia.

In a release to the ASX earlier this year Afterpay said it saw customers moving away “from traditional credit products” and that it was “responding to a generational shift in spending behaviour, with two out of three 18 to 30 year olds in the US not using a credit card”.

Sezzle intends to take a different approach and help millennials get used to managing money, including debt. Youakim said the company hoped to “layer in financial education” in the app as part of being consumer friendly and helping users understand how to build a credit history, which is a requirement in the US for applying for things such as a rental apartment or a credit card.

“The US consumer says credit is important to your daily life, you have to monitor your credit score, our product is a light-handed entry point for credit,” he said. The company currently does a “soft check” of a potential customer’s credit history in the US as part of an approval process, which checks for black marks but does not alter your credit score. Sezzle says they’re looking at reporting to credit bureaus in the future.

Plenty of competition in growing sector

In Australia, the buy-now-pay-later scene is heating up. Afterpay, Zip Pay, Zip Money and Splitit are all already listed on the ASX, while there’s also OpenPay, Oxipay, Brighte and more.

Tommy Wu, senior industry analyst at IBISWorld told Business Insider Australia the entire buy-now-pay-later sector was “still in its growth stage”.

“This is before it matures and we see a few major companies emerging and consolidating their market share,” he said.

Wu said Sezzle’s listing on the ASX made sense as “investors already understand the operating model” but that it was unlikely apps like Sezzle are a threat to Afterpay locally. “It’s unlikely any [apps] will really pose a threat to Afterpay, at least in Australia, given how well established they are in the market,” he said.

This may not be the case in other markets. For example, last year Afterpay, in its bid to move into the UK market, acquired UK payments business ClearPay. It was a strong signal that Afterpay is willing to throw its weight and considerable capital around in other markets.

Youakim said the buy-now-pay-later market in Australia has space for multiple platforms, in a similar situation to bank cards, where consumers use multiple providers rather than just the one. In other countries, such as the US, it may instead be an issue of “who gets there first” and establishes market dominance with the consumer.

“I think it’s the first mover advantage,” he said. “We view it as a Visa-MasterCard situation, which is why we’re so focused on the consumer. If you end up in the Visa-MasterCard situation you want the consumer to pick you.”

The question then is whether Sezzle can establish dominance in the US before anyone else – something which may prove difficult given how fast its competitors, such as Afterpay, are moving.

The AFR reports Sezzle has 226,000 active users in the US and almost 3,000 merchants, that are mainly online small- to medium-sized enterprises. While Afterpay has said that it was on track to have more than 1 million active customers and 2,000 active merchants in the US by the end of March 2019.

Youakim said the strength of the platform also came down to the relationships with retailers. The retailers advertise Sezzle’s availability and can advocate for it. “Our focus is reaching retailers as our partners. Once we have retailers as our partners they’re the ones that reach our market,” he said.

The question of regulation

Youakim said he hoped in five years that Sezzle would represent a “major payment method” in retail in the United States, but noted a likely difference in the US market is a more positive regulatory viewpoint by US regulators versus the Australian experience to date.

Wu noted the market is exciting right now due to a lack of regulation. “The barriers to entry are quite low especially with the National Consumer Credit Act they can still get away with sidestepping here,” he said.

In February, Afterpay and Zip Pay escaped a crackdown from an Australian Senate probe, but regulation may be on its way. If the Labor party is elected, it may choose to accept the 20 recommendations from the committee.

The AFR reported the Standing Committee on Economics did not recommend expanding national consumer credit protections to encompass buy-now-pay-later providers such as Afterpay and Zip Pay, meaning they do not require strict credit and identity checks for customers.

In concerning news for the fintech companies, the committee said further discussion was needed between government and corporate regulators, ASIC.

“Buy now pay later providers have no obligation to undertake credit checks or appropriate measures to ensure their product is appropriate for the consumer’s personal circumstances,” the committee said. “The committee considers that this regulatory gap should be filled.”

If regulators decide that buy-now-pay-later platforms should conduct lending responsibility checks on consumers, as per Australia’s National Credit Act, then it would make the easy breezy signup that many of the platforms offer not so easy breezy.

“We want regulators to feel good about our product, that’s one of the areas where we are differentiated from Afterpay,” Youakim said, referring to Sezzle. He said he hoped Sezzle could bypass Afterpay’s regulatory issues by doing credit history checks on its users.

In the meantime, as this space is heating up across the world, it will be interesting to watch who ultimately wins over consumers, merchants and the regulators.

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