Zip Co plays down CBA threat as US growth surges

Zip Co co-founder Peter Gray has dismissed the threat to its profits from the Commonwealth Bank’s move into the buy now, pay later (BNPL) sector, saying banks have largely lost the trust of younger generations.

As Zip shares surged after it revealed a quarter of rapid customer growth, Mr Gray said banks had a trust problem with the younger generations that have flocked to the booming BNPL sector.

CBA last month became the first major Australian bank to enter the BNPL market, saying it would launch a product that aimed to significantly undercut the likes of Zip and Afterpay, by charging merchants much lower fees.

Peter Gray (left) and Larry Diamond, founders of Zip. The company said its Quad business in the US had delivered an “outstanding” result.Credit: James Brickwood

While acknowledging CBA’s huge power as an incumbent, Mr Gray said it was not clear how the bank could drive down profit margins, because CBA’s product would not send extra referrals to retailers, as Zip does. He said the bank — which also has a partnership with Swedish BNPL firm Klarna — had not proven successful at signing up younger customers to BNPL products.

“I think one of the challenges that the big four banks have... is how do they engender the trust of newer generations? I think largely speaking, younger generations have zero trust in the big four banks,” Mr Gray said in an interview with The Sydney Morning Herald and The Age.

“I’m not suggesting that they’re not a formidable competitor. They’re obviously the largest bank in Australia, they probably are the most successful with regards to their relationships with newer generations of customers. But they really haven’t proven that they’re successful in being able to acquire those customers, or ship this particular product to them.”

Mr Gray made the comments after a trading update showed Zip’s revenue jumped by 80 per cent in the March quarter in annual terms, amid a surge in transactions in its crucial United States business, Quadpay.

Total spending on its US platform soared by 234 per cent in annual terms, while US revenue rose 188 per cent to $54.4 million. Mr Gray said Zip was “very confident” it could continue growing strongly in the US, saying BNPL only accounted for about 2 per cent of online spending, and some analysts had predicted this figure could rise to between 10 per cent and 20 per cent.

Zip is the second largest Australian player in the booming BNPL sector behind Afterpay, and like its rival it is targeting rapid growth overseas. BNPL firms allow customers to purchase goods and services upfront and repay the funds in interest-free instalments, but the product is not regulated as credit.

Tribeca Investment Partners portfolio manager Jun Bei Liu said Zip’s trading update was ahead of market expectations and noted BNPL shares had underperformed since a sell-off in late February. Ms Liu said Zip’s foray into the US was crucial to the company’s valuation.

“That’s where the future growth is going to come from. For the company to justify a strong share price, you certainly have to have very strong growth in the US market,” Ms Liu said.

Morningstar analyst Shaun Ler said he thought Zip would continue growing quickly in the US, but as giants including Commonwealth Bank and PayPal move into BNPL, he thought Zip would be more susceptible to competition than Afterpay.

“There’s a bigger chance for incumbents to eat Zip’s lunch, compared to eating Afterpay’s lunch,” Mr Ler said.

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