Focus on Zip Co after Square snaps up Afterpay

Attention has quickly turned to Zip Co after the announcement of a $39bn scrip buyout of Afterpay by US fintech company Square on Monday.

Afterpay, like its Australian rivals in the buy now, pay later space, is yet to reach profitability in the local market, and the Square transaction gives it the scale it needs to get into the black.

Square has been very successful at providing online payment solutions to small businesses, and by packaging up Afterpay services it has the scale to grow the BNPL offering.

Some observers say the far smaller Zip, with a $3.73bn market value, is not large enough to become profitable on its own.

It will soon face increased competition from Paypal, Apple, Affirm and Klarna in the local market.

Klarna is the fourth largest BNPL provider in the US.

It is understood that it has amassed a stake in Zip, which was founded by Larry Diamond.

The Afterpay move could provide the motivation it needs to embark on a tie-up with the Australian group.

Non-bank lender Humm, which operates in the BNPL space, is also expected to be affected by the Afterpay deal.

One competitor set to weather the storm is Sezzle, a well-run business that lacks competition in the parts of the US in which it competes.

The Afterpay transaction has been in the works for about four months, with the pair well known to each other after working together in the past.

Zip’s business model is slightly different to Afterpay’s in that the latter’s customers do not pay interest or fees on their credit unless they do not pay on time.

Zip’s share price soared on the Afterpay announcement, closing up 60c to $7.24.

The company counts Bank of America and Jarden as its defence advisers.