Pressure is on to build scale in the buy now, pay later market

There has been suggestions in the market that BNPL providers Sezzle, Zip Co and Openpay have all been testing buyer appetite as a race for consolidation takes place ahead of Apple’s arrival in the sector next year. Picture: AAP

The buy now pay later sector is back in the spotlight when it comes to M&A activity, with Sezzle and Zip among those in focus.

There has been suggestions in the market that BNPL providers Sezzle, Zip Co and Openpay have all been testing buyer appetite as a race for consolidation takes place ahead of Apple’s arrival in the sector next year.

The $1bn Sezzle is listed in Australia but based in the US and has been described as a well-run business that lacks competition in the parts of the US in which it competes.

It has more than 7.8 million users and more than 40,000 participating merchants.

There is talk that the BNPL provider has been openly looking for a solution to protect its market share ahead of the arrival of Apple in the BNPL market next year.

The same is the case for Larry Diamond’s Zip Co. Apparently, Diamond, the founder and managing director of Zip, was in New York about six weeks ago and was said to be focused on how the company could gain scale in the US ahead of Apple’s arrival.

Zip has a market value of at least $3bn and a merger with a group like Sezzle could provide one solution.

This would be as an alternative to a US listing.

The objective for Sezzle and Zip Co is both to gain critical mass, as is the case for all BNPL providers in a quest to move into profitability.

At the start of the year, Zip Co had more than 7.3 million users and 51,300 retail partners.

Unlike Afterpay, which offers credit over six weeks, Zip offers consumer credit over more than six months.

Zip Co’s business model is
also 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.

Compounding the fears of the Apple arrival in the US market is the prominence of large payment groups like PayPal and the recent $US29bn merger of Afterpay and Square.

Many believe gaining critical mass still remains a tough ask for the groups which are too small to take on the major players, even with merger activity.

Investment bank Morgan Stanley is believed to be close to Sezzle while Bank of America and Jarden are known to be close to Zip. Co.

Global BNPL heavyweight Klarna is also pushing hard to get its share of the market in the US following the Afterpay and Square merger. Klarna is the fourth largest BNPL provider in the US.

The three largest BNPL providers globally are Klarna, which counts the Commonwealth Bank as an investor, Australia’s Afterpay and the San Francisco-based company Affirm.