Zip Co falls by the close after deal with Visa

Zip ends lower after the payments provider announces deal with credit card giant Visa.

Zip co-founder Larry Diamond. Source: Supplied.

Zip shares swung into the red late on Tuesday after the payments provider announced it had struck a deal with credit card giant Visa that will allow Zip Pay to be used anywhere that accepts Visa.

Zip on Tuesday also announced partnerships with Apple and Google as part of its expansion of its in-store offering and the launch of its Tap & Zip payments product.

Zip shares initially jumped on the news, rising more than 5 per cent to $7.57, before falling back to close the session down 1.39 per cent at $7.07. Chief executive Larry Diamond said it was a huge day for Zip and the Australian retail sector.

“Tap & Zip is a new way for customers to pay that will dramatically increase in-store transactions and conversion rates for thousands of retailers and merchants around the country, many of whom have been significantly impacted over the past year,” Mr Diamond said.

As part of the agreement, Zip has been granted a principal issuer license with Visa and will earn interchange revenue on transaction volume processed on its cards.

Branding it a “significant though difficult to quantify” announcement, UBS analysts said Tap & Zip materially increased Zip’s total addressable market, with buy now, pay later options currently available at just 13 per cent of Australian stores.

“However, we see some risk of cannibalisation from higher margin transactions processed via the Zip platform, where we estimate Zip generates merchant fees of 2-3 per cent on average, to lower margin interchange.

“We also see a risk to future merchant growth given Zip‘s customers can now access such merchants without paying a higher fee, though going forward we still believe merchants will continue to integrate directly with Zip where there is a clear benefit to the merchant from marketing directly to Zip’s customers,” the analysts led by Tom Beadle said.

UBS also pointed to the new product as further evidence of competition in the buy now, pay later space.

“(We) highlight this product‘s cost to the system is materially lower than Afterpay’s (where merchant fees range from 3-7 per cent, depending on the size of the retailer).

“We also highlight that while it is illegal for Zip to prevent merchants from surcharging for its ‘Tap & Zip’ product, it is currently not illegal for Afterpay to do so for its offering, despite Afterpay’s materially higher costs at the system level,” the analysts said.

The Tap & Zip launch comes after a strategic product review of Zip’s instore payments experience, which until now has centred around barcodes and QR technology.

“We continuously hear from Zip customers that they want to use their digital wallet to pay for everyday purchases like groceries and petrol, or to buy products and services from merchants that don’t accept buy now, pay later,” Mr Diamond said.

Take-up of buy now, pay later in stores in recent years had been restricted by a clunky checkout experience and limited acceptance by merchants, he said.

Tap & Zip would allow Zip to compete with credit cards at every checkout in Australia, he added.