A priority for buy now pay later companies Zip Co and Sezzle Inc, if and when they bed down their merger, is to get their risk settings under control and bring down the level of bad debts, which are currently out of control.
Zip reported bad debts and expected credit losses of A$148.3 million for the six months to December – an increase from $29.5 million in the previous corresponding period.
Sezzle included a provision of $52.6 million for uncollectable accounts in its full-year 2021 financial report, compared with $19.6 million in 2020, and charge-offs of $40.6 million ($11.9 million in 2020).
These bad debt charges were the biggest contributors to the losses suffered by both companies - $172.8 million for Zip and $75.1 million for Sezzle.
Some of the increase represents expected credit loss but Zip’s net bad debts written off rose from 1 per cent of underlying volumes in the December half 2020 to 2.8 per cent in the latest half.
Both companies would argue that their losses are a result of ambitious investment programs to build scale in a growing global market. But the bad debt numbers suggest they have poor risk controls and they are throwing away shareholders’ funds chasing bad business.
Zip made some acknowledgment of this in its financial report, saying it “revised its risk settings in core markets during the course of 2021 with the objective of maximising growth while balancing revenue and bet bad debt write-offs”.
Zip and Sezzle announced yesterday that had entered into a merger agreement under which Zip will acquire Sezzle in an all-scrip transaction worth around $491 million.
Zip said the deal would enhance its scale and product offerings and give it the capacity to grow more quickly in the United States, where Sezzle does most of its business.
The combined group will have total transaction volume of $10.4 billion – Zip contributing $7.9 billion and Sezzle $2.5 billion.
Combined customer numbers are 13.3 million (Zip 9.9 million and Sezzle 3.4 million) and combined merchant numbers are 128,800 (Zip 81,800 and Sezzle 47,000).
On the operating side, the latest results show Zip increasing revenue by 88.5 per cent year-on-year to $301.3 million and Sezzle more than doubling income to $114.8 million.
Zip’s customer numbers grew 74 per cent and Sezzle’s grew 52.4 per cent.