Sydney-based fintech startup zipMoney, described as ‘online lending meets the checkout’, listed on the Australian Securities Exchange (ASX) yesterday after raising $5 million in an oversubscribed reverse takeover of mineral exploration company Rubianna Resources.
Founded in 2013 by Larry Diamond and Peter Gray, zipMoney is a ‘buy now, pay later’ finance product that operates like a payment gateway: online retailers simply integrate zipMoney into their checkout and customers have the option to pay for their purchase using their zipMoney account, instead of their credit card or PayPal account.
Behind the scenes, however, customers are provided with a revolving unsecured line of credit of between $500 and $10,000 to finance their online purchase, be it a bicycle or breast implants. The average approved credit limit is currently between $1,000 and $2,000, however approved limits depend on the vendor. For example, customers purchasing a bike will get a limit of $1,000, whereas the limit for cosmetic surgery will probably be higher.
Each transaction comes with a minimum three months and up to 12 months interest-free deal. Interest rates start from 19.90% after the interest-free period – this is lower than most rates offered by traditional retail finance competitors, which typically range from 22% to 30%.
In stores like Harvey Norman, JB HiFi, Myer and David Jones, customers are required to sit through a long, tedious process with an in-store salesperson, filling out forms, waiting for approval before receiving a credit card in the mail. With zipMoney, the approval process can take as little as three minutes – like many new online-only lenders, it assesses risk by using software to access data directly from applicants’ bank accounts and other sources such as social media. Once approved, customers are issued a virtual line of credit, meaning there are no plastic credit cards involved.
Added to that, customers are provided with easy-to-use online tools to configure their repayments to suit their needs – they can choose and change their repayment amount (as long as it’s above the minimum) and pay weekly, fortnightly or monthly. zipMoney assigns a minimum repayment amount to ensure customers can pay off their loans within five years maximum. It’s also very difficult to miss a repayment because customers are mandatorily signed up to direct debit authority at the checkout. In the spirit of openness, zipMoney also discloses to the customer what their interest-free balance is and how long it will take to pay off.
zipMoney’s system is entirely paperless – in most cases, zipMoney’s offering is easily integrated into the merchant’s order management backend and managed through its dashboard – and cloud-based, meaning that it operates on a ‘low cost to serve’ model with the ability to efficiently process high volumes of lower dollar value transactions.
While retail finance isn’t new – Harvey Norman and JB HiFi, for example, offer interest-free deals on in-store purchases and the Australian retail finance market is already worth approximately $10 billion – digital retail finance is still in its infancy. This is zipMoney’s primary focus.
The startup is keen to distinguish itself from peer-to-peer, marketplace and payday lenders, some of which have a predatory approach to customer acquisition and lack transparency. zipMoney, on the other hand, acquires customers through its merchant relationships. Unlike other types of lenders, zipMoney doesn’t provide personal loans, debt consolidations or cash to its customers – rather, it settles loans directly with partnered merchants to fund a consumer purchase.
Since its launch, zipMoney has partnered with almost 150 online merchants and facilitated over $9 million in transactions across 5,000 customers, with $4 million originating in the July-to-September quarter alone. On average, merchants have seen 50% increase in order value (or basket size) and 20% increase in gross sales.
In the spirit of transparency, zipMoney admits that it still makes money if customers repay their loans within the interest-free period. This is because merchants are charged a higher merchant services fee (per transaction) than others in the market like PayPal. However, in return, zipMoney bears all the risk. It offers merchants a seller protection policy so they don’t have to worry about chargebacks or mitigating fraudulent transactions.
“Merchants are happy to pay extra because we’re delivering the incremental contribution margin,” said Diamond, zipMoney’s co-founder and CEO.
zipMoney has funded its customer loans through pooled, senior-secured loan notes from unrelated third party lenders with up to 12-month repayment terms. Its funding facility of approximately $5 million has recently been extended to a $20 million facility. Diamond also told Startup Daily that zipMoney is currently working with a strategic funder on a $100 million traditional securitisation programme.
It’s clear the second half of 2015 has seen zipMoney enter a rapid growth phase; its customer loans have increased drastically in Q3, along with its monthly revenues. Though it’s unclear how much revenue has been generated between July and September, if the company delivered a quarter (about $100,000) of its total 2014/15 financial year revenue ($410,000) in June alone, and facilitated half of its total $9 million in transactions this quarter, then it would probably be a little too safe to expect tripled revenue in the 2015/16 financial year, especially now that the startup has extra cash in its pockets to invest in new talent and growth.
Diamond, an ex-Macquarie and Deutsche Bank investment banker, admitted that zipMoney has been growing “quite aggressively” as of late.
“We settle cash daily. It’s been really important for us to solve the debt funding side of the equation; and the other part is making sure our risk models and decisioning engines are working properly. We spent the first year proprietarily building our big data engine, which uses conventional and non-conventional data, and testing it to make sure it works, while also solving the debt funding side. We’re at that point now where we can scale quite well and that’s what we’re focused on,” said Diamond.
According to Earl Evans, Head of Private Wealth Management at Shaw and Partners, the firm that led the reverse takeover, the $5 million raising was completed within 24 hours of the offer opening and was heavily oversubscribed. The startup has raised capital previously from Geoff Levy, former Chairman and Founder of Investec in Australia, and David Shein, founder of Comtech Communications, which was acquired by Dimension Data for $1 billion.
Diamond has been quite vocal about the benefits of reverse listing, a strategy that has come under heavy scrutiny earlier this year, with Atlassian’s Mike Cannon-Brookes and calling the method ‘shady’ and many VCs agreeing with the sentiment. Many reverse takeover opponents regard the method as “cheating” or “a shortcut to the ASX”.
This is because during reverse takeovers, a private company buys enough shares to control a publicly traded company or vice versa. Typically, the private company’s shareholders then use their shares in the private company to exchange for shares in the public company. At this point, all the value is in the acquired company, and the private company effectively becomes a publicly traded one. Many of the companies that engage in this method either haven’t met the ASX’s listing criteria, want to fast-track their listing, or reduce the cost of their listing.
While Diamond is cognisant of the potential problems associated with reverse listing, he found the overall experience to be positive and beneficial for his company. For zipMoney, reverse listing cost 60% of the price of frontdoor listing, and the process took just six months.
“A lot of people do say [reverse listing is] shady, and I think there are some deals in the market that probably have question marks around it. But that is certainly a very large generalisation. We’ve see a lot of successful reverse listings in the last couple of years,” said Diamond.
He also said it’s difficult for startups to raise Series A rounds locally, so listing on the ASX, whether through the front door or back door, is a good alternative to venture capital.
“We were raising the equivalent of a Series A round. When you look at the Australian VC market around Series A, it’s very quiet. There was about $100 million in total VC deals in the last 12 months. We spoke to a lot of VCs and most of them are steering away from Series A … The reality is if you’ve got a great tech story and you’re looking for local VC support in [the form of a] Series A round, there’s quite a big gap in the market,” said Diamond.
“I think there’s great support right now for incubation and seed capital, which is fantastic because this means [startups] will eventually graduate to Series A and capital will follow. But currently it’s very quiet.”
Diamond also made sure to point out that, relative to other public markets like the NASDAQ, listing on the ASX is significantly cheaper.
Certainly, over the past 18 months, we’ve seen an increase in ASX listings of technology companies, proving that public markets, is helping fill the funding gap that has many times forced Australian tech startup founders to relocate to places like Silicon Valley and Singapore that have larger funding pools.
In addition to increasing the capital on a company’s balance sheet, there are other benefits of going public that are increasingly being recognised by Australian tech founders. For one, public companies have higher valuations – usually double that of a privately-held company.
Another benefit is the ability to divest equity at any time in small or large portions; founders of private companies cannot easily sell 10 percent or 20 percent of their shareholding, whereas when trading on the ASX, they can sell 1 percent, 5 percent or 20 percent. Public companies also have greater credibility; large prospective clients like government departments and corporates are more trusting of, and are more willing to adopt, products supplied by public companies.
“The ability to go public is always exciting. It raises the profile of your company; it increases your ability to attract talent. There are many benefits, so if there’s a quicker and cheaper way to do it, then that’s great for startups,” said Diamond.
zipMoney has recently hired former PayPal Australia’s Head of Retail, Jonathan Kelly as its Director of Merchant Services. This comes after the May poaching of FlexiGroup’s National Accounts Manager, Craig Dufficy to be zipMoney’s new National Sales Manager who will be leading the company’s enterprise merchant acquisition strategy. With its latest cash injection, zipMoney will be looking to make additional hires to grow its existing team of just under 20.
“A large chunk of the $5 million will be used to acquire really good talent because we’re a very people-heavy business. All of our tech is in-house, so we have to invest a lot in great people,” said Diamond.
Featured image: Larry Diamond, co-founder, zipMoney. Source: Provided.
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