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ยท Posted on
February 21, 2024

Zip Co's learning that BNPL is a risky business, as its credit losses widen beyond its target range

Acquiring more customers means more credit risk, a fact Zip pay now knows well.

What's the key learning?

  • Credit risk is the chance of loss from a borrower failing to repay a loan.
  • This risk can increase when inflation increases, because people are spending more money to get by.

๐Ÿ‘‰ Background: Zip Co is an Aussie-born buy now pay later (BNPL) company that's been going global pretty quickly. It acquired QuadPay in the US and more recently announced plans to acquire Sezzle too.

๐Ÿ‘‰ What happened: Zip's third quarter results revealed some good stuff. Revenue is up 39% year on year and transactions grew 28% in the US and 7% in the ANZ region โ˜๏ธ. BUT there was also some bad stuff.

๐Ÿ‘‰ What else: Credit losses increased outside Zip's target range during the quarter. Borrowers aren't paying Zip back as much as they have in the past, prompting it to adjust its risk settings.

๐Ÿ”” What's the key learning?

๐Ÿ’ก Credit risk is the possibility of a loss resulting from a borrower's failure to repay a loan.

๐Ÿ’กCredit risk can increase as inflation increases, which is happening right now. The Aussie annual inflation rate rose to 3.5% in Q4 2021, from 3.0% in Q3. And this is putting some major pressure on household budgets.

๐Ÿ’ก ย If people are spending more money just to get by, it means they have less money to satisfy their financial obligations - AKA pay back BNPL companies like Zip ๐Ÿ’ธ.

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