London-based fintech firm Zilch, fresh from an $11 million capital raise, may be about to transform the burgeoning BNPL industry.
BNPL stands for “Buy Now, Pay Later.” The term refers to a group of financial innovators that are beginning to disrupt the merchant payment industry. They do this by providing consumers with a way to bypass credit cards and spread payments on small online purchases over several weeks or months. Other terms for the industry include “POS lending” or “alt-credit.”
The BNPL industry has been booming throughout 2020, as millions of younger, tech-savvy consumers have had their incomes disrupted by COVID-related shutdowns but still need to make purchases. The consumer benefits from zero-interest or very-low interest financing. The merchant benefits by closing the sale immediately and realizing revenue streams they would never have seen without the ability to provide financing at the point of purchase through BNPL technology. Some merchants report that offering a BNPL option increases ticket size by as much as a third.
The brainchild of South African entrepreneur Philip Belamant, Zilch was the first BNPL company to reach a large-scale marketing deal with a major bank card network: Zilch plans to make it possible for consumers to finance purchases anywhere where MasterCard is accepted.
In the U.S., Visa and MasterCard are both accepted at nearly any merchant that takes credit cards. Globally, MasterCard is the 2nd most popular card network, amounting to 31.3% market share. It’s accepted in 210 countries around the world and at over 8 million merchants in the U.S.
This radically expands the potential BNPL merchant base. Which, of course, attracts new consumers. The company released its “beta” product in August of 2019, and has been mostly operating in “stealth” mode since that time. But with economic slowdowns pushing consumer demand for cash flow management and flexibility, Zilch can now boast more than 7,500 merchants, and is signing on more than 24,000 new users each month. The growth rate is accelerating – but with 8 million merchants in the U.S., there’s plenty of room for growth, says Belamant.
“Our unique over-the-top approach to BNPL comes from our strong knowledge and experience developing economies such as South Africa and South America, amongst others,” says Belamant. “Zilch combines the best features of credit card and interest-free instalment financing to create the best way for our customers to pay over time. And we can do it anywhere MasterCard is accepted.” The company plans to use its $11 million capital infusion to accelerate the rollout and expand their merchant and consumer base.
While Zilch’s merchant base is now entirely online, the company will soon be rolling out a “tap and pay” capability, allowing customers to use Zilch to finance in-store purchases as well, says Belamant. “It’s a win-win all around,” says Belamant. “Cash-strapped consumers are getting a huge boost through a very challenging year, economically. And our merchants can sell bigger ticket items to more people – and boost customer loyalty at the same time.”
For the consumer, Zilch’s primary advantage is easy zero-interest financing. In fact, Zilch does not charge the consumer any interest or fees of any kind. It simply spreads the transaction out in four equal payments over six weeks. Customers pay 25% at the time of sale, and then three more equal payments every two weeks.
If the customer’s bank doesn’t have the funds when the scheduled payment hits, Zilch does not tag on an overdraft or late fee. They just try the draft again a little later. The customer does not have to worry about getting caught in a vicious cycle of high interest, over-limit fees, and late fees, says Belamant.
This is a major plus over credit card financing, which currently carries an average interest rate of 16 percent at press time, for newly-issued credit cards. Further, credit cards often charge significant late payment and over-limit fees as high as $40 per instance.
Credit cards offer customers more time to pay off their balances: Credit card borrowers can carry balances indefinitely, as long as they make their minimum payments. However, credit cards typically allow for higher credit limits – which can feel pleasant in the short-term, but frequently results in borrowers overextending themselves – and getting into long-term credit card debt. Zilch addresses that issue by using artificial intelligence to calculate what consumers can actually afford. Using consumer-consented Open Banking data, lenders can now access a consumer’s up-to-date financial information, without having to perform invasive hard credit checks. This ensures thorough affordability checks, while avoiding unnecessary delays for customers.
The combination of zero interest and a limited borrowing limit can help keep customers out of credit card trouble. In practice, Zilch customers thus far seldom overborrow or default.
Additionally, Zilch brings another critical advantage for merchants: Currently, most BNPL vendors require their merchants to take extra steps to integrate their point-of-sale technology with various third-party providers. This can be daunting to small merchants without a dedicated IT staff, and risks complicating the sale. Zilch’s patent-pending model, on the other hand, doesn’t require integrations. Instead, Zilch merchants can offer instant financing through their existing POS systems.
BNPL transactions are up 200% and more this year, with thousands of new merchants and tens of thousands of new buyers signing up every month. A recent report from PYMNTS.com found that among customers between ages 22 and 44, 87% of them expressed interest in spreading out purchases over time without having to use high-interest credit cards.
Furthermore, younger consumers are souring on credit cards. A 2016 report from Bankrate.com found that almost a third of all consumers between ages 18 and 29 don’t even have a credit card at all. For these customers, Zilch may mean the difference between making a needed purchase or going without.