A $35 million initial public offering (IPO) to Australian investors will be used by United States e-commerce company Zebit to service the credit-challenged demographic in its home country.
The California-based Buy Now Pay Later (BNPL) enterprise wants to tap into a pool of 120 million people, who either have no traditional credit score or are below the mainstream threshold to access cost-effective credit options.
It is asking investors to take up 22.2 million CHESS depositary interests (CDIs, equivalent to Zebit shares) at $1.58 per CDI and be part of a US “first” in solving a major social and structural problem.
It hopes to list on the Australian Securities Exchange this month with an indicative market capitalisation of $149 million on an undiluted basis, using the ticker ‘ZBT’.
Zebit founder and chief executive officer Marc Schneider – who grew up in the shoes of the market he is now catering to – chose an Australian listing after seeing companies like Sezzle (ASX: SZL), Afterpay (ASX: APT) and Splitit Payments (ASX: SPT) conduct their own IPOs amid growing excitement on the global BNPL trend.
He said the company will bring a “fundamental and much-needed change” for millions of US consumers who are in a perpetual struggle to get a foothold toward financial stability.
“I experienced [US economic inequality] as a child and was fortunate to make it through the obstacles that block people who come from financially unstable circumstances, [but] most
people are not as lucky,” he said.
The aim is to ensure “financially underserved” US consumers – which represent an $85 billion market – have access to a suite of consumer goods and the ability to pay for them in interest-free instalments over six months.
“These customers’ FICO (credit) scores tend to be lower and they tend to be risky, so I had to work out how to underwrite the market and create a big tech moat in terms of the data to de-risk them,” he explained.
“A FICO score means nothing for a ‘non-prime’ consumer, and it offers little insight into affordability, or someone’s ability to make repayments over time.”
Large credit segment
Financially underserved consumers make up a large credit segment in the US and have
historically been relegated to a very limited and costly set of product financing options such as rent-to-own and lease-to-own, or have taken out payday loans to buy what they need.
These options can cost up to 400% of a product’s retail value and can end up trapping consumers in a seemingly endless cycle of debt.
Zebit offers buyers in this segment over 90,000 products across more than 25 categories – including electronics, appliances, home decor, furniture and beauty – and store credit to pay for their purchases in monthly instalments.
It is a “closed” e-commerce website, available only to consumers who are underwritten and accepted by the company, and has been built as a streamlined operating model with over 81 fully integrated drop-ship distribution partners to pick, pack and ship products directly to customers.
This diverse supply chain network has allowed Zebit to avoid the typical activities that reduce e-commerce gross margins, such as tying up working capital to buy and carry inventory, stock obsolescence, general discounting and warehousing and logistics.
Zebit already has 630,000 people signed up to its marketplace, with about 35% having made purchases to date.
Dealing with the credit-challenged sector has inherent risks, and Zebit expects
a certain percentage of its active customers will fail to pay some of their instalments.
The company has spent millions on establishing the algorithms that power its e-commerce platform to reduce the chance of non-payments.
“Historically, about 15% of our sales in the business have been written off, representing between 10% and 20% of our customer base,” Mr Schneider said.
“But bad debts in the future will be much lower than what we saw in 2019 because that was a huge year for testing.”
Customers who are kicked off the platform for not making a repayment have the chance to be reinstated with a lower credit line if they end up paying the debt in full, with no late fees or penalties.
“We try to get the consumer back on track, without adding additional financial burden in terms of fees, penalties or other punitive action,” he said.
Zebit generates revenue by selling physical products and e-certificates on its marketplace.
The company earns a margin from the difference between the wholesale price of a product and the retail price it sells for and in some circumstances, it will also earn a small margin on shipping.
In 2019, Zebit recorded $85.5 million in revenue, representing a more than 88% jump on the previous year.
It continued the growth trajectory in the first quarter of this year, with revenue and gross margins exceeding those from the first half of 2019.
When COVID-19 disruptions rocked the global economy, Zebit’s management team began taking steps to manage the company’s cashflow, deliberately pulling levers to dampen consumer demand, slow growth, increase gross margins, lower credit losses and increase cash inflows.
Proceeds of the IPO will be used in part to strategically release several of these constraints and invest in further growth.
Mr Schneider said funds may also be used to expand the company into Europe and Latin America, with the goal to become a $1 billion business within three years and to be profitable by early 2022.