The buy now, pay later model, popularized by companies like Klarn and Affirm has been one of the big e-commerce winners in the last year, giving consumers who might be stretched financially another option to pay for things when they buy them online. While that has prompted the UK financial authority to re-examine how it regulates the space, an enterprise taking a slightly different approach is announcing some funding as it prepares to expand to the US.
Zilch, a London startup that has built an “over the top” buy now, pay later (BNPL) business out of cutting deals directly with consumers — bypassing the need for integrating anything new into an e-commerce site’s check-out process, as many of the leading providers have done — has raised $80 million, an all-equity Series B that values the company at over $500 million.
The funding is coming from Gauss Ventures and M&F Fund, among other unnamed investors. The startup has up to now opted to raise from individuals and smaller firms, CEO and founder Philip Belamant said in an interview, although that may change in future rounds as it looks both to bring in a tier-one debt line, not just to fuel growth in its current market of the UK but to expand to more countries, including the United States.
For now, Zilch has financed usage of its service off its own balance sheet: it has more than 500,000 users, Belamant said, and is seeing sign-ups of around 4,000 a day on its app.
BNPL is a payment scheme that has been around as long as stores themselves, but its emergence online has been more a later arrival. It’s proven to be a very popular one. A recent report from Worldpay estimated that in the UK, which is the world’s third-biggest e-commerce market in its estimation (£192 billion, or $266 billion, transacted in 2020), BNPL will account for 10% of all sales by 2024, when the overall e-commerce market will be worth £264 billion ($366 billion).
Most schemes today are run by third parties — Klarna and Affirm being two of the biggest — who ink deals with e-commerce companies and integrate in the check-out alongside other options for payment. Zilch’s key differentiation has been that it’s cut a deal with only one other company — Mastercard — and created a payment card with it so that when a person wants to pay using Zilch, they use the Mastercard number in the checkout, which then triggers the option to them to either pay in installments or pay as you would with a normal credit card.
As with other BNPL schemes, Zilch doesn’t charge fees on its service, and instead makes a cut in the transaction from the retailer (part of the fee retailers pay to card companies in card transactions: the deals are all predicated on the idea that these alternatives to paying everything up front increases conversions, and that ‘convenience’ is what retailers are paying to have as an option). Its approach is pretty straightforward: it offers installments for paying back that start with 25% up front (so not exactly “zilch”) and paying for the item in full in 25% installments over 6 weeks. For those who miss a payment, they are stopped from using the service again until this gets cleared but Zilch doesn’t charge late fees.
The prospect of bypassing the retailer means that Zilch has been able to scale by making its service more applicable to more payment scenarios, a model that Belamant said was inspired by another killer disaggregator.
“If you look at when Amazon started, many commented on it being a phenomenal bookstore, but they built an infrastructure to sell everything. They could have built that covering different booksellers one by one but Amazon went direct to the consumer and said it would ship any book in a day. How profitable is not your problem,” he said. “We didn’t want to be beholden to the retailer and wanted the relationship with consumer. We go to them and say, pay over time, and use us anywhere you like. We built this technology plugging them in on one side and plugging retailers on the other. We can now build up any way to play and can use it anywhere they like without being restricted by retailers.”
Conversely, this has also helped Zilch fend off competition from bigger BNPL players, at least up to now: “Their main customers are retailers, and they have pre-existing arrangements with those retailers,” Belamant said of the Affirms and Klarnas of the world. Offering a model similar to Zilch’s, he said, “would have to circumvent those services, and that’s a massive cannibalization. Can they do that? Well, it’s naive to say they can’t. But will they? I’m not sure.” (For the record, Klarna’s CEO accuses Zilch of copying an idea it had years ago, but it seems that the majority of its business is still based around working with and integrating with checkout for retailers, so this is what Zilch is differentiating on.)
Zilch’s approach of riding the rails of Mastercard — which may well soon to be augmented by other providers like Visa — means that it can quickly distribute a recognized payment method, but as Belamant describes it, it’s Zilch that is still building the algorithms to make the credit evaluations for individual consumers.
Using what Belamant described to me as “soft credit checks” alongside Open Banking data — a system used in the UK and Europe that taps into using APIs to share and integrate data from one financial service with another (in this case a way to easily check a person’s credit and financial history by way of their bank details as they are applying for a new financial service) — people sign up and automatically get assessed for their suitability for a BNPL scheme.
This has helped the company, as it says, become the first BNPL provider to be regulated by the Financial Conduct Authority, the financial services regulator in the UK that has run an investigation of BNPL companies and appears to be preparing tighter regulation around how they can work, to stave off people inadvertently walking into spending money that they don’t have and may never be able to repay. Zilch was officially authorized as a consumer credit provider in 2020.
This is not to say that others in the space will not be able to also get the same certification for their models, incidentally, but it might mean more regulatory hoops, possibly slower growth, and perhaps also more consumer wariness as the situation continues to get more publicity. (The UK in particular has a pretty sordid history with other schemes to provide people with financing, specifically around the murky practices associated with payday loan schemes, and that has left a bad taste in many consumers’ mouths.) Other BNPL providers, like Klarna, might claim to have superceded this particular authorization because they are regulated as banks. Again, it’s not clear how and if this will play out with regulators, and whether they will demand more specific clearance in the future.
One specific advantage also of linking up with a card company is that, in this world of “everything will soon be virtual”, it gives Zilch users access to a card, which they can in turn use to also shop using BNPL in brick-and-mortar stores. Tap and Pay-over-time, as it’s called, means users can integrate the card number into a digital wallet to and use it as they would their handsets to pay with Apple or Android-based payment schemes. Zilch said it’s the first BNPL do make this leap. (To be clear, for now there is no physical ‘card’ although it seems they are considering how and if to offer it.)
Updated with some comments from Klarna’s CEO.