‘We want to be the first payment choice everywhere and everyday’: Zip’s Larry Diamond

Tearsheet hosted its first LinkedIn Live session. Joining me on the show is Zip co-founder and CEO, Larry Diamond. Ten years ago, Zip was founded in Australia as a buy now, pay later service, embedding a quick and easy consumer loan in a retailer's checkout flow. Larry recently moved to the US to focus on Zip's expansion stateside.

In this LinkedIn Live session, we discuss:

• Zip's US opportunity
• What the US BNPL market can learn from the more mature Australian market
• Consumer protections and rising calls for regulation
• How Zip differentiates
• Levers in the business
• Where Zip is headed next

If you'd like to attend future LinkedIn Live sessions, follow me and Tearsheet on LinkedIn.

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The following excerpts were edited for clarity.

About Zip and its founding story

Larry Diamon, Zip: So it's actually our 10th birthday this year. We started in June 2013. I've still got the fire. I'm still wearing my Zip t shirt and pretty much wear it every day. I got a little bit grayer over the years, but the passion is still there. Because at the end of the day, I think we can build a really strong business around the world of financial services, doing things better.

Our purpose is creating a world where people live fearlessly today, knowing they're in control of tomorrow. And the idea is that when people use and interact with our products, and they click our button, they know that we have their backs. We started 10 years ago in the world of consumer finance, others call it buy now, pay later, on a journey that's taken us from Australia, Sydney, all over the world, and now currently in America. Over the last 10 years, we've grown from zero to 12 million customers.

What I like to say is I've probably had 10 jobs in those last 10 years, too. So it's been an interesting and enjoyable learning experience.

The BNPL model and Zip story

The story that we like to tell to sum up why we love the space in which we play is that Naomi was going through checkout on a bicycle hipster store in 2013 -- 10 years ago, around Christmas time. And she's she's looking to buy a bicycle for her son. She has a few options at the checkout. Option one, she can check out and put it on a credit card. And of course, what happens 25 days after, you get charged. Credit cards are all designed about revolving high interest balances, where it takes decades to pay off.

Option two is she could put on her debit card. But it was a busy time -- she was buying presents for friends and family, food for the table.

Or she could select Zip, and pay in three equal installments, interest free. When she clicked our button and checked out, in December of 2013, we sort of realized the magic of the consumer finance model, this sort of triple win: a win for the merchant who's able to converted a browser into a paid customer, a win for the customer and a win for us.

Geographic expansion

We realized that our customers became much more loyal to us versus her bank and credit cards. You start to build an amazing relationship with the customer. And so ultimately, that magic that we saw in Australia helping not just big business, but small business get access to these financial tools, we realized technology has no borders.

After visiting Singapore in 2019 for Money 20/20, we really got the energy to say, well, if technology doesn't know any borders, and this this can work in both the developed world, but equally in the developing market, you saw us over the last few years expand into developed markets like UK and America, but we also placed bets in places such as Philippines, India, and and the Middle East, where where you can almost leapfrog decades of old legacy financial infrastructure.

Deciding to focus on core markets

So we had product market fit. Timing is not in your control. But given what was happening in the financial system, there was a big opportunity to do things better in all these markets. But I like to say in a parallel galaxy right now, we built out this global payments system and we're just dominating. But as we saw the reckoning of interest rates, which happened very viciously, we had to adjust and we had to focus on markets that were either profitable or had a near term pathway to profitability. 90% of the enterprise value were in our core markets: Australia, New Zealand, America and Canada.

So we really made the difficult decision because we spun up some of the best fintech teams in all these markets, both through a mixture of organic and inorganic expansion. We've just finished saying goodbye to all of those rest of world markets -- we've basically sold or exited those markets.

And we're now exclusively focused on our core markets. And, you know, it's producing $8 billion to $10 billion in GMV per year. Our last quarter, we're doing about $180 million in revenue a quarter. And over 12 million customers have joined us. So we've got a lot there to take care of. And we've got a good business platform.

US BNPL market opportunity

The US is competitive, but also large and exciting. I'm personally enjoying the journey. I've been running Zip globally, doing all the jobs from chief of janitorial services to customer service, product design, and sales. I think it's important as a leader to be able to inspect the details to understand things. What happened over the last nine years is as a global CEO, I moved a bit further away from the coalface.

I moved to America last year to run the US business and I'm really getting stuck back into it. I'm actually pretty excited working on everything from user journeys, product signups, strategy, culture, leadership and hiring.

Around competition, I would say, first of all, that the BNPL sector here is incredibly very noisy. If you look at share of payments, it's only about 2% of its payments market. So it's got a long way to go to get to more mature markets, like the Nordics, which have had BNPL for almost two decades now where 20% of the ecommerce sector goes through by now, pay later. So we see it as incredibly early.

I think ultimately if you're a product- and technology-lead organization, you listen to customers, you get feedback, you rigorously experiment -- ultimately, our competition is other banking dinosaurs. And that gives me a lot of excitement, because they struggle, both with the ways of working, as well as legacy infrastructure. At Zip, we can be fast, we can be speedy, and agile. So we've come in here, we've got a fantastic beachhead, and we work with some fantastic brands. And ultimately, we see about 100 million Americans, under that FICO score of 670, who we believe are underserved by the banking community that we can make a real difference to.

Growth learnings and keeping the fire lit

As a leader, I think that the most important character trait, particularly in a fast growth business, is just self awareness. Where am I at? Where am I weak? What do I need to learn? And so that's what we encourage. That's what I've encouraged myself to think that way. If you can do that, you can continuously adapt and work out okay. When we were all working around the table, we knew everything that's going on. Then we moved to a team of 30 -- okay, now we have to create new roles, we have to split up roles, we have to hand over hats, crumbs fall in between. And so the company almost breaks all of these moments and you can kind of decisively see those right in the beginning.

We're all product folk, then you've got to move into management. I mean, it's just phenomenal to see how I've personally changed over those years and a guiding light is almost trying to find someone who's a little bit ahead of you. Not too far ahead -- you want someone who is always about 18 months ahead of you, who has that experience to really help guide us through. A lot of the things were learned on the fly, creating new processes, creating a product function that didn't exist when everyone's doing everything -- customer research teams to forecasting to codifying our principles and values.

So we actually know who is as Zipster and who wants to be part of our team. And equally, I think you have to be incredibly mindful of if you do reach a ceiling -- and I've always said that about myself, if I can't keep leveling up along the way -- then it might be my time to step aside. We have seen Zipsters come and go, some people don't want to go on the journey. They haven't necessarily got the growth mindset and aren't willing to evolve or move into different roles, but many have. And I think that's what kept up the energy and excitement in the team along the way. It's almost like a different business every year.

Australia BNPL vs. US

One thing is around the go to market strategy. I think the unique thing about BNPL is it lives in this sort of decentralized distributed world. Customers don't come up to the front door and sign up, like at the banks. They sign up at checkout at that moment of truth. We understand intimately how to build that distribution to drive a flywheel acquisition. A lot of that IP has come to the table. Similarly, on the underwriting and collection side, how to talk to customers, how to underwrite customers, how to incentivize customers to grow with you.

Over time, we've also been able to sign up a merchant in Australia and bring them to the US. So we're getting a lot of synergies on the sales front. And then finally, the people. We're cross pollinating our teams, both with local knowledge, who understand the local landscape, the type of customer set, but equally with the subject domain expertise from from back home.

Awareness is still growing over here in the US. In Australia, one in three adults are using buy now pay later. The banks have had to respond -- I think about 40% have actually trialled it. But you can just see the response coming from big banks and payment companies that they really see this product as the entry point to that financial relationship. It's simple, it's easy to understand. It's on the side of a customer, it's transparent, it pays back over one or two pay cycles. And so this BNPL world which disrupted online retail, but then disrupted omni channel retail, is now actually disrupting financial services and banking.

BNPL as a beachhead

I think BNPL is almost credit with training wheels. It pays back over six weeks, you pay it back over one or two pay cycles, there's no hangover with high interest, no revolver. I think the banks have done a terrible job in financial budgeting, right? If you go and get a bank account or a credit card, there's just no tools that really help you. And this becomes this powerful budgeting tool that everyone's gravitating towards. The signup is really easy.

So I think the adoption has been at checkout at that moment of truth -- I no longer need to go into a bank and sign up. I can do it right there at the checkout. And so it sort of starts there. But the beauty of why we love this space is payments almost becomes the access point to the relationship between us and the customer. And that's why we were so product centric and customer centric because every transaction -- well, It's an opportunity to talk to the customer, understand what they're looking for, how they think about their financial world. That's really informing how we're building out our app it when it starts at checkout, but ultimately, we want them to be in the app and our mission is to be that first payment choice everywhere and every day

Smart regulation

We've always advocated for fit for purpose regulation. Ultimately, we do see ourselves as extending credit. It's credit over a six week period, and we're introducing products to provide slightly longer repayment terms for for bigger ticket purchases. But ultimately, if you go and sign up for a mortgage, there's a certain amount of diligence the financier needs to do on you. If I go for a car loan, that's slightly different, less protection, perhaps. Then a personal loan, or credit card, and then BNPL. And each of those has a very different credit limit associated with them -- from millions of dollars to tens of thousands of dollars. The average credit card and in the US is, let's call it, $8,000, whereas BNPL is in the hundreds, maybe $1000.

So therefore, we do advocate for fit for purpose regulation. And I think the journey that we're seeing the US go through is a very natural evolution of this new financial construct, which is to understand regulations meeting innovation, and how we create the right safeguards in place to ensure that customers use the product appropriately, don't get stuck and don't fall behind.

We are we work closely with the CFPB. We actually work with WebBank with a federal banking charter, it's allowing us to innovate around the credit products, make sure that customers have the right information. Before they sign up, we pull soft credit checks. So we can look at the credit file, we also use alternative data, and AI models.

Adding in bank transactional data to credit checks

We're also looking to add bank transactional data as well into the mix, which actually -- this is one of the learnings that came from Australia.

When we started 10 years ago, we operated in a regulated credit environment, we started with a credit licence. And as part of the requirements on the Credit Act in Australia is if someone signs up for credit, and they tell you what their income and expenses are, you have to verify that what they told you is true. You can't just assume it is and so the only way to make that real time was to ingest bank transactional data.

This was open banking 10 years ago, and Pete, my co-founder, said to me, there's no way anyone is going to put in their internet banking credentials, it's just not going to happen. I said, Well, let's give it a shot. Let's see. And we would not be here having this conversation if we didn't get the right conversion rate. Then we actually built our business, not just with credit data, but with bank data, which is the holy grail for those that are less credit active or might be new to credit.

Differentiating versus other BNPL players

It depends who are pitching. I still do a lot of sales. It depends on the angle. If we just take a step back, and we look at the emergence of the BNPL industry: the six largest credit card issuers in America today are really for the customer of yesterday. So who's going to be the next six for the customer of tomorrow? And that's where we see there is a world where multiple BNPL players can actually coexist. BNPL has to live at the checkout, you have to live in this distributed world, because you're seeing different models evolve, some are just creating a form factor on their existing financial app, but you have to be embedded and you have to be distributed. And I don't think many companies have built that into the DNA of the organization, working deeply with merchants and distribution.

Ultimately for us, the way that we like to explain it is, you know, first of all, when you Zip in a transaction, you can spread spread the cost of that over time, responsibly, be that short or long duration. We can fit in many different categories. We've got a fantastic chief risk officer and a fantastic division that's really been built up over 10 years. It started as a rules based engine 10 years ago when we just used intuition and traditional consumer finance rules, to now AI machine learning models. We're ingesting new and exciting datasets that allow you to provide that accessible credit to a much larger population. Those are probably the big pieces.

We are flexible on pricing in the sense that we've got customer income and merchant income, which means we can actually work with a much broader category set, depending on the gross profitability of certain verticals.

And then finally, we don't have all the answers. When we signed up Amazon in Australia a few years ago, we did not have what they needed. We didn't. I'm an ex business analyst. And we sat down, showed them at the end of the day with product and tech, you can actually do anything. And you know, they believed in us and we threw 60 engineers onto the project, and delivered the experience over there. So we are really a product and tech shop at the end of the day.

Scaling the platform

Today, we have made it a lot more modular, easy to connect to. We went live with Best Buy last year, the integration is important because ultimately, that customer journey, making sure it's seamless. Payments are becoming invisible, how we deliver those experiences. But you know, over the last couple of years, we've built some fantastic partnerships on the go to market side with players such as Stripe, Adyen, Fiserv, as well as some of the ecommerce platforms that really allow you to go live in sort of days or weeks.

We were a pioneer in the US actually using virtual card technology for integration. So rather than a full RESTful API integration, we can just generate a one time virtual card, send it behind the scenes in the gateway and process that. Others have since got that and massively cut down integration. But we don't stop there. That's sort of phase one: go live, drive volume, drive new customers. Merchants see that. But there's so much more to do. So we'll talk to them around an in store experience, other user journeys.

Levers in the business

BNPL started life out in the fashion, apparel, and footwear space, where the average order value might be $100 to $200. We've actually started to see it enter many other verticals, right. And also, many different age groups. We're starting to see it enter travel, autoparts, healthcare, health services. We've even integrated into banks, who are looking to offer this new and exciting product to their experiences. So we were looking at new and existing verticals, we're looking at new and deep partnerships.

Ultimately, we see ourselves as a financial services player. You're not going to see us necessarily build this whiz bang shopping app. It's about building financial services for our target audience to ultimately drive more and more engagement with them and own a greater share of their wallet. Some customers want to pay later. Other customers might not be eligible to pay later or don't want to pay for this thing on credit. And we can service all of those experiences.