Sezzle: America's answer to Afterpay

Alan Kohler here with today’s CEO, and it’s a company that’s not yet listed but will be soon.  The company’s called Sezzle, it’s an American business, the CEO is Charlie Youakim, who is based in Minneapolis, which is where the business is based, and it is effectively a copy of Afterpay.  They launched in the US before Afterpay, but they did actually copy the Afterpay business model at that point which was 2017 – it was operating in Australia and they thought, this is going to work in the US, so let’s copy, and so they did.  And they managed to launch in America before Afterpay got there and now the two of them are signing up merchants like crazy in The United States and growing pretty quickly.  They’re both burning cash and both engaged in a land grab.

Sezzle, is in the process of organising an IPO with a range of $20 to $30 million US to raise.  They’re going to list on the ASX some time in May, so I thought it’d be a good idea to talk to them and Charlie beforehand so you’re ready for the IPO and so you know what’s coming.  Without further ado, here is Charlie Youakim, who is the CEO of Sezzle.  Tell us a bit about Sezzle, Charlie, when did you start the business?

Sezzle was started in early 2016.  We started the company, basically, in response to a lot of data we saw in The United States that young people were paying with debit and higher volumes than ever before.  Over time we’ve evolved to the solution you see today which was referred to as a buy-now, pay-later, in the lexicon of today.  

Did you copy Afterpay’s business model?

Yes, around early 2017 we did take note of what was going on here in Australia and we really loved the business model.  We saw how consumer friendly it was and no on in The United States was doing that sort of business model in the US.  We took our product and we evolved it to fit that sort of design in terms of the interest free instalments over four payments.  We made some slight changes to it and adapted some things to the US market, but in large part, it’s a very similar business model to what is present here in Australia.

Did you launch your business in the US before Afterpay did?

Yeah, we did.  We launched in August of 2017 and then Afterpay launched in May of 2018. 

What are the difference between yours and Afterpay’s business?

There are subtle differences.  We believe that we’re more consumer friendly and more consumer focused.  Of course, that’s our opinion.  But what we do with our product is when the user has a payment due, we actually give them the option to shift their payments to get out of a pinch or a bind, so they can go into our systems and every order, once for free, the user can actually shift their payment schedule to hit the dates that they think they’re most comfortable with.  Additionally, we only charge one $10 fee per order and if the user fixes it within 48 hours, we waive the fee, so we’re really trying to do everything in our power to remove user fees from the equation.  I think that’d be one difference.

Additionally, we embraced the idea that we’re a credit product, which I think is a little bit different than Afterpay’s viewpoint.  We actually, in the US, embrace credit, we know it’s important for our daily lives and so our viewpoint is that this is a credit product, it’s just a starter credit product and our goal is to help the user get along in their financial future on the credit side of things.

Do you mean that you contribute to people’s credit score in the US or not?

We do actually look at users’ credit data, both traditional and non-traditional, and we do see a strong tie in terms of behaviour when we do have that credit data available.  Of course for a lot of young people it’s not always present.  In those cases what we’ll do is we’ll do as many checks as possible on the user and on the transaction at hand and we’ll give users the appropriate amount of credit.  Then based on their behaviour in the product, it really lets us adapt those limits as the user uses us.

You had a slight first-mover advantage over Afterpay in the US, are you bigger than them now in the US?  Have you got more merchants and more customers than they do?

It’s sort of a mixed bag on that front.  From our understanding, we have more merchants.  We haven 2,900 active merchants on the platform today and it’s largely because our SME focus out of the gate.  We have 226,000 active shoppers, which we know is lower than the amount that Afterpay reports on the US shoppers, and that’s because they started with some larger merchants when they came to the US.  We’re working our way upwards into some larger merchants.  In terms of volumes they’re higher than us, in terms of merchants on board, we’re higher, to our best of knowledge.

Are you competing with Afterpay on price or do you charge the same?

The price points are, from our knowledge, relatively the same.  Both companies charge SME merchants 6% plus 30 cents per transaction and our range of fees are generally, from what we know, generally the same.  It’s not really a price competitive battle at this point.  What we’re really trying to compete on is feature set.  Our focus is on the consumer and our consumer scores.  We really point to the superior consumer scores and reviews that we have on Trustpilot and use that as our differentiation.

Can you just paint us a picture of what this business is like in the US, the buy-now/pay-later business?  I mean, are they as advanced as Australia on that and how competitive is it?

We’re not as advanced as Australia.  The US, we would say, is probably 2-5 years behind Australia in this space, but we do believe that the US is going to be adopting it to the same scale that has occurred in Australia.  We can sense the wave is coming.  Payments in general in the US is behind Australia.  The ‘tap’ system everyone here is largely familiar with is relatively non-existent in the US.  Probably less than 1% of payments are tap at the point of sale, and the same thing could be said for buy-now/pay-later, it’s just starting but it’s really starting to pick-up steam.  

And how many competitors are there?  There’s obviously you and Afterpay, who else?

There’s one more competitor worth noting, it’s a company called QuadPay.  They’re the smallest of the group, but we’re the three pure-play, interest-free instalment providers in the US. 

And what’s your growth rate?

We grew at 30% per month in 2018, then really starting off with a good start here in 2019 too. 

Every month?

Every month, yeah, 30% per month over the entire year was our average growth rate.

Right, so does that look like continuing this year?

No, we don’t have it projected at the same type of growth rate for 2019, because it is a pretty ridiculous growth rate, it was hard to hang on for 2018, but we are growing at a pretty rapid clip here in 2019, so it’s still an attractive growth rate but probably normalising over time. 

What do you think that you and Afterpay and QuadPay are doing, where do you think that this is going?

Our viewpoint is that this is really going to become a new type of network, like a new-age credit card network.  When we read our reviews for our product, you see people mentioning the fact that it does give them additional purchasing power, just like a credit card, but they also mention the fact that there’s budgeting built into the product.  It’s viewed as like a budgeting credit product.  Our view is that this is going to become a new-age credit card network very much like a Visa/Mastercard, and so we think there’s room for everyone.  It’s a huge market in the US, there are a lot of merchants that have no solution whatsoever and we believe that a lot of us are going to be launching on these merchant sites and adding users to our portfolio.  Then over time, those users add value to our networks and we can bring those users to other merchants that don’t have us installed and we’ll have a lot of dual-installs, perhaps triple-installs of our systems across merchants.

You don’t think this is going to be winner takes all?

No, our viewpoint is that it’s not.  We’ve already had many merchants refer to this as a solution that they might add both of us, where they might add both of us.  We actually had a recent merchant refer to us as a Visa/Mastercard.

And so you are Mastercard to Afterpay’s Visa, would that be a reasonable observation?

Yeah, our viewpoint is that’s probably likely to happen.

Because most merchants take both Visa and Mastercard, it isn’t one or the other is it?

Yeah, exactly.  The way they view it is, if you have millions of users, which neither of us have yet but we probably will in the future.  If you bring millions of users to their check-out, they’re happy to take those users because it speeds up their conversion, they spent a number of dollars getting those consumers to their checkout, the last thing they want is to have a hitch in the checkout.  If we have users that our competitors do not, they want to get those users enabled so they can check out quickly.

Can you give us a sense of the operating profit leverage in this business?  I mean, how profitable does it potentially get once you hit breakeven?

The model is actually very attractive, so the biggest drivers in the unit economics all improve with scale, and that’s, in my view, one of the most attractive parts about the business.  Our merchant fees have been relatively stable over time.  If you’ve looked at what has happened here in Australia, actually over time things have risen on the merchant fee side and on the cost side, the major drivers of cost, our processing cost, borrowing cost and loss rates which all declined with scale.  In our view the model is attractive and it gets more attractive with scale. 

I presume you’re burning cash obviously, you’re in a land grab at the moment, can you tell us what your burn rate is?  

We can’t disclose the burn rate.  In our Prospectus we’ll have much more detail on that.  At some point it will be visible to investors out there, but you’re right, we are burning cash and that’s the reason we’re fundraising.  There’s a large opportunity at hand in this market and so our viewpoint is we want to fund that growth so that we can win the market.

And can you tell us what your revenue is then, are there any numbers you can tell us?

At this stage I think it wouldn’t be safe for us to disclose those numbers, just because of where we’re at in the IPO process, but again, that will be in the prospectus?

How much money have you raised so far?

Just prior to last week we had raised USD$10.7 million and we had grown the company very efficiently today.  We’re only using $7 million of that to get to where we are today.  Just last week, we closed our pre-IPO funding round of $5.6 million in the US from a group called Continental Investors.  The head there is Phil Purcell, who is the former CEO of Discover and Morgan Stanley, and his son runs their fintech fund and they’ve had recent exits in WePay and LevelUp.  They’re a very active fintech investor and highly successful.  They were the pre-IPO investor, helping us get into this IPO process.  

How much do you expect to raise in the IPO?

We have a range, the range is USD$20 million to USD$30 million in the IPO process.

Right, and what do you think that money’s going to be spent on, just to give us a sense of what the demands on the cash are?  I mean, is it about marketing or is it starting or what?  

It’ll be a mix.  Right now the US is growing quite rapidly, so we will be spending quite a bit on sales and marketing to make sure we can meet the needs of what’s going on in the market.  Implementations as well, to make sure that the larger retailers that are coming onboard with us, come onboard smoothly, without a hitch.  But we also think the market is really new.  It’s a nascent market, especially in the US.  We’re not going to be shying away from investing in innovation, so we’ll be putting some of the capital towards our development teams and data sciences teams as well. 

How many people do you employ now?

50 full time employees.

Where do you think you’ll need to be at in terms of your establishment?

We don’t have a number in mind in terms of employees for our growth.  I think if I had to take a conjecture of where we’d probably be, I think we probably would double in staff size over the next 18 months.

And you’re based in Minneapolis?

Yeah, we’re based in Minneapolis but we have sales team members in New York and Los Angeles to help with the growth there, but the primary team is Minneapolis, which is actually a great retail hub.

Yeah, well it’s kind of in the middle there somewhere isn’t it?

Yeah, we have two of the top-10 retailers in The United States located in our city, Best Buy and Target.

Well, you better sign them up!

[Laughs] We’re working on it!

[Laughs] How long do you think this buy-now/pay-later business, before you and the others, get scooped up by big players like Visa and Mastercard and PayPal?

I would imagine it’s unlikely that a Visa/Mastercard would play in this because of the credit risk in the system.  The network goes a little bit beyond that.  We’re more like a Discover and American Express because they take on the banking side of things.  Those might be players that might be involved.  PayPal’s in the mix obviously in the United States, but it’s really a fast moving game right now and so the companies like Sezzle and Afterpay that have the nimble nature, that can move fast, are really at a large advantage as we take this on.  It might take a large player a year or so to develop a solution, and so our view is that the market’s going to be won in the next 12 months, or the market leaders will win in the next 12 months, and so we think we have a strong chance of doing that.

Have you had any approaches at this point?  I imagine it’s too early for you to sell, but is there any indication that the big players are interested already?

I think there is a stir going on in the US market in terms of some of the larger players.  There are private label credit card companies out there that have a lot at stake with these merchant relationships.  There are major players throughout that are taking note of this, but I think it’d probably be too early for anything to happen.

Well, it’ll be interesting to watch and it’ll be interesting to watch your IPO.  Thanks very much, Charlie.  We’ll look forward to staying in touch.  

Thank you very much for having me, I appreciate it.

That was Charlie Youakim, who’s the CEO of the buy-now/pay-later business, Sezzle.