The Rise of Buy Now, Pay Later and Zilch's Unique Approach

The buy now, pay later (BNPL) payment option, gaining prominence through companies such as Klarna and Affirm, has emerged as a significant driver of growth within the e-commerce sector. This model provides consumers with increased financial flexibility when making online purchases. However, this growth has prompted regulatory scrutiny in the UK, leading authorities to reassess existing regulations.

Zilch Secures $80 Million in Series B Funding

Zilch, a London-based startup, is taking a distinct approach to the BNPL landscape. The company has successfully raised $80 million in an all-equity Series B funding round, achieving a valuation exceeding $500 million. This capital infusion will facilitate the company’s expansion into the United States market.

Funding Details and Future Plans

The funding was led by Gauss Ventures and M&F Fund, alongside other undisclosed investors. Previously, Zilch primarily secured funding from individual investors and smaller firms. CEO and founder Philip Belamant indicated a potential shift towards attracting larger investors in future rounds.

These future rounds will aim to secure a substantial debt line, supporting both growth within the UK and expansion into new territories, notably the US.

Zilch's Business Model and User Growth

Currently, Zilch finances its service through its own balance sheet. The platform boasts over 500,000 users and experiences approximately 4,000 new sign-ups daily via its mobile application.

The Expanding BNPL Market

While the concept of BNPL has existed for decades, its online adoption is relatively recent. The market is experiencing rapid expansion. Worldpay’s recent report projects that BNPL will represent 10% of all UK e-commerce sales by 2024.

This projection anticipates a total UK e-commerce market value of £264 billion ($366 billion) in 2024, with BNPL accounting for a substantial portion.

Differentiating Zilch from Traditional BNPL Providers

Most BNPL schemes are facilitated by third-party providers like Klarna and Affirm, who integrate directly into e-commerce checkout processes. Zilch distinguishes itself by establishing a direct partnership with Mastercard.

This collaboration allows users to utilize a Zilch-branded Mastercard during checkout, triggering the option to choose between installment payments or standard credit card transactions.

Zilch's Fee Structure and Payment Terms

Similar to other BNPL services, Zilch does not charge consumers directly. Instead, it receives a percentage of the transaction from the retailer. This model is based on the premise that offering flexible payment options increases conversion rates.

Zilch’s installment plans require an initial 25% payment, followed by four additional 25% installments over a six-week period. Users who miss a payment are temporarily suspended from the service, but no late fees are imposed.

Inspired by Amazon's Disruption

Zilch’s strategy of bypassing retailers was inspired by Amazon’s early success. Belamant draws parallels between Zilch’s approach and Amazon’s initial focus on building a direct-to-consumer infrastructure.

“We didn’t want to be beholden to the retailer and wanted the relationship with the consumer,” Belamant explained. “We go to them and say, pay over time, and use us anywhere you like.”

Competitive Advantages and Challenges

Zilch’s direct-to-consumer model provides a competitive edge, as it avoids the potential conflicts of interest inherent in retailer-centric BNPL schemes. Belamant suggests that established players like Affirm and Klarna would face significant challenges in replicating Zilch’s approach due to existing retailer agreements.

However, Klarna’s CEO has asserted that Zilch’s concept was initially developed by Klarna itself, though Zilch maintains its differentiation lies in its independent approach.

Credit Evaluation and Regulatory Compliance

Zilch leverages “soft credit checks” and Open Banking data to assess consumer creditworthiness. This system utilizes APIs to securely share financial data between institutions, enabling a streamlined credit evaluation process.

This approach has enabled Zilch to become the first BNPL provider to be fully regulated by the UK’s Financial Conduct Authority (FCA). The FCA is currently reviewing BNPL regulations to protect consumers from potential financial risks.

Navigating Regulatory Scrutiny

While other BNPL providers may seek similar FCA authorization, it could involve increased regulatory hurdles and potentially slower growth. Concerns surrounding predatory lending practices, reminiscent of past payday loan schemes, are driving the increased scrutiny.

Expanding Payment Options with Mastercard

Zilch’s partnership with Mastercard allows users to access a recognized payment method, facilitating both online and in-store purchases. The company is pioneering “Tap and Pay-over-time,” enabling users to integrate their Zilch card into digital wallets for contactless payments.

Currently, Zilch does not offer a physical card, but is exploring the possibility of introducing one in the future.

Updated with some comments from Klarna’s CEO.