Sezzle Inc, the Minneapolis-based buy now, pay later (BNPL) firm, has announced that it will follow up its Australia-listing with a listing in the United States. According to Crunchbase, the fintech company has raised $301.6 million throughout all its funding rounds to date. When it entered the Australian public markets, it debuted with a valuation of A$217 million and an IPO share price of A$1.22. At present, we do not know the terms of the proposed US-listing, as Sezzle has only released a note stating that it has submitted a draft S-1 filing with the Securities and Exchange Commission.
Sezzle is a Matchmaker
The fintech company operates a two-sided platform and is, therefore, a “matchmaker”. Crudely, Sezzle matches merchants selling products to consumers who are enabled to buy those products or increase their expenditure, thanks to Sezzle’s BNPL offering.
A matchmaker aims to create network effects leading to winner-takes-all-market. In its Annual Report for 2020, the company highlights the fact that its platform benefits from a “symbiotic and mutually beneficial relationship” between its merchants and consumers.
This relationship is as follows: consumers buy products online using interest-free installments paid out over a short period. The value they gain from using the Sezzle Platform is that of having a flexible payment option and being empowered to budget for purchases over a period of time. On the other side of the platform, stand merchants. Merchants supply the goods that consumers buy and are provided with a tool that helps them increase sales, their average order values and reduce the rate of cart/checkout abandonment. Merchants gain access to a market that otherwise would not have existed: consumers who are more inclined to buy a product or increase their average order value thanks to the BNPL benefits of using the Sezzle Platform. For this, Sezzle takes a processing fee, deducted from the purchase price. The entire purchase price is paid upfront to merchants. Sezzle is left to assume the cost and risk associated with non-payment, fraud, and consumer payment processing.
In this model, each new consumer adds value to the network to current consumers, bringing in more new consumers and creating barriers to entry, further enriching the value of the platform. At present, Sezzle is running at a loss. Three things will determine if it ever achieves profitability and build barriers to entry: (1) if it can achieve minimum viable market share; (2) the degree of customer captivity; and (3) its success in using consumer-generated data to drive product and pricing optimization.
Sezzle’s Financial Performance
Sezzle’s financial performance reflects the realities of the BNPL market: high growth and hyper-competition. The company’s revenue has soared 272% year-over-year, from $15.8 million in 2019 to approximately $58.8 million in 2020. The cost of revenue has also risen dramatically, by some 193% year-over-year, from roughly $7.7 million in 2019 to nearly $22.5 million in 2020.
In this period of rapid growth, the company’s operating loss has widened from around $11.3 million in 2019 to almost $28 million in 2020. The net loss went from about $13 million in 2019 to approximately $33 million in 2020.
Sezzle faces a hypercompetitive market with well-resourced rivals such as PayPal and Square, rivals who see the same attractive, fast-growing market opportunity. Apple is rumored to be mulling its own BNPL service. Competition may be great for consumers, providing them with product diversity and low prices, but it is anathema to profitability and the erection of barriers to entry. The challenge for Sezzle is finding a way to not just grow, but to attain minimum viable market share, enhance customer captivity and use its consumer-generated data more effectively. Without this, it will never become profitable. I’m going to choose mirrored lenses to watch what unfolds in the BNPL space over the coming years.