When Funding Circle was looking to break into the US market in 2013 they did so by acquiring a nascent lending operation called Endurance Lending Network (I wrote about this here). One of the key executives at Endurance Lending was Albert Periu, who helped run capital markets for the next several years until he left to found NepFin at the end of 2016.
NepFin, co-founded by Albert and Tom Meister who met at Funding Circle, was originally focused on middle market business lending and expanded to revenue-based financing for e-commerce companies. The company struggled during the pandemic as funding sources dried up, but the business had started to recover this year. Still, Albert found himself fielding offers to buy the business which he took seriously. And when he was introduced to the CEO of Zilch by a mutual friend, he realized right away that this would be a great fit.
Who and What is Zilch?
Our US readers may not have heard of Zilch, but they have become quite the force in the UK buy-now-pay-later market. It is not news that BNPL is hot right now (see last week’s news of the Afterpay acquisition) and Zilch is firmly entrenched in this market with a subtle but important difference.
Zilch allows its users to use the popular BNPL method of paying in four installments. The key difference is they allow customers to use this payment method anywhere, at any merchant whatsoever. They are focused on the consumer, not the merchant, and they have developed technology that allows any transaction to be split into four equal payments if the consumer wants. They do this through their partnership with Mastercard using a standard debit card, issued as a virtual card, with some fancy programming on the backend.
This week I caught up with both Albert Periu and Zilch founder and CEO, Philip Belamant, to discuss their US launch. Philip explained to me that when Zilch launched in 2019, they didn’t want to be a copycat service, they wanted something truly differentiated which is why they focused only on the consumer. This way consumers can take the popular BNPL experience to any merchant.
He said the advantage of going direct to the consumer is they can adapt a payment method quickly and easily. Today, pay in four is the most popular product but tomorrow it might be something different and with a consumer-only offering it will be easy to shift as preferences change.
Expanding to the US
In April we learned that Zilch closed their Series B, raising $80 million at a $500 million valuation. Then last month Zilch announced a $110 million extension to the Series B that included debt and equity with backing from Goldman Sachs.
With this cash infusion the company set its sights on expanding to the US from their base in the UK. They went looking for an existing team who had a successful track record and who understood the UK market. When Philip was introduced to Albert through a mutual friend, they immediately hit it off.
Albert had been through this entire process before when Funding Circle acquired Endurance Lending. He not only understood the UK market, he knew where the blind spots would be when it comes to the US market.
From Zilch’s perspective, by acquiring NepFin they get a plug and play operation for both tech and regulatory as well as a California Finance Lending License. Albert and his family moved recently from the Bay Area to Miami so they will be building a staff of 20-30 people in the Miami area and Albert will be CEO of Zilch USA. Albert also has a deep understanding of capital markets which will come in very useful as the business scales here. They intend to launch their operation here by the end of the year.
The leading players BNPL space (Klarna, Afterpay and Affirm) are all worth tens of billions of dollars. But there is clearly room for a differentiated offering focused on the consumer. With Zilch adding 150,000 customers a month in the UK it is demonstrating traction that could well translate to the US.
Apple has pioneered the use of virtual cards in the US with the Apple Card so the market here is more comfortable now with the idea of a virtual card that integrates with a mobile wallet (Zilch works with both Apple Pay and Samsung Pay). Philip said they have not ruled out issuing a physical card but will launch with a virtual-only debit card.
I have said before we may well have reached peak credit card usage as younger people reject the revolving debt model in favor of debit cards. BNPL is only going to get bigger, much bigger. With just 1.7% of e-commerce sales using this payment method today I could easily see that growing 10x over the next few years.
There will not be just one winner in this space. Because financial services is such a big industry there can be many companies that reach significant scale within any given niche. That is what Zilch is banking on. They have a long way to go to reach the scale of the big three but as Philip pointed out they are already at a scale larger than Affirm was at the same stage in their development.
I will be paying close attention to Zilch’s progress. Funding Circle have scaled their US business well showing that UK companies can be successful here. Zilch’s team are expecting they can duplicate that success in the BNPL market.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.