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Australian buy now, pay later (BNPL) company Zip announced it has pulled out of a $330m merger agreement with US rival Sezzle, citing macroeconomic and market conditions as a reason.
The parties agreed to abandon the deal in light of "current macroeconomic and market conditions", Zip said in an announcement.
Zip chair Diane Smith-Gander added that "mutually terminating the merger agreement with Sezzle at this time is in the best interests of Zip and its shareholders, and will allow Zip to focus on its strategy and core business".
The deal, announced in late February, was meant to give immediate scale and growth opportunities to the combined firm, helping Zip to “win in the important US market”, the company’s global CEO, Larry Diamond, said at the time.
Just three weeks ago, Zip told its shareholders that the “acquisition of Sezzle remains on track”.
Now, the Australian firm has pulled out from the A$491m ($333m) deal, citing current macroeconomic and market conditions.
Zip, which also owns US BNPL provider Quadpay, will pay $11m to Sezzle as part of the termination agreement.
Shares in Zip went up by 13 percent immediately after the announcement, while Sezzle shares dropped by 34 percent.
Struggling BNPL sector
After a record year in 2021, which saw BNPL become established as a mainstream product and market participants from all parts of the payment ecosystem rushing to offer their own versions of the innovative quasi-loan product, recent macroeconomic developments have eventually started to have an impact on the mushrooming sector.
From abandoned takeovers, to market pull outs, intensifying competition, plummeting company valuations and employee layoffs, 2022 has left a mark on the sector.
Shortly after announcing the merger with Zip, Sezzle decided to lay off 20 percent of its North American staff and around 40 to 50 percent of its employees worldwide.
This was followed in March with Swedish BNPL pioneer Klarna announcing it was letting 10 percent of its staff go.
Klarna co-founder and CEO Sebastian Siemiatkowski said at the time that the world last autumn “was a very different world than the one we are in today”.
He pointed at the war in Ukraine, a shift in consumer sentiment, a steep increase in inflation, a highly volatile stock market and a likely recession as important factors that “marked the beginning of a very tumultuous year”.
For example, inflation, which could prompt more consumers to use deferred payment methods such as BNPL, often leads to high interest rates.
For BNPL providers that operate without a banking licence and do not have access to deposits, this means they need to borrow the funds they lend out to consumers. As interest rates grow, so do lending costs in terms of extending money out to consumers, which eventually affects their already thin margins.
Bursting valuation bubble
Klarna, just like many of its fintech and BNPL peers, has experienced a significant drop in its valuation since the beginning of the year.
In its latest financing round, which closed on July 11, Klarna’s valuation stood at $6.7bn, down from $45.6bn last June.
Similarly, Australian BNPL provider Afterpay, which was sold to Jack Dorsey's Block for $29bn last August, has lost almost half of its value since the agreement. As of July, the company’s current market cap stands at $14.8bn.
Fellow-BNPL providers Affirm, PayPal, Zip and Sezzle have also lost respectively 51 percent, 61 percent, 85 percent and 92 percent of their valuation since the start of the year.
With worsening macroeconomic conditions, the market has clearly become spooked as to whether many of these firms can meet their future expectations.
Even before the crash, as valuations of these firms skyrocketed in 2021, many were still making significant losses, partly the result of intensifying competition and aggressive expansion plans.
In 2021, for example, Zip generated a $652m loss, a 3,000 percent increase compared with 2020.
Similarly, Klarna registered a loss of $750m in 2021, while Affirm and Afterpay reported net losses of $430m and $156m respectively in the same period.
Alongside these issues, as well as increasing pressure from policymakers to strengthen the regulation of the market, BNPL providers are facing increasing competition from market giants.
Last month, Apple announced that its iOS 16 operating system update will include a new BNPL service called Apple Pay Later.
The cash-rich company said it will be self-funding the product through Apple Financing, its wholly-owned subsidiary, which means that control of financial service products will remain largely in-house.
A couple of weeks later, Revolut also revealed plans to roll out a new BNPL offering in Ireland, with plans to expand into other EU markets.
Despite these challenging market conditions, analysts nevertheless expect continued strong growth in the sector.
In a report released on Tuesday (July 12), ResearchAndMarkets.com predicts that the global BNPL market size will reach $39.41bn by 2030, registering a 26 percent CAGR from 2022 to 2030.
