Why Apple Is Following Philip Belamant’s Zilch BNPL 2.0 Playbook

Thanks to innovative fintech companies like Philip Belamant’s Zilch, the payments and buy-now-pay-later (BNPL) arena is quickly changing — and for the better. While many business models of traditional BNPL 1.0 companies, like Klarna and Afterpay, put consumers in difficult positions when they, unfortunately, fall behind on payments, where they must fork out for high interest and late payment fees, Zilch has innovated the BNPL and payments industry, providing a breath of fresh air and a safer space by partnering directly with customers. Providing them a virtual Mastercard, they can spend at over 37 million merchants worldwide. Further, Zilch has never charged one of its 2.5 million customers a late fee since inception.

Instead, Zilch offers its customers cashback and rewards for each transaction completed in-store via Tap & Pay, or online, and in total difference to traditional credit cards, Zilch measures the affordability of every customer each and every time they spend. This means with Zilch’s business model, it manages to avoid lending a customer more than they can afford to pay back.

With BNPL space predicted to surge in value to $1 trillion in value, Zilch has been alone in running a DTC business model. Now under the leadership of Tim Cook, Apple (AAPL), the world’s largest technology company (market cap circa. $2.1 Trillion), has researched the DTC business model’s value that Zilch offers its customers through its all-in-one card, which provides the very best of debit and credit (BNPL 2.0). And in June 2022, the iPhone maker announced plans to enter the customer lending market with a BNPL 2.0 product of its own: Apple Pay Later.

Klarna’s response to the launch of Apple Pay Later

In light of the Apple Pay Later news, Sebastian Siemiatkowski, the CEO and co-founder of the large BNPL provider Klarna, appeared in an interview on CNBC’s “Squawk Box Europe” on June 10, 2022. During the interview, CNBC’s anchors Karen Tso and Steve Sedgwick questioned Siemiatkowski on whether Klarna’s traditional BNPL business model is now outdated.

During the interview, CNBC highlighted Zilch’s approach to disrupting the traditional credit card industry, noting that the upcoming Apple BNPL model will adopt a similar approach to Zilch. CNBC emphasised that both Apple and Zilch’s business models focus on partnering directly with customers instead of merchants, protecting the financial safety of their business in markets like this, and notably, whether Sebastian thought Klarna’s chosen model was the right one to survive a market where inflation is surging and will be for certain followed by higher interest rates. By being a button on the checkout, BNPL 1.0 companies like Klarna and Afterpay partner with retailers in a way that many critics argue encourages people to make purchases they can’t afford due to the point in the buying process they meet them, which can lead to damaging consequences.

Siemiatkowski defended Klarna’s model, billing the BNPL product as “superior” to the credit card model and  “extremely recession-proof”, claiming that the average Klarna user has an outstanding balance of $50, compared to the average credit card user’s outstanding balance of $5,000. In May 2022, Klarna reported a loss of $748 million. The company also announced it would lay off 10% of its 6,500 staff to save costs.

Companies like Zilch provide alternative value-driven BNPL 2.0 services for the modern customer and are attracting many of those who once used traditional BNPL products or replied on traditional high-interest credit cards to access finance.

Traditional BNPL and payments providers like Klarna, whose customer is the merchant, are now grappling to keep pace with companies like Zilch, which sees utilisation rates today being daily vs. around 10-15x a year for the checkout button, BNPL 1.0 model. These latter companies will soon have to also compete with both Apple and Zilch in the fast-paced BNPL and payments industry.

Why Apple is adopting a Zilch-centric strategy

Since launching in 2020, Zilch has developed a base of more than 2 million customers in the UK – growing, in many cases, more than twice as quickly as some of its competitors. Now, approximately 250,000 customers sign up to use the BNPL product every month. And, in May 2022, Zilch launched in the U.S., scaling its ground-breaking payment solution into a new international market. Now, Apple is looking to achieve similar success by capitalising on Zilch’s revolutionary approach to BNPL.

While traditional BNPL companies partner with retailers, Zilch connects directly with customers by allowing them to buy goods from any merchant that accepts Mastercard, whether in-store or online. Customers can use their virtual Zilch card or the Zilch app to make their purchases with more than 37 million merchants.

Another key feature of Zilch’s consumer payment platform is its technology-driven affordability algorithm, which provides each user with a spending limit based on the customer’s financial data and payment history. Zilch updates this personalised spending limit after every customer transaction – which is daily in most cases. This affordability check is much more frequent than credit card providers, who will only check when you request a higher limit. In April 2022, Zilch partnered with Experian to develop its affordability analysis algorithm, which blends Open Banking, CRA, and behavioural data. The partnership integrates Experian’s data with Zilch’s, improving Zilch’s 360-degree view of users’ evolving affordability.

Apple’s strategic launch should see the company achieve success in a similar vein.

What’s the difference between Apple and Zilch’s payments product?

Apple’s product will be different from Zilch – it is not as ubiquitous. To help clarify, it’s important to note that the Apple product will;

Firstly, it will only be accessible to iOS customers – accepted at all retailers but only accessible to iPhone users – cutting out the 46% and 50% of Android users across the USA and UK respectively – effectively halving the potential TAM.

Secondly, Apple’s Pay Later product works on the Mastercard instalment rails (issued by Goldman Sachs) meaning these will be one-time cards. Users will have to create a new card for each transaction and there is a minimum spend of $50.

Our business insights show this indicates Apple could lose out on more habitual usage of active, returning customers (up to 40% of transaction volume).

This is exciting for a business like Zilch that doesn’t have the restrictions of being solely iOS, the restrictions of the Mastercard instalments product, and no minimums. Instead, Zilch has a fixed card product with a personalised spending balance, which can be used anywhere and on an ongoing basis without having to generate a new card every time. Zilch can also create as many plans as they want without needing Mastercard to create those plans for them.  Most importantly Zilch is a debit and credit product in one.

Zilch: a Payments & BNPL market leader

Given Zilch’s position as a Payments and BNPL market leader, it’s no surprise that Apple is plotting to follow in the company’s footsteps. As part of Zilch’s dedication to protecting customers’  financial well-being, the BNPL provider has worked closely with regulators to advance BNPL industry protocols.

When Zilch’s CEO and co-founder Philip Belamant announced plans for the pioneering BNPL product, Zilch’s model didn’t fit into existing regulatory brackets. So, Zilch completed the Regulatory Sandbox Programme, working with the Financial Conduct Authority (FCA) to develop the BNPL product and identify its position in the market. This 12-month research and development (R&D) process saw the FCA examine Zilch’s offerings, balance sheet, profit and loss forecasts, and cash flow statements. The FCA also conducted a background check to qualify Zilch’s management team. In particular, the FCA praised Zilch for its rejection of compound interest and low initial lending limits.

Having earned a consumer credit licence, Zilch then began contributing to essential changes in BNPL regulations that protect consumers’ financial health. The financial regulator has since required other BNPL providers to change their terms and conditions in line with Zilch’s consumer-focused approach.

Now, as the BNPL space continues to evolve, there are more industry regulations to come that will strengthen consumer protection in line with Zilch’s ways of operating.

About Zilch

In a sea of BNPL 1.0 providers that have grown from only a few when Zilch was founded, Zilch stands out as the one that enables much more than payment delays and instalments. Not only does Zilch allow customers to either pay in one transaction at checkout and receive instant cashback rewards or divide the payment into four transactions, spread over six weeks at 0% APR, but it also offers a plethora of customer rewards and incentives and protects consumers from the costs associated with its competitors. Overall, Zilch’s mission is to create value for its users at every transaction.

Although Zilch is a young company, its value reached $2 billion in November 2021, 14 months after its Series A. This milestone saw Zilch become a double unicorn and at the time the fastest-growing European unicorn in history.