{"id":9952,"date":"2025-02-10T16:22:59","date_gmt":"2025-02-10T16:22:59","guid":{"rendered":"https:\/\/finderica.com\/?p=9952"},"modified":"2025-02-10T16:22:59","modified_gmt":"2025-02-10T16:22:59","slug":"how-a-fintech-saved-itself-by-targeting-buy-now-pay-later-addicts","status":"publish","type":"post","link":"https:\/\/finderica.com\/?p=9952","title":{"rendered":"How A Fintech Saved Itself By Targeting Buy-Now, Pay-Later Addicts"},"content":{"rendered":"\n

This story appears in the December\/January 2025 issue of Forbes Magazine. <\/span>Subscribe<\/a><\/p>\n

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Facing extinction, Sezzle chopped costs and hit on a strategy for making money from the heaviest users. The stock market noticed.<\/h2>\n

By <\/sub>Hank Tucker<\/sub>, Forbes Staff<\/sub><\/h4>\n
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T<\/abbr>he future looked grim<\/strong> in mid-2023 for Minneapolis-based Sezzle, an also-ran in the fast-growing buy-now, pay-later fintech business. It had burned through most of the $115 million it had raised in a 2019 initial public offering on the Australian stock market and two subsequent offerings. A rescue deal it had struck to be acquired by a competitor was collapsing, along with both companies\u2019 stock prices. And when tiny Sezzle tried to sign up big retailers, it had to make too many concessions to ever turn a profit\u2014a problem because the typical buy-now, pay-later transaction, which allows online shoppers to pay for purchases in four installments at 0% interest, relies on subsidies from merchants.<\/p>\n

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Photo by Nate Ryan for Forbes<\/small><\/p>\n<\/figcaption><\/figure>\n

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Meanwhile, investor enthusiasm for money-losing fintechs, which surged during the early days of the pan\u00addemic, was evaporating. Venture capital fun\u00adding for the sector fell from a rec\u00adord $141 billion worldwide in 2023 to $39 billion in 2023, per CB Insights.<\/p>\n

\u201cWe were reaching a tech-pocalypse with interest rates rising, and [investors were] thinking \u2018We\u2019ve got to look at the fundamentals of companies,\u2019 and our fundamentals were not great,\u201d remembers Charlie Youakim, Sezzle\u2019s 47-year-old CEO and cofounder.<\/p>\n

To survive, he started chopping. He shuttered the company\u2019s operations in Europe, India and Brazil, cut worldwide staff from 580 to 240 and began shedding unfavorable partnerships. He even trimmed headcount in the U.S.\u2014the heart of Sezzle\u2019s business\u2014by 10% and made symbolic changes like canceling the $500-a-month contract for a fancy Bevi machine that dispensed carbonated and flavored water at headquarters.<\/p>\n

Up against much bigger and better-funded competitors such as San Francisco-based Affirm and Sweden\u2019s Klarna, Youakim couldn\u2019t simply cut his way to survival, let alone profitability. He needed a new revenue source and strategy. He found both by focusing on the niche of heavy users, chronic buy-now, pay-later addicts.<\/p>\n

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In 2023, Sezzle launched a $12.99-a-month subscription service aimed at these frequent fliers, with benefits including access to more retailers and flexibility in rescheduling payments. Those opting for the premium \u201cSezzle Anywhere\u201d (introduced in June 2023) pay $17.99 a month and can use 0% installment buying at physical stores and restaurants too by loading a virtual Visa card onto their phones. In all, Sezzle has 529,000 subscribers.<\/p>\n

That $17.99 monthly charge works out to $216 a year. That\u2019s expensive when a host of credit cards charge no annual fees and<\/em> <\/strong>pay cash back on all purchases. But many buy-now, pay-later users don\u2019t qualify for the best credit card deals. A recent study by the Consumer Financial Protection Bureau found that most buy-now, pay-later loans are made to borrowers with subprime credit scores and that heavy users are more likely than other Americans to have outstanding student and personal loans, in addition to their credit card balances. Three-quarters of Sezzle\u2019s users are Gen Z or Millennials.<\/p>\n

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Here\u2019s another way to look at Sezzle\u2019s offering, which gets mixed user reviews online. Credit cards now carry an average annual interest rate of 21.5% (though people with low credit scores typically pay more). Using that average, $216 is roughly the interest someone carrying a constant $1,000 balance on a credit card would pay in a year. Sezzle won\u2019t disclose the average outstan\u00adding balance subscribers have. (Surprisingly, it doesn\u2019t even give subscribers a credit limit; each purchase is approved individually, the company says.) It\u2019s safe to say $216 is a steep price for infrequent users, but for the heaviest users of Sezzle Anywhere\u2014the top 10% make an average of 10 transactions each month\u2014it may be worth it.<\/p>\n

With subscriptions bringing in a growing share of revenue\u201433% in the third quarter of 2024\u2014Sezzle has been profitable for more than two years. For the first nine months of 2024, it reported $53 million of net income ($8.94 a share on a diluted basis) on 57% growth in revenue to $173 million. By contrast, Affirm, which went public in January 2023, lost $279 million on $1.9 billion in revenue during the same nine months. Klarna, which is preparing for a U.S. initial public offering, lost $10 million in the first nine months on $1.8 billion in sales and is finally turning quarterly profits. It started its own subscription service in the U.S. last year.<\/p>\n

Both champions and skeptics have taken notice. Sezzle\u2019s stock, which listed on Nasdaq in August 2023, shot up 2,000% during the first 11 months of 2024. It has fallen 44% since, including 23% on December 18, when short-seller Hindenburg Research issued a report savaging Sezzle as a \u201cfailing\u201d platform that had \u201calready been left in the dust\u201d by bigger competitors and \u201creported rosy numbers using short-term tricks.\u201d Its stock recently traded around $240 a share, for a total market cap of $1.3 billion, making Youakim\u2019s 44% stake worth nearly $600 million.<\/p>\n

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As Hindenburg points out, Sezzle\u2019s merchant roster has declined by more than half since 2023 to 23,000, while its active customer count is down 20% to 2.7 million. \u201cYou should not be focused on keeping active customer accounts high at the sake of financial performance. I call them vanity metrics. The real metrics that matter are performance metrics,\u201d Youakim says, pointing to Sezzle\u2019s growth in sales and profits.<\/p>\n

This isn\u2019t Youakim\u2019s first startup. Minnesota-born and -bred (his father is a Palestinian immigrant), he graduated in 1999 from the University of Minnesota with a degree in mechanical engineering and a knack for coding. He spent his 20s working for a parking software company before heading back to the University of Minnesota in 2008 for an MBA. Graduating in the wake of the Great Recession, he found job prospects limited and started Passport, his own mobile parking payments company, in Charlotte, North Carolina, with a cousin. The company was successful, but the cousins butted heads. Youakim was pushed out at the end of 2015.<\/p>\n

Wanting to stay in payments, in 2016 he founded Sezzle with Paul Paradis, a business school buddy who wanted to stay in Minnesota. They raised $1.8 million in a seed round and in 2017 launched a product that aimed to lower transaction costs for merchants. When that fell flat, Youakim drew inspiration from Afterpay, an Australian-born buy-now, pay-later startup. (Afterpay entered the U.S. market in 2018 and was bought by Block in 2023.)<\/p>\n

With Afterpay, Affirm and Klarna already in the field, VCs weren\u2019t interested in backing Sezzle. So Youakim sold his stake in Passport to Bain Capital Ventures for about $12 million (a \u201cmassive discount,\u201d he says) and invested $8 million of it into his new company\u2014after taxes, that\u2019s basically all he had. An analyst suggested he do a roadshow in Australia, where it\u2019s more common to go public at early stages, leading to a $30 million 2019 IPO.<\/p>\n

Despite being public, Sezzle was way behind its rivals. By 2019, Affirm had already raised $1.1 billion in debt and equity at a valuation of $2.9 billion. Plus, it had buzz\u2014it was run by Max Levchin, a PayPal cofounder, making him an O.G. member of the PayPal mafia, along with Silicon Valley royalty Elon Musk, Peter Thiel and Reid Hoffman. (Affirm\u2019s current market cap is $18 billion; Levchin owns 10%.)<\/p>\n

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In 2020, Youakim made his first bid to distinguish Sezzle from larger players with an optional free service allowing users to have their loan payments reported to the credit bureaus (Experian, Equifax and TransUnion) to help build their credit history. Buy-now, pay-later lenders haven\u2019t traditionally reported to the bureaus, and reporting could even lower a consumer\u2019s score if it looked like they were taking out lots of personal loans. Sezzle\u2019s solution is to aggregate a user\u2019s transactions for each month and report it as a single revolving line of credit (like a credit card).<\/p>\n

Credit reporting wasn\u2019t enough to differentiate Sezzle. By February 2023, it was running short of cash again. Sezzle\u2019s stock had tanked 80% in a year to $2 a share amid rising bad debts and assertions by a local fund manager that it was hiding negative information. That\u2019s when Sezzle agreed to be bought for $300 million by Australian competitor Zip\u2014a deal that fell apart five months later.<\/p>\n

One current issue flagged by Hindenburg: The push for subscribers has caused Sezzle\u2019s customers\u2019 default rates to rise from 1.2% in 2023 to 2.3% in the third quarter last year. Youkaim waves this off as a natural consequence of growth. It\u2019s worth noting that buy-now, pay-later users have much lower default rates on these loans than on their credit cards because lenders like Sezzle require <\/em>that borrowers set up automatic repayments\u2014either from their bank accounts or through charges to their credit cards. In other words, the buy-now, pay-later companies buck some of the default risk to the credit card issuers.<\/p>\n

Hindenburg, which ceased operations in January, raised other issues with Sezzle. One is that Youakim has pledged the majority of his stake (some 1.7 million shares, worth around $400 million) as collateral for a margin loan. Youakim insists that what he has actually borrowed is a tiny fraction of that and that he simply wanted a little personal liquidity since he has never sold a share. He has been as frugal personally as professionally, he says. He doesn\u2019t own a car in Minnesota, walking two and a half miles each way most days to Sezzle\u2019s office, and still lives in the same home he\u2019s owned since he started the company, though he spends most of the winter in Puerto Rico. He chose the Sezzle name\u2014a mashup of sell<\/em> and sizzle<\/em>\u2014in part because its domain name was cheap.<\/p>\n

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After spending just $4.4 million on marketing and advertising in the first nine months of 2024, Sezzle is loosening its purse strings a bit. In August it agreed to spend more than $5 million annually for three years to have the Sezzle name and rainbow-hued logo patched onto Minnesota Timberwolves players\u2019 basketball jerseys. The sponsorship deal also comes with four courtside seats at every home game to entertain partners and investors.<\/p>\n

\u201dWe knew it was time for us to do something a little bit splashier,\u201d says Youakim\u2019s cofounder Para\u00addis, who worked in sales for the Timberwolves in his first job out of college and oversees Sezzle\u2019s marketing strategy as its president. He points to competitors\u2019 efforts\u2014Klarna, Afterpay and Affirm have done billboards, and Klarna bought a Super Bowl ad.<\/p>\n

Timberwolves superstar Anthony Edwards looms on a billboard outside the franchise\u2019s Target Center with his Sezzle patch prominently displayed. After the team surprised many with its best season in decades last year, the NBA rewarded it with 25 national TV games this season, up from just 10 a year ago.<\/p>\n

\u201cWe\u2019re not a regional player,\u201d Youakim says. \u201cWe\u2019re looking for national impressions.\u201d<\/p>\n

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Illustration by Patrick Welsh for Forbes<\/small><\/p>\n<\/figcaption><\/figure>\n

HOW TO PLAY IT <\/strong><\/h3>\n

By William Baldwin<\/em><\/p>\n

There is a time for sizzle and a time for muscle. Fiserv<\/strong>, which processes payments for merchants and banks, delivers the latter to your portfolio. This pedestrian firm, headquartered in the flyover state of Wisconsin, lacks the excitement of Silicon Valley outfits reinven\u00adting money. But in financial technology size has its advantages, especially in software development and fraud detection. Fiserv hauled in $20 billion of revenue last year and is sufficiently profitable that it was able to dish out something like a fourth of that sum to investors via share buybacks. The shares trade at 22 times the $9.30 Value Line expects for earnings this year.<\/h4>\n

William Baldwin is Forbes\u2019 Investment Strategies columnist. <\/em><\/p>\n

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MORE FROM FORBES<\/strong><\/h4>\n

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This story appears in the December\/January 2025 issue of Forbes Magazine. Subscribe Facing extinction, Sezzle chopped costs and hit on a strategy for making money from the heaviest users. The stock market noticed. By Hank Tucker, Forbes Staff The future looked grim in mid-2023 for Minneapolis-based Sezzle, an also-ran in the fast-growing buy-now, pay-later fintech<\/p>\n","protected":false},"author":1,"featured_media":9953,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"rank_math_lock_modified_date":false,"footnotes":""},"categories":[196],"tags":[3978,3976,1577,3977,3614,3054],"class_list":{"0":"post-9952","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-finance-news","8":"tag-addicts","9":"tag-buynow","10":"tag-fintech","11":"tag-paylater","12":"tag-saved","13":"tag-targeting"},"_links":{"self":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/9952","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=9952"}],"version-history":[{"count":0,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/posts\/9952\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=\/wp\/v2\/media\/9953"}],"wp:attachment":[{"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=9952"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=9952"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/finderica.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=9952"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}