London fintech Zilch is ramping up its use of artificial intelligence to boost competition with rival buy-now-pay-later (BNPL) providers like Klarna and help it achieve profitability ahead of a planned IPO next year.
The payments firm, founded in 2018 and valued at $2bn (£1.65bn) last October, has enjoyed bumper growth in recent years. Its financial year to March 2023 saw revenue nearly triple to £30m and gross profit increase more than fivefold to £17.4m.
Now it has its sights firmly set on bottom-line monthly profitability.
“We think that we’ll be talking about that soon,” co-founder and chief executive Philip Belamant told City A.M.
He said the firm’s progress on AI and machine learning would unlock “tens of millions of pounds of cost efficiency in the company just in the next couple of years”.
“For the average model our team’s building, we’re training it now with 10 times the amount of data than we were quite literally six months ago, and then we’re building, testing and deploying that model in days rather than weeks,” he said.
Zilch offers a card allowing consumers to pay via debit or credit which can be paid off in four interest-free instalments over six weeks, rather than a “checkout button” like many other BNPL firms.
These companies make most of their revenue from partnerships with merchants, earning a commission on sales for financing instalment plans. Zilch also earns fees from brands advertising on its app.
Banks and fintechs are racing to expand their use of AI to boost productivity and enhance their offerings. Klarna, the UK’s biggest BNPL firm, has said its AI assistant alone could drive $40m (£32m) in profit improvement this year.
More deals, less fraud
Zilch is rolling out new technology to help it underwrite credit, deal with customer enquiries, develop its user interface and root out fraudulent merchants.
Belamant highlighted the potential for “buyer intent prediction”. “If we know you’re about to come and tell us you’re shopping for groceries on Tuesday because on Tuesdays you tend to do that, well obviously it’s easy for us to get that and then get some deals,” he said.
“What if we knew that was more valuable for you to do on a Monday? Why don’t we go find the value for you before you know, and then actually ping you through the app?”
Belamant said generative AI could write descriptions for these deals or even go “one step further” to create imagery or video promoting them to customers.
The firm’s top brass noted a wealth of “first-party data” from its direct-to-consumer business model and high engagement.
“We’re literally seeing and approving or rejecting the card transactions,” said chief technology officer Sean Hederman. “So, by definition, we have the best data around for that.”
“Customers use Zilch up to 10 times more than they would use any other type of product you might think about in the space,” Belamant added.
Zilch announced last month that it was extending its partnership with cloud provider Amazon Web Services (AWS) to bolster its AI innovation.
Belamant said the fact that Zilch has always been hosted on AWS guaranteed efficiency and security as the firm would not have to move data from one place to another when building its models.
BNPL headwinds
The UK’s BNPL sector is grappling with intense competition, reduced funding appetite and the spectre of regulation, which could be costly for some firms to adapt to.
City A.M. revealed last month that Laybuy, once one of the country’s biggest BNPL names, was putting itself up for sale following a turbulent few years.
“It is a very difficult space to be in, particularly if you’re on the checkout page,” Belamant said. “If we’re being frank, you’re an undifferentiated commodity.”
He added: “These companies were typically underpricing themselves to win the deals. So the margin was thin anyway – now the margin is negative. And unfortunately, there’s just no money to fund that type of business.”
Belamant said the shifting sands had forced smaller firms to rely on late repayment fees for a major chunk of their revenue, hurting their reputation among customers.
He set Zilch, which is already FCA-regulated, apart from the competition. “Our margin has more than doubled just in the last year alone,” he said. “Of card spend in a month from a customer of Zilch, we are about 50 to 60 per cent of all that spend now.”
Having held on to double unicorn status for more than two years, Zilch is planning a much-anticipated stock market listing. Belamant said the firm was still aiming to float “within next year or around that mark” but had yet to decide on a location.
The firm has held talks with the Nasdaq, New York Stock Exchange and London Stock Exchange. Belamant himself is a co-chair of trade body Innovate Finance’s “Unicorn Council”, which has made a series of policy recommendations for the UK government to make London a more attractive place for fintech IPOs.
Belamant suggested that Klarna’s plans for a blockbuster listing, reportedly eyeing up a New York float at a valaution of $20bn (£15.9bn), could affect his company’s IPO blueprint.
“There are a couple of other companies that are considering this, and they at least could be seen as somewhat of a peer, so that may change things as well – whether they do or don’t do it, and how it goes if they do,” he said.
