Minneapolis company Sezzle in a healthy spot as buy-now-pay-later options grow

There are plenty of examples of immediate needs not matching up with budgetary restrictions.

Like replacing a broken window air conditioner during a heat wave despite the $500 price tag. Or maybe a new pair of back-to-school shoes that have to be tied up by September.

Consumers are turning to buy-now-pay-later payment options — like those Minneapolis-based Sezzle has created — to make purchases in installments as they try to manage their budgets and avoid the high interest rates of credit cards. In the past few months, companies like Sezzle have rapidly expanded their products' reach so shoppers can finance their purchases at more places.

While the buy-now-pay-later (BNPL) market is still maturing, fintech, or financial technology, experts are debating about the future of the industry. Some say growth potential is enormous while others argue there are serious hurdles the industry has yet to overcome.

Already, BNPL has made a splash this shopping season during Amazon's Prime Day sales. On July 12 — the second day of the Prime sale — BNPL accounted for 6.6% of online orders, driving $466 million in revenue, a 21% uptick to last year, according to Adobe Analytics.

"This back to school and holiday season will also be a good indicator of BNPL's viability," said Anne Mezzenga, cofounder of the Omni Talk retail podcast and a member of Sezzle's advisory board. "Once economically strained consumers reach the checkout for those big seasonal stock-up trips, I think we'll see more BNPL usage there than we have in past years."

Sezzle is one indicator of the category's evolution. It released its second-quarter earnings late Tuesday showing its fourth consecutive profitable quarter after losing $1 billion in value in the past few years as investors pivoted away from tech companies.

Sezzle announced it earned $1.1 million from April to June, a large improvement from the more than $15 million loss the company reported a year ago. Even though its merchants and active consumers have declined, Sezzle's repeat usage, number of subscribers, income from processing fees and marketplace volume have all had sizeable jumps. This is all after Sezzle had to work to reduce costs, including laying off 20% of its workers early last year.

"We started on our path to profitability in the first quarter of 2022, which required us to make some tough decisions," said Sezzle CEO Charlie Youakim in a Tuesday night call with analysts. "Those tough decisions have turned out to be good decisions and have allowed us to drive and expand our product offerings to better serve our merchants and consumers."

Sezzle's example

Sezzle has made several significant changes within its company in the past few months. In June, Sezzle launched its Pay Anywhere subscription that allows members to use its virtual card online or in-store through its mobile app anywhere that accepts Visa.

Pay Anywhere followed Sezzle's May product announcement of Pay-in-2, which enables customers to pay two equal installments through two weeks for purchases such as groceries and monthly subscriptions.

As of the end of July, Sezzle had nearly 190,000 subscribers across its Premium and Pay Anywhere subscriptions.

Sezzle, publicly traded on the Australian Stock Exchange, has filed for listing on the startup-friendly Nasdaq Capital Market. In recent weeks, Sezzle moved to offices in the Dayton's Project building on Nicollet Mall in downtown Minneapolis, another signal of the company's improved positioning.

Sezzle, accepted by retailers such as Target, is only one player in a growing alternative-payments industry that includes options such as Affirm, PayPal, Klarna and Afterpay.

In March, Apple launched Apple Pay Later, a buy-now-pay-later feature that allows users to split purchases into four payments over six weeks anywhere that accepts its Apple Pay mobile payment.

Affirm's Debit+ physical card, which started testing in 2021, could be "revolutionary" for the industry, said Nicholas Lucas, a fintech equity research associate at Mizuho Securities. The card can act as a traditional debit card, but it also enables the shopper to choose through the mobile app while in store to pay in installments instead. An uptick in Google searches for Affirm's Debit+ in the past few months is a good indicator that the card is gaining traction, according to Mizuho Securities.

"I think we've definitely gotten past the deep ramp-up on the adoption curve, if you think just about how many BNPL companies popped up in 2021. ... As consumers have learned more about the product and have started to use it more, it definitely feels like it's gaining adoption more quickly now," Lucas said.

Physical integration of BNPL in U.S. stores is still rather untapped.

"Due to the macro environment, inflation and prices are high and student loans are going to come back, so people are going to be facing some kind of hardships, and having some kind of flexibility that buy-now-pay-later offers is an opportunity on the horizon for these companies," Lucas said.

Questions remain

Eugene Simuni, an analyst at MoffettNathanson research firm, is more skeptical about the industry's prospects and said he thinks while it might grow, it will be gradual. Market penetration is still low, with BNPL making up only about 4% of e-commerce, travel and leisure spending in the United States and being barely existent in store card purchases, according to a 2022 MoffettNathanson report.

In the United States, BNPL is a harder sell because more consumers use credit cards. In addition, many of the shoppers who might turn to BNPL generally have less spending power. BNPL companies have also tightened some of their lending, which has also limited their growth, Simuni said.

Going forward, it might make more sense for a financial services company or a marketplace like Amazon to offer BNPL options than an independent stand-alone company, Simuni said.

"It's a tough business," he said. "It's tough to make it work, but it's a really interesting one."

For a consumer, BNPL can present a good alternative to credit cards. However, shoppers should try to avoid several financial pitfalls, said Shannon Doyle, program manager for financial education for Lutheran Social Service of Minnesota.

Payments still need to fit into the budget, and consumers should look at the terms of service to understand any potential fees or interest, she said. It's also important to pay attention to payment due dates and understand how some installment plans charge an initial payment.

Doyle also said to be careful of having more than one installment plan purchase at once.

"They make it sound and feel so easy," she said, "and I think there can be unintended downsides."