Zip Co’s share price could rise on BNPL regulation

The share price of Zip Co (ASX: ZIP) could rise on its ability to better deal with tighter regulation of the buy-now-pay-later (BNPL) sector in Australia compared to its domestic competitors. 

Zip’s share price could also receive a boost from the possibility of a takeover bid, with analysts speculating that the BNPL platform is ripe for acquisition. 

Tighter regulation a positive for Zip

Brokerage Shaw and Partners has become highly bullish about Zip, giving the BNPL platform a price target that is over four times above where it’s currently trading. 

Shaw has given Zip a buy recommendation with a 12-month price target of $2.02, as compared to its current price of around $0.50. 

The brokerage expects the launch of tighter regulations governing the BNPL sector to have a positive impact on Zip compared to its peers, given that it’s already compliant with the new requirements. 

This will give Zip an edge compared to its competitors in the Australian BNPL sector, who will be scrambling to ensure compliance with stricter standards. In some cases, Zip’s BNPL peers may even make an exit from the market. 

‘Broadly, we suspect that there is a 30 - 50% upside medium term to Zip’s Australia and NZ volumes if and when the legislation is implemented,’ Shaw said in a note. 

The Australian federal government announced last week that BNPL services will be classified as credit products by the end of 2023, following the lead of UK regulators. 

The move arrives following calls from Australian consumer groups for tighter scrutiny of the BNPL sector, following rapid growth in its popularity during the Covid pandemic in a lax regulatory environment. 

A 2020 report from corporate watchdog ASIC found that BNPL platforms had caused some Australian consumers to ‘[suffer] harm.’

Stephen Jones, Financial Services Minister, said at a borrowing and lending conference in Sydney that Australia’s BNPL sector had been ‘unchecked and unregulated,’ leading to serious harm for consumers. 

According to Jones, because BNPL ‘looks like credit, it acts like credit, it carries the risk of credit,' it also warrants the same regulation as credit products. 

Is Zip ripe for acquisition?

Adam Dawes, senior investment advisor at Shaw and Partners, believes the market has failed to take note of the company’s recent strong performance.

In an interview with Switzer TV Investing, Dawes noted that Zip’s third-quarter transactions were 2.3 million, up 12% for the year. Transaction volume was $2.2 billion, up 9% for the year, while revenue was up 15% for the year at $182 million. 

In spite of these strong figures, Dawes said that Zip shares are still heavily shorted by the market. 

Given its low share price, Zip could be a ripe candidate for a takeover bid from a larger financial institution eager to access the BNPL platform's huge retail database. Zip currently has over 80,00 merchants in its database alongside millions of customers. 

Potential suitors could include Australian BNPL peer Afterpay, which was acquired by American payments giant Block Inc at the start of last year. Block was founded by former Twitter CEO Jack Dorsey in 2009 and has since emerged as a leading multinational fintech conglomerate. 

Zip has been the object of acquisition and merger plans in the recent past. In 2022 Sezzle – a North American BNPL platform headquartered in Minneapolis but listed on the ASX, sought a $491 million merger plan with Zip. The proposed merger ran aground in July, however, as a result of adverse economic conditions, prompting Zip to pay Sezzle US$11 million to cover associated transaction costs. 

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