Sezzle’s (ASX:SZL) Meteoric Rise Raises More Questions Than Answers

Sezzle’s (ASX:SZL) Meteoric Rise Raises More Questions Than Answers

Sezzle Inc (ASX:SZL) is an Australian Buy-Now Pay-Later (BNPL) company.  It is domiciled in the US and the majority of its operations are in that country. Underlying merchant sales are approaching a $1bn per year run-rate, which is not large – but not trivial, either.  Sezzle has a $1.1bn market cap on $32m in revenue for the twelve months to June 2020, and is a small player in a red-hot space.

When I look at Sezzle, I have four fundamental thoughts.

  • Why are fees so high and do these cast doubt on the “financial freedom” the business aims to deliver?
  • Why was the Merchant Interest Program (MIP) not disclosed sooner, and is the accounting of this program correct?
  • What is the value prop of the MIP for a small retailer, and are retailers fully apprised of the risks they run with this program?
  • There is a large amount of stock coming out of escrow in July 2021.

Merchant Fees

In the third quarter of 2020, Sezzle earned fees equivalent to 5.8% of the underlying merchant sales (UMS). This is one of the highest rates in the industry and increased from 4.8% at the end of 2018.  While this is a positive from a business perspective, there are limits on the amount that can be charged to retailers, especially given standard credit card processing fees are a fraction of the cost.  According to the Merchant Agreement, Sezzle’s standard fee is 6% of the transaction value plus $0.30 per transaction (section 5.2).

It is difficult to form a comparison because Sezzle’s customer base is diverse, but 5.8% could be a quarter or more of a retailer’s pre-tax margins, after accounting for processing fees that would otherwise occur on credit card transactions.

For a rough comparison, a $100 purchase on a credit card might cost the retailer 1%-2% to process.  The interest on a $100 credit card purchase at ~17%p.a. over 6 weeks (the same time as Sezzle’s repayment terms) is another ~2%. This is a total transaction cost of 3%-4%, which is far below the 5.8% Sezzle is earning.  Admittedly, with a credit card the interest on the purchase is charged to the user (instead of the merchant), but clearly the overall cost to the system of Sezzle’s solution is much higher.

I would ask:

  • For a business that is presenting itself as financially responsible by making credit more accessible, is this actually a better outcome?
  • Does this make Sezzle vulnerable to competition from incumbents who can implement a lower-cost solution at greater scale?
  • A large benefit of BNPL solutions is lower friction for the buyer and retailer; can you be a low-friction solution if you are a high-cost provider?


Interestingly, Sezzle offers to defray high fees by paying merchants interest on unpaid balances, which leads us to…

The Merchant Interest Program (MIP)

When a Sezzle transaction completes, the merchant ships the product to the customer, and Sezzle becomes liable to pay the merchant for that purchase. The customer, in turn, becomes liable to repay Sezzle for that transaction over a 6-week period. However, in some scenarios, merchants can elect not to receive payment but instead let Sezzle keep the money and earn interest on the balance. Merchants can earn up to 8% interest per year on these funds (currently 5%).

Merchants who want to withdraw their funds can expect to be repaid in 7 days for withdrawals larger than $250,000. However, Sezzle reserves the right to impose limits on your Merchant Interest Program and make changes to your Merchant Interest Program without notice or limits.  This includes the withdrawal amount and withdrawal frequency.

As of June 2020, 86% of Sezzle’s outstanding payables to merchants are in the Merchant Interest Program. There has been a massive increase in the size of the MIP over the past 6 months, indeed it is plausible that a large part of Sezzle’s growth has been funded through this program.

On the face of it, we have a very interesting invention – a better mousetrap. Merchants are able to earn a reasonable rate of interest and Sezzle is able to obtain cheap funding to continue its growth. Sezzle pitches the MIP as a great way to save on fees – while getting two bites at the apple via cheaper funding – which is cheeky but not illegal.  It is a tacit acknowledgement of the high level of fees, however.

“Start to earn back the money taken out for fees.”  (source: Sezzle website)

It’s clever.  I’ve never seen anything like it. It’s borderline genius.  But it also raises a lot more questions than it answers.


The first question is simply around disclosure.  Sezzle did not disclose the MIP program until July 2020, despite revealing in the 2020 half-yearly report that it had $10.05m in the MIP at the end of December 2019.  This was ~76% of outstanding payables to merchants at the end of 2019.  What’s more, the annual report for 2019 does not disclose interest payments to merchants on these amounts, stating only that an increase in interest payments were driven by use of the company’s revolving credit facility (page 34 of the 2019 annual report).

Quarterly reports in the first part of 2020 also do not disclose the program, stating again that increase in interest payments were due to mandatory borrowing levels on the revolving credit facility.  As far as I can tell there has been no disclosure around when the program began. This raises several important questions:

  • When did merchant participation in this program first commence and why was it not disclosed at that time?
  • Why was such an important source of funding not disclosed in the audited annual report in 2019?
  • Was auditor Baker Tilly aware of this program at the time it signed off on the annual report?
    • Did Baker Tilly approve of the accounting treatment of the MIP?
  • Was the market fully informed of the importance of the merchant interest program at the time of the capital raise in July 2020?
    • I can see a mention of the MIP in that presentation, but no explanation of what it is or how important it has been historically
    • July 2020 was the first mention of the MIP I have seen in Sezzle’s ASX announcements.


From my perspective, it looks an awful lot like Sezzle has a few quirks in its business model, and has managed disclosure carefully to reach that first capital raise in July without having to fully open the kimono.

I would also highlight the way that the Merchant Interest Program is recorded in the accounts. The MIP appears to be recorded as an account payable rather than short term debt in the current liabilities section of the balance sheet. This means that the MIP inflows stay as an operating cash flow item rather than moving to cash flows from financing.  This has the effect of making operating cash flow look a lot better than it is, while also understating debt levels.  I am not an accountant so take this with many grains of salt, but it seems to me that an interest-bearing liability should be recorded as debt and as financing cash flows, not as accounts payable and operating cash.

Noting the apparent non-disclosure of the MIP, I would be interested to know if auditor Baker Tilly was aware of the existence of this program and if it approved the accounting treatment of this liability.

Funding Risk

The importance of the MIP as a source of funding has been diminished with recent capital raises, but is nonetheless a very material part of the business model.

  • What is the median length (in months) and size (in dollars) of merchant participation in the MIP?
  • What is the median size of participation in the MIP, relative to each merchant’s underlying merchant sales?
  • Are MIP liabilities concentrated among certain MIP participants?
    • Sezzle reports no concentration risk among customers, so concentration in the MIP would be unusual.
  • Has Sezzle ever refused or delayed a merchant’s attempt to withdraw funds from the MIP?
    • How many times has this happened, what quantity of funds was affected, and for how long?


Separately, I would question if Sezzle is skirting the edge of legality by advertising the MIP as being “like a savings account”. Sezzle also does not, as far as I could see in the Merchant Agreement, highlight the risks of becoming a creditor of Sezzle.  More questions:

  • Is Sezzle legally able to, under its licenses, describe the MIP as being “like a savings account” ?
  • Is Sezzle required to obtain additional licenses to let merchants open “interest-bearing accounts”?
  • Is Sezzle legally required to disclose to merchants the risks of becoming a creditor of Sezzle?
    • Does Sezzle currently make these disclosures to merchants?


There are laws governing this type of claim. source: Sezzle website

If there is no FDIC deposit insurance, I would politely opine that Sezzle’s balance is not “like a savings account”.

So Many Questions

Lastly, I would highlight the risks to merchants:

  • Do merchants have any security over the funds in the MIP?
    • If no – why are merchants comfortable becoming an unsecured creditor of Sezzle?
  • Are merchants given any extra disclosure that would permit them to better assess the credit-worthiness of Sezzle?
  • Who are all these small merchants that can afford to sell products and not get paid for them?
    • Almost all of these businesses look like they sell physical inventory, which has a cost.
    • It would be unusual for a small merchant to have a larger working capital burden by leaving the cash with Sezzle.
  • Why are these businesses bloating their funding requirements in return for 5% interest from Sezzle?
    • Inventory finance typically costs more than 5%, so what is the actual benefit to merchant participants?


So many questions, so few answers. There’s a lot of stock coming out of escrow in July 2021, so it will be interesting if there is clarification before then.

Food for thought.

I have no position whatsoever in Sezzle or any other buy-now pay-later stock. This is a disclosure and not a recommendation.

No Comments

Add your comment