How Does Sezzle Make Money? Analyzing Its Business Model

Executive Summary:

Sezzle is a payment provider that offers ‘Buy Now, Pay Later’ solutions to both customers and merchants. Items can be paid over the course of 4 installments.

Sezzle makes money via merchant fees as well as late payment (or penalty) fees. The bulk of its revenue is generated by merchant fees.

Founded in 2016, Sezzle has become one of the leading ‘Buy Now, Pay Later’ providers in the United States. It went public in 2019. Today, more than 29,000 merchants partner with Sezzle.

What Is Sezzle?

Sezzle is a FinTech company that offers ‘Buy Now, Pay Later’ (BNPL) solutions to both merchants and customers.

Purchases are settled within 4 installments. The first one is due up-front (when ordering) while the other 3 must be paid within a matter of 6 weeks (2 weeks for each installment).

Customers do not pay any interest on these installments nor does Sezzle charge any upfront or hidden fees. In fact, if payments are settled on time, no additional fees are applied.

Customers simply sign up and let Sezzle run a soft credit check in the background. Once approved, they simply select Sezzle as their preferred payment method and go ahead shopping.

To be able to use Sezzle’s service, a customer must be 18 years of age, have a Canadian or US phone number (to receive texts), have a working email address, and a non-prepaid payment method.

Sezzle works together with over 29,000 stores in categories such as fashion, electronics, art, pets, home, and more.

Customers can, furthermore, discover and shop stores directly from Sezzle’s website as well as its mobile phone app (available on Android and iOS devices).

A Short History Of Sezzle

Sezzle, headquartered in Minneapolis, Minnesota, was founded in 2016 by Charlie Youakim (CEO) and Paul Paradis.

Prior to launching Sezzle, Youakim was one of the founders and long-time CEO of Passport, a SaaS company that develops mobile payment applications for parking, permits, and so forth.

The idea for Passport came to him when using dollar notes to attend a class at the University of Minnesota where he did his MBA (and, in fact, grew up).

Nevertheless, Passport was (and still is) based in Charlotte, North Carolina, where his cousin (whom he built the business with) was from.

In 2015, 5 years after launching Passport and finally getting it off the ground, Youakim was ousted from his own company.

To make matters worse, his own cousin Bob Youakim was the one leading the charge. At the time, Charlie Youakim went through a divorce with Bob’s sister, ultimately tarnishing their professional and personal relationship.

Just days after being kicked out, Youakim reached out to Paul Paradis, whom he met during his MBA in Minnesota. Paradis, who’s also a purebred Minnesotan, was working leading sales for The Abreon Group at the time.

A few weeks later, in January 2016, the pair incorporated Sezzle. The original idea for Sezzle wasn’t that of an installment-based company, but to build a payment platform that directly competes with the likes of PayPal.

They even touted it the PayPal 2.0 of merchant processing. The idea was to essentially halve the cost for merchants while simultaneously allowing consumers to earn cashback rewards on every purchase.

sezzle old website
Wayback Machine

Unfortunately, the idea never really took off. Saving money wasn’t really that important to the merchant. What was important, though, was that all of them wanted to find ways to increase their sales.

One day, Youakim’s (new) wife was scrolling through her Instagram feed and noticed that Australien merchants were offering an odd payment method called Afterpay.

Afterpay, just like its competitors Affirm or Klarna, was part of the BNPL movement that slowly started to spread across the world. Especially Afterpay in Australia as well as Klarna in Europe had made big strides in popularizing this model within their respective territories.

In May 2017, Paradis and Youakim decided to cash in on that trend and pivot the business into the BNPL direction. To differentiate against existing competition like Affirm, the team decided to first go after merchants that offer items in the $100 to $500 range.  

In the coming months, the firm’s sole focus was to expand its merchant base. To fuel growth, Sezzle raised a venture round of $9.1 million in April 2018 and followed that up with $100 million in debt financing in November 2018.

Just 2 years after the pivot, in July 2019, Sezzle already decided that it was time to hit the public markets.

The business wasn’t listed in America though but on the Australian Stock Exchange (ASX). This had 2 reasons:

  1. Filing to go public on the ASX is generally less restrictive for smaller companies.
  2. Other competitors, such as Afterpay or Splitit, have had successful Australian IPOs in the past.

At the time of the IPO, Sezzle had grown to almost 270,000 active customers which were transacting with 3321 merchants. That same month, Sezzle announced it would enter Canada (via a partnership with Kappa), its first foreign market.

One of the major advantages of being a public company, especially when dealing with other businesses, is that it adds a sense of legitimacy to a business. This, oftentimes, eases contractual negotiations and acts as a secondary marketing channel, ultimately increasing awareness.

Within 6 months of going public, Sezzle was able to increase its customer count to over a million. Furthermore, it had now closed partnerships with more than 10,000 merchants. It also continued to add more capital (both in the form of equity and debt) to its balance sheet to fuel growth.

Sezzle was ultimately propelled to new heights when the world was forced to lockdown at the beginning of 2020 due to the novel coronavirus. Millions of new customers flocked to online shopping – with some of them choosing BNPL as their preferred method of payment.

On the backbone of that growth, Sezzle was able to sign partnerships with the likes of Apple Pay and Google Pay to enable its service for in-store payments.

Despite the exponential growth, not everything was always going according to plan. For starters, Sezzle (and the BNPL industry as a whole) has been subject to criticism from various consumer rights groups and financial experts.

These critics claim that BNPL firms encourage irresponsible financial decisions, essentially putting people into debt they can’t recover from.

California’s Department of Business Oversight (DBO), in January 2020, denied Sezzle a crucial lending license for 10 days. Sezzle was eventually approved but forced to pay back $282,000 for fees it charged in the past. On top of that, it also had to pay a $28,200 penalty.

As a result of that agreement, Sezzle has launched a few initiatives to better educate its customers and encourage responsible spending. In December 2020, it launched Sezzle Up, a service that reports a user’s payment history to the credit bureaus. By making payments on time, users can actively improve their credit scores.

In April 2021, the company announced that it plans to go public in the United States as well. The IPO, which is set to go through later in 2021, is intended to give American investors greater access to its shares.

Today, more than 500 people are employed by Sezzle which operates offices in Minneapolis, Mississauga (Canada), as well as Bengaluru (India).

How Does Sezzle Make Money?

Sezzle makes money via merchant fees as well as late payment (or penalty) fees. Let’s dive into each of these revenue streams in more detail below.

Merchant Fees

The bulk of Sezzle’s revenue is generated by the fees that merchants pay the company. As previously highlighted, Sezzle does not charge consumers any interest or other fees.

The service, from a consumer perspective, is essentially free of charge if payments are made on time.

Whenever a purchase is made, Sezzle collects the first 25 percent from the consumer, but already pays out the full sales price to the merchant.

Sezzle then charges the merchant with a transaction fee that is equal to 6 percent plus $0.30 per transaction.

The 6 percent fee is a standard fee and may vary depending on the risk profile of the merchant partner and the industry it operates in. The amount charged is roughly in line with what competitors like Affirm and Quadpay impose on merchants.

Larger, more established brands can likely command lower rates. Reduced rates may also apply to non-profit organizations.

There are a few reasons why merchants would choose to partner with Sezzle and offer BNPL options to their customers.

First, Sezzle takes on the risk of payment default and conducts the debt collection process (if this becomes necessary down the line).

Second, Sezzle claims that offering BNPL options increases both the number of sales as well as the average order value.

Lastly, offering a well-known and secure payment option like Sezzle often leads to an increase in the customer base. These customers, on average, also tend to return fewer products.

Late Payment Fees

Sezzle applies a so-called account reactivation fee as well as a rescheduling convenience fee for users that miss making payments on time.

The account reactivation fee is paid whenever a user fails to make a payment within 2 days of the payment schedule.

The fee is $10. If the user fails to make the payment, his or her account will be banned until the outstanding payment and fees are settled.

Rescheduling convenience fees are applied whenever a user wishes to delay the payment to a later date.

Sezzle applies a rescheduling fee of $5 per request. Users can change their payment schedule up to 3 times per order while the fee can be waived once per order.

Sezzle Funding, Valuation & Revenue

According to Crunchbase, Sezzle has raised a total of $301.6 million across 7 rounds of debt and equity funding.

Notable investors in the company include Bastion Management, E-Merge, CSV Upshot, or Daren Cotter (founder of InboxDollars).

Sezzle raised another $30 million during its IPO. When Sezzle went public, its business was valued at around $168 million. Today, its market capitalization is around $1.6 billion, marking an almost tenfold increase within 2 years.

For the fiscal year 2020, Sezzle reported income of $74.3 million, a 250 percent increase compared to 2019.  

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.