Episode Transcript
Julia: So welcome to the exchange.
Philip: Thank you for having me.
Julia: Great to have you here. And I'm really excited with the discussion we're going to be having today. Now, today marks the third anniversary of Zilch, the official third anniversary. And before we dive into the business model, really want to get a sense of your background and what brought you here. Be great to hear more about you before we dive into the business.
Philip: All right, no problem. Well, thanks for having me. So I'm South African, and I went to the University of Rao in South Africa. And while I was there, I was looking at mobile technology. And so when I left university, I started a company that was meant to be the world's biggest social gaming company. This was the aspiration, right? And so think of Nokia 33 10s, like Snake version one, not version two. And the idea was that we were going to allow people to play against one another using data, because data was starting to roll out. And you had GPRS on phones for the first time. And so what we started with is that people could actually use their prepaid airtime. So you could go and top up your phone with minutes, and you could use those minutes to buy items in the game, and then you could transfer items to one another or buy new items in the game. And what we found over time is that there was a lot of transfers going on of minutes, but no one was playing any of the games. And so we decided, okay, fine, what do you do?
Julia: But not that one.
Philip: Yeah, exactly. And we thought, yeah, we were going to be the world's best gaming business. And it turned out no one liked our games, but they loved the money transfer side of the company. So we got rid of the games and we actually just stumbled into fintech. So we stumbled into finance, and people were using our app and our product to transfer the store value, which happened to be airtime minutes to one another. And that's sort of how this whole journey into fintech began. But what was interesting is when that happened, we started to realize that the problems we were solving for people were so very much different to what they were before. Gaming is all about. Oh, you enjoy this some downtime. It's something interesting to you. Finance is personal. And we realized this was changing how people were spending money and thinking about how they were buying certain things.
Julia: How they were managing their lives.
Philip: Absolutely.
What that transformed into one of our biggest success stories in that business was a product we called airtime lending. So what happened was that the problem was that people were traveling vast distances on the weekends, queuing for hours just to buy prepaid minutes or prepaid electricity and then traveling back home. So they were away from family and friends for all of their Saturday, some of Sunday, and then back to work on Monday. And what we did is we solved that problem for people by lending the airtime minutes to people on the weekend, on their phones, on their cards, and then they paid us back on the Monday when they went to work, and it was convenient for them to do so.
And really, that just transformed the company. We rolled this out in 27 African countries. It was a huge success, mostly because it changed people's lives. They were reunited with family and friends. This was very convenient. And most importantly, it was free. And the way we were able to deliver that is we realized one fundamental business principle here, and that is that if we could introduce a buyer to a seller at the point of highest intent in a very seamless, great experience, the seller is going to part with some of their margin and give it to us for that privilege and that sale, and we could use that margin to subsidize the cost of this loan. It was free, therefore, to the customer and at the same time build a very profitable, sustainable company. And that's really where the whole idea and concepts really were built, in my mind, at least. And with my experience for fintech for good, and how you can use interesting business models to really transform the way products are delivered to customers, that's fascinating.
Julia: And it's that fundamental thing of really understanding people's experience and how they're spending their time and what their needs are and how you can meet that problem that they've got and that they will change their behavior and behave differently and accept new products as a consequence of you solving a problem. So that feels like a very good segue into Zilch. So let's talk a little bit about kind of what it does, what its structure is and why doing it in the UK.
Philip: Yeah. So fast forward until about ten years ago and I moved over to the UK, and the whole sort of principle, the thinking was, we have this playbook we now know works well. So let's look at the market, and we want to do sewing on a big stage, right? This is a fantastic country, big GDP. The UK and the US is really interesting. So really the idea was, let's go and run the same playbook. Let's look for a real problem that people have today, big opportunity and tam, as people put it, let's look at, is there a technology or a way that we could fix that problem by going almost over the top? So leaving existing infrastructure intact, similar to what we did in South Africa and Africa.
And that means it could scale really quickly and become big fast, and then find a really interesting business model that would allow us to deliver this to the consumer with maximum value. So that really is the playbook. And where we started to focus was consumer credit.
Obviously, if you look at people today, all of us have a lot of problems. There's a lot to fix, there's a lot of different problems to fix, a lot of problems. But consumer credit caught our eye. And the reason is mostly because if you look at the cost of credit, there is a huge tax people are paying today for credit. And you typically always have this problem with credit. It's the inverse pyramid problem, right? And that is that people with the least pay the most for credit and have the least access to it, whereas of course, it's the opposite for people that have the most. And so how do you fix this problem? And really, if you look across the US and the UK, we have over a trillion US dollars of debt sitting on credit cards today. And that's costing customers over $150,000,000,000 every single year in interest and fees going to credit card companies.
Obviously, when we looked at this, we said credit can be a forceful good, there's no doubt about it. But this tax, we need to do something about this 150 billion cost. And so the opportunity that we saw was, how do we create a business model that's for the mass market and can drive that 150,000,000,000 a year cost to zero, to zilch. And that's where the name came from and that's how the business was born.
Julia: Yeah. It's a brilliant story for the journey of how you get to a name, but also how resonant it is for people in terms of that cost.
It's interesting about how many people actually understand what those economics are and therefore how they can be attracted by the alternative as well, because not everybody is seeing really how that cost is structured and how it works. So let's talk through how it actually works, what the business model is, what the proposition is, and how the technology also associated with it.
Philip: Sure. So if you look at it, I think Einstein said, the question always stays the same. It's the answer that you change. Right. And that's what we feel has happened here in this space. We have had the benefit of hindsight. There are a number of companies in this space that have done very interesting things over the last decades. And so what we did is we started focusing on these companies. So we looked into the market in consumer credit and we said, what's going on? Who's trying to help? And you had some credit card companies trying to make it easier. Of course, the credit card model intrinsically is built on obfuscating what's really happening when you're being billed and how often. But some were trying, ultimately not doing a great job. You then started to look at some of these BNPL type companies, and there's a number of them, point of sale finance, embedded finance, any of these businesses. And when we started looking at that model, we thought, oh, that's actually quite interesting. They are taking some revenue from the merchant and using that to subsidize, to some degree, the cost. But there was a whole raft of other things we didn't quite like in that model. It seemed like there was huge downward pressure on the margin, a lot of competition. The margin seemed very thin. These companies really hadn't been through a cycle before where they're going to sustain that and actually build profitable, sustainable companies. We weren't sure. But even if you parked all of that, the biggest single problem we had with this model is that it didn't represent how we feel about finance. We think that finance is personal, and so we think about how we want to deliver our product to customers. A little bit like hospitality.
I always like the quote that hospitality is what happens for you, not what happens to you. Right. I always like that quote. And we think about it the same way. If you think about point of sale finance or embedded finance, you get to the checkout page of a website and it happens to you. Right. These companies have negotiated with a brand. They've decided what deals or what types of ways to pay to show you that suits their margin. And here they are. Right. So it's happening to you. Here's your select number of things you can do. Nothing else.
Julia: Yeah. Your agency is choice. Nothing else.
Philip: That's it. Right. And what we wanted to do is we said, what if we actually build a product for customers and we have this happen for them? We think about how important this is for them and their families and their lives. How can we help them better manage their cash flow? How can we help them do that anywhere and for anything that they want, regardless of what the retailer might say? And that's how we think about it. So we built our business a little bit differently. We went direct to customers to build a consumer proposition that solved this pricing problem in the mass market, offering a cost of credit that's very low or free. Typically that price point reserved for the wealthy in the mass market. So if you take a bit of a step back, what was really going on in the market is you had brands paying billions of dollars on Meta and Google to get in front of you with their ads. The problem is 30% of those clicks and impressions are fraudulent. They're going to click and impression farms. And of the 70% left, only 50% of that really performs. It's the old adage, 50% of my ad budget works great, I just don't know which 50, right? And then they convert you. And what does a customer do? They pull out their credit card and they pay billions of dollars in interest and fees every year to credit card companies to buy the goods. It's very inefficient. And so what zilch aspires to do is really make that whole process more efficient. If we can bring a buyer armed with buying power, responsible, regulated buying power, to a seller, introduce them at the point where you have the least amount of friction and the highest conversion, which must be payment, right.
We know that that seller is going to give up some of their margin to us, which will be more efficient to them, giving it up to other ad platforms so we can earn ad revenue from them. And we're using that revenue to subsidize the cost of fully priced credit to that customer and of course make a healthy margin so we can build a sustainable, profitable company. And so effectively, we created what we sort of call internally an ad subsidized payments network. We are really using ad revenue to subsidize the cost of credit for the mass market and that market in consumer finance. And that's what's gone on here. So a little bit similar to what you saw happen with Google 25 years ago. They used ad revenue, subsidize the service, and then you had meta do the same thing and others in social, no one's done this in payments or credit yet until now. So we think about this as like the googleization of payments, right? That's how we think about it. And so that's really the business model and how this works and why we're able to give customers something so important to them, personalized to them, but at a price point that typically you would not be able to access.
Julia: And it takes us back to that starting point, actually, that point of maximal intent, solving a problem, personalizing it to the individual and what their needs are. But I think there's also something very different about that scattergun expense at the moment. Being focused at a particular point in time that is most valuable for all sites. So it's fascinating to me that transposition of principle of business model that you've taken from the initial gaming idea into what Zilch is today, and there's a wonderful through line to that as well. Does it feel like a through line to you as a sort of philosophical approach?
Philip: I think it's one of those where you've got to try and avoid the narrative fallacy to some degree, because you're connecting dots in hindsight. But ultimately, certainly I don't think if I hadn't have stumbled into fintech on mobile devices, which sounds like such a weird thing to say today, but back then, people were like, oh, mobile technology.
Exactly. Everyone was like, wow, that's really bleeding edge, mobile technology. So if that wasn't the way that I'd kind of come to be here, I don't think we would have thought about the problem this way and the interesting business model. If I throw right back to how we were making money from mobile network operators on the airtime lending business, they were paying a margin to distributors of airtime. And so what really happened is we became one of the largest distributors of airtime for them in the country. It was just digital with no footprint. So we could afford to actually use some of that margin to service the credit and then keep the rest without a physical footprint to actually build a very sustainable, profitable company. And it's the unique engineering of the business model with the technology and then that ultimate delivery to consumer and seller that really made that sing. If we look back on it now, at the time, we didn't quite know what we had, but today it's easier to see. And we've applied the same thing here.
Julia: And we've talked about hindsight, but let's talk about foresight. So in terms of where things you think things are going in the future, what's your sense for the future? For the future, profitability and the ultimate direction of travel result?
Philip: Well, for us right now, we're really focused on what we do. We're quite good at knowing what we don't do. So that's sort of important to us, is let's stick to what we do great and go and do that again and again and again and again.
And ultimately, if you look at commerce, we just think commerce is being transformed. It's happening in front of our eyes. So used to have you've got advertising and then you've got sales, and everything was a little bit disjoint. Here what's really going on is all of this is starting to overlap. And so if you think about retail media compared to traditional media today, you look at companies like Amazon, eBay, some of their biggest growth in revenue is coming from retail media. And that's a complete overlap of advertising and commerce. It's becoming one thing. Now, you throw into that mix payment, particularly credit, and you have something very powerful at that intersection of the three, and that's where we exist today. So our aspiration is not necessarily to go and take some of the tam from credit card companies. We think that we should do that, but that's not the goal. The goal is to create a tam tomorrow that today doesn't even exist, and we want to fundamentally own the vast majority of that tam. That really is where we think we should play. So that's the aspiration for us as a firm moving forward. And obviously, to get there, there's these complex moving parts. And myself and my co founder spend a lot of time on this, where we say we're doing two things at one time. We've got to build and operate the business, and we have to return value to shareholders. And a lot of people used to tell us they're the same thing. Of course, we've learned that that is not true. You can deliver a lot of value in the business. It might not result in value for.
So, you know, for us, the way we're thinking about this is, what does that mean for Zilch and the future of this company? How do we think about corporate finance as a strategy for us as a business?
And we need to think about that on an ongoing, consistent basis. And so, really, we're looking at saying we need to operate, but we need to create value for shareholders. How do we do that? And we've always said publicly, we think this business needs to be listed, and ultimately, it's a race to the start for us in that regard. This is a complex company. It needs access to a lot of different types of finance, and that would enable us to grow significantly beyond even perhaps some of our dreams. And so really, that's the aspiration for us over the next three to five years, is to say, how do we get to the start in the next two or so years, and then really grow from there? And that's what we focused on. And obviously, it's probably something we should talk more about, too.
Julia: As you can imagine, that's a topic very close to my heart, and one that I can talk no, surprising that, and one that I can obviously also talk about. Till the cows come home. So we might need a separate conversation about that, because I think it would take up an awful lot of airtime. Can I just ask you a couple of other questions about that future direction of travel as well? We're at a very different inflection point in the interest rate cycle than we've been in for the last 20 years or so. How do you feel about your proposition through that lens?
Philip: It's actually a fantastic question. What's interesting about the business model that we deploy is that to a large degree, it's countercyclical.
If you look at a lot of lenders, they start by doing what they should, which is borrow money long and lend it short.
And then they're looking for volume, so they borrow money long, and they lend it long, and then they're looking for more volume, so they borrow money long, and they lend it longer. And what happens is that the room for error or fundamental change in interest rates diminishes. And ultimately, for every percentage point increase in interest rates, you have a real problem.
Our business model is not like that. So we've got great partners around us, companies like Goldman Sachs, Mastercard, AWS, Amazon. And we leverage these partners to optimally perform as a company. And so, by way of example, we borrow money long per annum, and we turn our book almost 20 plus times per annum. Right. And so that makes us very efficient. So for every full percentage point of interest increase, what you find is it only impacts our margin by about four to six bips, right? So, of course, while we don't like to carry the additional 24 bips of cost, we would prefer to see that go away. We can manage that.
Now, interestingly, on the other side of the equation is custom acquisition and repayment on custom acquisition cost. And in a business like ours, fundamentally in the mass market, interestingly, CAC is always lower anyhow, because you have the mass market to go after, and optionality is smaller for this customer. Unfortunately, we're changing that. But in a market like this, our CAC is actually inversely proportional to interest rates and cost of capital. So as the price of money goes up, banks and traditional lending institutions tighten their lending. They start disqualifying more people, and your opportunity goes up, and our opportunity goes up. Our CAC falls way down, demand goes up, interestingly, therefore, bad debt also drops because customers of a higher credit quality are also applying for the product because they've been rejected by traditional institutions. And so what you find is that CAC is the lowest it's ever been repayment on CAC is the lowest we've ever seen.
Less than twelve months by quite a distance, which is fundamental for a fintech business, high growth company. And so we think for the next three years, we have an interesting market arbitrage and frankly, a very real need to solve for people in the market, and we believe we're best positioned to do that. So as a regulated firm, one of the only ones in this space here in the UK, we're obviously in a fantastic position to deliver something that can be transformative for people at a time. We have this big arbitrage in cost.
Julia: And if that isn't a compelling story to sell to the market for a listing, I don't know what is.
Philip: I would agree with you.
I agree 100%.
Julia: The pathway to how you think about that proposition. Fascinating to see. What are the things in your head that you're thinking about when you're thinking about that set of options for yourself as a company.
Philip: So, I mean, right now, where we are today, fortunately, we're a well funded business.
We make a 45% gross profit margin, which is a pretty phenomenal margin in this space. I don't know any other payments firm, in fact, that makes a margin like this.
We're fundamentally in a very strong position.
In fact, we haven't yet decided. The question we're asking ourselves right now, internally, is exactly this. What do we do? Private markets we know have changed and they always tend to lag public.
Seems like they lagged them more so this time around. But needless to say, they're lagging. So we're really keeping an eye on public markets. It's our aspiration. And so for us, really, we think it's probably a hop skip, really, to going public. That's the way we're thinking about this right now. Our view is do something privately, potentially maybe during next year, and then that would be as a prelude to, obviously, to then going public. And we hope that you start to see a little bit better multiples, because the compression in that case has been quite dire. So we're hoping that eases up. And obviously you start to see this market thaw and ipos start to get away, and we're all watching some of the current ones, obviously with bated breath. So that's the way we're thinking about this. And obviously that plays into how we're creating value. And as I mentioned before, Sean and I, my co founders, spent a lot of time sitting going, how do we create that value as well for shareholders if it's not going to be something public. What does it look like? And obviously you've got ITV. There's a lot coming down the track we're very interested to learn about and see, and obviously we're having conversations to see how that looks, because staying private a bit longer is an option. But I will say we've never liked that option. We've always said we've never liked that option. I think a lot of firms like the idea of being able perhaps, to do things without the scrutiny, and there is some merit in that. But we really do believe that being a listed firm-
Julia: I think particularly as a regulated financial services firm as well, I think that makes a difference in terms of the scrutiny and the visibility.
Philip: To people, and you've got the governance constraints anyway. So when we think about it today, we've got the difficult side of being a bigger firm, a potentially listed firm. So we do quarterly reporting already for shareholders.
We're a regulated firm, we have to comply. And so we have, of course, a formal board, we have chief risk officer. So we run our business like a pseudo listed firm. So you almost have all of the complexity and the drag-on cost and time, but you're not getting the benefit of a tradable commodity in paper that you can use for things like M&A, etc. And so that's really why we think that's the best direction of travel for us. The question is, how do we get there from here to there? And obviously, what is that period of time? And we really do think there's a bit of a herd mentality. When the herd moves, it moves, and so we just want to be ready. So when the herd moves, we can actually join the party and use that opportunity to take advantage of this three year arbitrage that I mentioned before.
Julia: And it strikes me that actually the time in the meantime is even more proof of the pudding, of the pressure testing of the business model, as you've articulated. You talk about it being a hop, skip and a jump. Well, we're a hop, skip and a jump from our balcony right now. So we very much hope that we might have the opportunity for you to do it in London and do it from here and be able to use this balcony and the one we have downstairs to celebrate. So it's been wonderful to have you. Thank you very much for coming in. It's been absolutely fascinating to hear about the journey of Zilch and continue to follow it in the many years ahead. And we must have another conversation about where the capital markets are going in the UK, because I think we've had so many touch points in this conversation about it that we should probably pick that up at another time.
Philip: Would love to do so. And thank you very much for having me. Pleasure. Thanks, Julia.
