Interview with Sezzle CEO Charlie Youakim

0:04Well, I think we're early days still in this market. I think we have like seven to 10 years of growth or strong growth in the BMPL space. So I think it's going to be a rising tide for all the players.

0:21That was Charlie Joachim, co-founder and CEO of Sezzle. I'm Motley Fool producer, Matt Greer. Now at our recent Motley Fool member event, Motley Fool co-founder and CEO, Tom Gardner, talked with you, Akeem, about entrepreneurship, competition, and the business of buy now, pay later. We're going to talk about Sezzle in a second, but I think I just want to start with your background. What caused you to become an entrepreneur? What made you think about starting the first company you started, and how did it lead you to Sezzle? Well, I wasn't the lemonade stand kid, that's for sure. I was a video gamer.

0:56I love science, technology, coding, building computers, you know, basically a nerd. And, but no, no entrepreneurs in my like family or friend group, you know, or anywhere nearby. I just always thought it was interesting. And I think my first job out of school, like I wasn't that pressured. It wasn't that high of a bar. I had time on my hand. I was tinkering, playing with stuff. I remember building like a Dropbox like product before Dropbox. And I wish I would have known how to start a company back then. And then it just kind of happened. I was talking to my cousin about starting a company, going to business school.

1:29and we just, it was during the global financial crisis and we just said, let's do it. Let's try it. I mean, I think we're both adventurers and we just decided to do it and just jumped in and learned the hard way, every which way and the first company, that's for sure. How many companies have you started? Just two. Just two, okay. What is happening with the first company? What was the business and what is it doing now? So it's a company called Passport and we did mobile payment apps. So first of all, we had the wrong idea at the start though. We started into parking hardware, way too hard for us, but with low capital, we went into mobile payments for parking.

2:05And everyone thought we couldn't do it because at that time, there were two big leaders, park mobile, pay by phone that were leading the way. And people in the parking industry were like, you guys just give up. We just didn't. We just kept on innovating and adapting. We invented the wallet functionality. We invented white label and we just worked our way up. And that company is currently a market leader in that space. That is a private. It's a private company. Separate company. Yeah. Got it. I moved on from that company in end of 2015 and then wanted to stay in payments because I knew payments, but I wanted to go after something bigger.

2:37So retail payments. And again, wrong idea at the start. We were trying to do like a Venmo for checkout to lower processing fees. And then we noticed Buy Now, Pay Later, this Pay and Forward technology taking off in Australia. We pivoted to it. And it was just a rocket ship from that point forward. I still think there's a lot of misunderstanding about Buy Now, Pay Later. I mean, if you look out in the comments areas about buy now, pay later stocks, in our case, out in our community and elsewhere, there are skeptics that think people are buying things they can't afford and this is a bad alternative.

3:08It should never have been brought to market. So maybe explain the difference between buy now, pay later and typical traditional credit card usage and why you favor BNPL. Yeah, so I think customers are making these purchases anyway on their credit cards if they didn't have BNPL. so i think the difference being that with bnpl the customer actually feels safer it also computes to a lower cost product for the customer as well you know i don't think they're sitting here with a calculator figuring it out but i think they're figuring it out through through usage and here's here's the reason why i say that's the case well i'll give an empirical example as well but i think the customer when they use bnpl the payments are planned we got down payment today one at two weeks four weeks and six weeks which matches to these pay cycles for these young customers mid to low income like these bi-weekly pay schedules they view it as budgeting and i think they want to use bnpl because they don't want to get over their skis because what happens with bnpl the moment there's a missed payment i.e you've overextended you can't use this anymore you've got to catch up before you can use this again so bnpl companies like sezzle but i think all of us we're all 100 aligned with financially allocating credit to these customers if we overextend them we also get into trouble because if they get too overextended they're less inclined to want to catch up with us now flip that to the credit card companies i think they're inclined to get people over their skis which is the very reason why these young customers are afraid of credit cards because if they overspend, they find themselves with end of a month balance they can't catch up on.

4:52They've got to make the minimum payment. They spend more and they get in this never ending cycle. They can't catch up. And the upcoming holiday period is the greatest example of that. I think for us, our credit decision teams, it's like we're getting ready for war. We batten down the hatches. We pull back limits across the board. We shut off some new customer groups, especially to new products. We really play defense. in the holidays to make sure people don't overextend themselves. I think that's when the revolver is created for the credit card company. I think they don't mind the overextension at that period because now they got a revolver for five years.

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6:09There was a moment in time where I remember learning the term that credit cards use for their customers that pay their cards off at the end of the month is deadbeat. That's when I realized it's pretty good to be a fool in this world, or another time I realized it's pretty good to be a fool in this upside-down world. I'm pretty clear in my thinking on it, but I do encounter a lot of people that aren't sure about whether this is a beneficial solution that's being provided in the marketplace. But I see no advantage to using your credit card over BNPL. But I'm sure there is some. Obviously, some larger payment you have to make are points, et cetera.

6:44But I think the average balance on a buy now, pay later, maybe it sizzles around$85 that is not paid in a credit card. It's like$6 ,000. Is that anywhere near close? It's near close. We're in the low hundreds. Okay, low hundreds, yeah. I think these are different credit tools for different products or usages and different stages of life. And you can interchange the two as well. Got it. I want to talk a little bit about what will happen to Sezzle during a recessionary period, because there are a lot of questions for Sezzle shareholders. And of course, we're all here as fools. In fact, raise your hand if you own shares of Sezzle.

7:15Great. We have probably about a third of the room that are Sezzle shareholders. So you're speaking to them and then you're speaking to the two thirds that haven't yet been convinced, which is fine. The fear is that there will be a lot of defaults. Transactions will slow down. Your earnings will get clobbered. And what will happen? even just in a normal recession, like a two or three quarter recession? What do you think happens to Sezzle during that? Well, I think first of all, our customer is more paycheck to paycheck than the average customer anyway. They're mid to low income, younger. So our CFO, she's always been in this sort of like lending area.

7:47And she says, this customer is already in a bit of a recession. So they're kind of, you know, in there that situation already, just like the level set. But I think here's where the big benefit we have at Sezzle versus other companies in the credit space? First of all, incredibly short durations with an incredible amount of data points coming in really fast per customer. So we can detect a customer reaching some sort of financial difficulty early. They get shut off. The moment they miss a payment, they get shut off. Extension of further credit is stopped. Credit cards, not the case. They can continue to purchase.

8:21So we stopped the extension of credit. We stopped the runaway train to that customer. And then we can also, if we're starting to see like abnormalities in our system, which we see every day, we watch data every day. We see abnormalities. We can lower limits across the board. Again, a tool a lot of other companies cannot do, especially credit cards. Credit cards have to give 45-day notice just to lower a limit to a customer. We can lower limits next hour if we're seeing things we don't like across the board. And then we can also shut off new customer groups or tighten across the board and new customer groups.

8:55What the downside might lead to, I think, is maybe lower volumes, maybe at the start. But if you look at a downturn in the economy, I think it actually could pull higher scoring credit groups, potentially, or people that may not have used BMPL, into trying out BMPL. Maybe a spouse got laid off in that time period. Hey, maybe we should try this other credit product. It might help us in this time period. We might pull more users into the space, which could offset our tightening to the existing customer group and offset that. And then I said the last thing that I think makes, I mean, I'm a big shareholder.

9:29This is what makes me feel good about our system. We have really strong gross margins already. Great safety factors. So right now our PLRs are about, you know, 2%, kind of running 2%, principal loss rates. But our top line revenue percentage is like 11%. And our gross margin for this on volumes, our gross margin on volumes, 6 % or so. We can basically triple our loss rates and still come out with a profit. I mean, I don't think we'd be high-fiving at the end of this, but we'd be profitable still. Great safety factors. Got it. Can you talk about what your customers are using Sezzle for to purchase?

10:12For example, the natural inclination of a critic, and I understand, is they're buying unnecessary items and this is just encouraging people to overspend. But what percentage of it is spent on what you would consider to be basic necessities, for example? Well, I think, you know, it's growing, actually, what's happening is it's growing. So where the business started was we were partnering with e-commerce merchants, getting our product displayed on their website, helping them make the sale. those types of products initially were like beauty cosmetics fashion apparel supplements you know you name it across all the internet companies like where if you look at the internet e-commerce companies that's where where sezzle was and other bmpls but sezzle is a little bit different than the rest of the competition we started to go to what i call open loop products faster and what i mean by that is we went direct to consumer and said hey you don't have to look wait for us to find us at a website you can sign up for sezzle premium you can sign up for sezzle anywhere we'll issue you a virtual card and now you can go tap this card anywhere and then what happened tom when we started issuing these cards we became more general purpose you know people are using us at target they're using us at walmart they're using us home depot lows everywhere in their lives probably where they're making something like 100 to 120 purchase like oh let's let i'll sizzle this one and split it up over my paycheck.

11:34And that's where we're seeing more and more purchase behavior is toward that just general purpose purchase. Hey, everybody, it's Leo Laporte. I hope you'll join me and Steve Gibson every Tuesday for Security Now. This week, we talk about an antivirus program that infects its own users. That's not good. The Notepad++ hack, that's really not good. And how MongoDB has lowered the hacking skill level bar to the floor. It's just too easy to hack. Every week, Steve Gibson tells you everything you need to know about security. On Security Now, you'll find it at twit.tv slash sn or wherever you get your podcasts.

12:15Two or three reasons that you think somebody would use Sezzle instead of Klarna. Well, I think one is we've got credit building. That's the tool in the tool belt that we really believe in. So we've got young customers, mid to low income, and actually a good number that are new to credit completely. And so when we launched our BNPL products, all of our competitors were doing nothing with credit reporting. So we decided, let's do that. And the reason wasn't just because our competitors were not doing it. The reason we decided to do it was, these are young customers. They don't have good credit scores or they have no credit score.

12:55let's help them build their credit scores up and by the way so the audience understands young people generally have low credit scores so your credit score grows with age and typically if you look the profiles and so you actually want to start building your credit reporting at a younger age because it helps you get your credit score up over time which gives you access to renting an apartment buying a house buying a car and when we were talking about it within our management team we were thinking about this and i was thinking even about my own family like i have a little kid right now but he's not but if he was 18 years old i would have not told him to use sezzle when he was 18 because i would be like you got to build your credit score and i was like if i couldn't recommend the very product i'm helping build to my son what the hell am i building you know i so i we just viewed it as like this is just the right thing to do so that's one big difference between us and a clarna and i'd say the other big one is the the open loop products i think we just have this a fantastic suite of open loop products that reach direct to consumers.

13:55So consumers don't have to wait to find us on a merchant website. When they like the way Sezzle operates and the way the system works, they can just get the card and tap away. And the reason I think that's really important is think about the evolution of, or think about a credit card in your wallet. Would you rather have 15 private label credit cards or would you rather just use your general purpose credit card? I think that's what the BMPL customer is finding. I'd rather just have a general purpose credit card that I can use everywhere. In this case, BNPL. I've heard you speak positively about the competition.

14:25We've had two conversations, an interview, and then we had an opportunity to have lunch, both of which I so much enjoyed. And when I hear that from a CEO, obviously one scenario, that CEO is delusional. We don't want any competition. We want to crush everyone, eliminate everyone. And the other scenario is the market is still so misunderstood and so early on that actually there's a benefit to just people getting in the game with one of the solutions because it's going to open their eyes to the other possibilities. I'm presuming that's more of how you see the market developing or where it is now.

14:53And of course, I do like CEOs that admire their competition and learn from them. So maybe talk a little bit about how you think about competition for this stage of the market. Well, I think we're early days still in this market. I think we have like seven to 10 years of growth or strong growth in the BMPL space. So I think it's going to be a rising tide for all the players. Our view is get our elbows out and gain more of the share of it, i.e. win the game as we do that. And I really view business as like a sport. I kind of view it as like we're going out to play tennis. Tennis would really suck if you're sitting up against a board all day.

15:26I mean, maybe not in terms of like, you know, we're going to win all day. But you're going to have the monopoly. But it's way more fun. You wake up in the morning. What's the competition doing? What can we do to out-compete them? I think that helps drive, at least drive me. Like, you know, getting up in the morning, what to do, what to do. And I really do believe, Tom, that we have good competition. You know, my last industry, Passport, this parking space, I think it was a great industry for me to start in as an entrepreneur. But I almost call it nowadays like the minor leagues of business. It doesn't drive as much talent.

15:58But even the retail payments or the payments industry we're in, wow, it's the major leagues. And actually, I'm thankful that I had Passport behind my belt before I came into Sezzle because it better prepared me for this level of competition. I mean, we've got Klarna. We've got Affirm. We've got PayPal. We've got Afterpay, which is a part of that block now. We've got Zip. I mean, these are all really good teams. So we're always excited to see what they've got. And our goal is still just keep on gaining market share ahead of them. Well, you're definitely an innovator and a visionary. I'm sure you're operating the business very well as well, but I know you have a lot of ideas.

16:34So how far out is your vision, do you think? I mean, obviously, maybe there are flashes of it, but a tangible vision for Sezzle goes how far for you and what does it look like? I usually like to think five years ahead, like where we're going to be with our products and services. And so I think five years from now, we're going to be hitting the same customer group, younger, mid to low income, which, by the way, is the heart of America. It's like this is a huge percentage of America. And the way I see it is I want that group of consumers to see us as a must have application on their phone, a must have for financial services and a must have for shopping services.

17:15and if they find out their friend doesn't have the app on their phone, why don't you have Sezzle? You have to download it. Charlie Eukum, the founder and CEO of Sezzle and I will say before we give him an applause, Charlie took a red-eye flight last night and did not sleep at all and he performs at this level on zero sleep. So, Charlie, thank you so much for the half hour. Thank you, Simon. Appreciate it.

17:41As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. For the Motley Fool Money team, I'm Matt Greer. Thanks for listening, and we will see you tomorrow.

18:14We'll be right back.