ZipPay: What is it and can you trust it?

The adage goes: if it sounds too good to be true...

ZipPay is one of the emerging digital money lenders swapping the plastic in your wallet for an app on your phone, and boisterously promoting '100% no interest'. But can you trust it? 

What is ZipPay?

ZipPay effectively offers credit of $250, $500 or $1000 that can be spent only at participating retailers. Shoppers can make their repayments either weekly, fortnightly or monthly, as long as a minimum repayment of $40 is made each month.

A growing number of stores are adding ZipPay to the their list of accepted payment methods. By the end of last year, ZipPay was used by more 530,000 shoppers to make $230 million in purchases from 7700 merchants across Australia, including Kogan, Toys R Us, Fantastic Furniture, Anaconda, Mitre 10 and Bose, to name a few.

The application and approval process happens pretty quickly online, though it authenticates a lot of your personal details by linking with your Facebook and PayPal accounts. (And if you're like us, you may be sceptical about sharing so much sensitive personal information.)

ZipPay says they conduct formal ID and credit checks to decide whether your limit will be $250, $500 or $1000.

What's the catch?

ZipPay swaps interest charges for flat fees. For every month there's a balance owing you're hit with a $6 fee. Fail to cover that payment within three weeks and you're charged another $5. If you were to miss all of your repayments on a $100 pair of jeans, for instance, you would have to spend an extra $33 on fees.

We ran the same numbers on the frontrunner in the category, AfterPay, when we evaluated its service and found it would charge $68 on a $100 pair of jeans if you missed all of your repayments.

There's also the chance you could be hit with fees from your bank. ZipPay's repayments are set to direct debit by default. It's best then to make sure there's enough money in your account to stop it from being overdrawn and, in most cases, leaving you to pay back fees.

How does ZipPay make money?

ZipPay makes money primarily in two ways: by charging customers fees and by charging retailers a percentage every time a sale is processed on its platform.

We can learn a lot about the company from the quarterly financial statements filed by its parent company, Zip Co.

As of the quarter ending 31 December 2017, Zip Co was owed a total of $231.3 million from its customers. About $32 million would be paid back each month, $4.3 million would be made from fees and $5.3 million would have to be written off due to customers being unable to pay off their debt.

ZipPay claims its default levels are "well below industry standards", but it does expect its defaults to rise towards $6.9 million, presumably in the coming quarter.

What's the most expensive purchase I can make?

ZipPay accounts are capped at $1000, but the company has made it possible to increase your credit limit to $3000.

ZipPay has a sister company called ZipMoney that sells loans between $1000 to $3000. The two sibling companies have upgraded their infrastructure so that the customers of ZipPay can apply for a ZipMoney account.

These loans work more like a credit card you can only use at partnering retailers. And like credit cards, an interest rate is charged following a grace period.

The interest-free period starts at three months and can extend until 36 months at some participating retailers. Thereafter, the rate of interest charged is between 19.9% and 23.9% per annum.

Should I use it?

Products like ZipPay and AfterPay make spending money you don't yet have even easier. Saving up before a purchase is still the best way to go. The category of fintech products is, afterall, one that is emerging.

But if you are inclined to sign up with ZipPay, be sure you budget to make all of your repayments.