U.S. Zip CEO: Stop Judging Buy Now, Pay Later

Welcome to Money Isn’t Everything. I’m Mary Wisniewski, Cornerstone Advisors editor-at-large and host of the show that explores early-stage ideas that could, if not already, shake up financial services.

On the show today is Joe Heck, who is the CEO of Zip in the U.S.

He makes a strong case in defense of buy now, pay later, including its use for small-ticket items.

We also get into why Zip is no longer letting customers fund buy now, pay later with credit cards, and his take on incorporating buy now, pay later into underwriting models.

Here’s our conversation.

Joe, welcome to Money Isn’t Everything.

Thanks so much for joining me today on the show.

Thanks.

Yeah, excited to be here.

Well, I’m excited for you to be here because I read, not too long ago, a very, let’s call it vivacious interview with you in American Banker about buy now, pay later.

So I want to explore all your thoughts and feelings about buy now, pay later because you were really pushing back against buy now, pay later skeptics.

I think among the examples you were using was in reference to Coachella.

I remember when buy now, pay later was coming for Coachella, there were a lot of headlines of, oh, this is how younger adults are wasting their money and that kind of thing.

How do you push back on the skeptics?

What’s your take here?

Yeah, look, thank you.

I feel like the world of financial services is a loaded topic for, I would say, most people.

If you have money, I think that there’s always pressure about what are you doing with it?

When you don’t have money, there’s pressure on, how do I survive?

Ultimately, the system’s built heavily on judgment.

It’s judgment with really small amounts of information.

If you think about any of our daily lives, we’re optimizing across many, many different things that are impacting us as humans.

I think the Coachella article is kind of a good one because I think it conflates that BNPL is something other than transactional credit.

We all wake up every day using credit cards or debit cards, and BNPL is another form of payment now that gives additional flexibility to the consumer.

I think wrapping it in and trying to make it something it isn’t is kind of just, I would say, an uninformed position that, frankly, I had before coming here.

Well, that’s interesting.

Tell me a little bit about your opinion before coming to Zip.

What was your stance on it?

And actually, how did you, if you had that kind of anti-stance, how did you join the company, Joe?

Yeah, look, you have good people in your life that you listen to.

I can remember somebody calling me and talking to me about the Zip job.

It sounded super interesting, but I had a bad taste in my mouth for what I thought BNPL was.

What I thought it was was a way for, I mainly thought about it as almost reverse layaway.

I grew up in Flint, Michigan.

Layaway was a part of our lives as a paycheck-to-paycheck family.

Largely, it was a way to secure something you needed or wanted, and then a payment system that worked outside the traditional credit system.

My initial impression of BNPL was it was offering credit to people that shouldn’t be using it.

I’m going to use the word purposely, “shouldn’t,” because that’s a judgment call by me.

That’s inappropriate.

The more I dug into the data, the more I found that traditional credit products just don’t work for paycheck-to-paycheck consumers.

Largely, those consumers are pretty frustrated with the financial system because it feels like an Indiana Jones movie full of booby traps.

If I make a mistake, all my credit gets dried up, my FICO score suffers, and I end up in this spiral.

Even when I don’t make a mistake, I can end up in a revolving hell of an APR product like a credit card.

I think when you see those paycheck-to-paycheck consumers leaning into a product like this, it’s really because it simplifies how it works.

It’s a very simple fee structure that’s transparent and easy to understand.

But they also realize, which was my misperception, that they can’t really get upside down.

It’s small-dollar loans that are paid back very quickly over the course of four installment payments.

If they run into trouble, it’s not like they can revolve that balance and have this ongoing liability that sits there.

They get it paid off, and they choose to use credit in a responsible way.

I think meeting the consumer where they’re at in their financial journey, without that judgment, letting them optimize their ability to manage their money, BNPL just becomes a really good product to complement what they have.

You’re touching on some things, so I’ll just cue up right now “That’s What You Said.”

Again, this is back to the American Banker interview, but you were talking about how traditional finance is largely based on judgment.

You went on to say, “Look at every budgeting tool. They’re all borderline fad diets because they’re really not all that personalized. They’re all about the ways you’re spending your money wrong.”

Yes.

That’s a head nod.

Yeah.

Well, the relationship to fad diets was fascinating to me because I’ve been around long enough to see a lot of diets come and go.

You see, don’t eat carbs, only eat carbs, eat bacon, only eat nuts and berries that have fallen from the tree.

They’re extreme, which usually means they’re unsustainable.

It doesn’t mean they’re good or bad for you.

Sometimes they can be.

But to me, it’s about building sustainability.

I’ll use an example.

If you think of the typical budgeting advice of, hey, if you could just stop going to Starbucks, you would save so much money in your budget and you would have a happier life.

Unpack that for a minute.

If your happiest moment is going to Starbucks and talking to the barista, like my mother-in-law does, or meeting friends there and it’s part of your social life, cutting that out of your life is a really big deal.

Sustaining that is an even bigger deal.

So when I think of the budgeting advice that most people get, it’s like, hey, how do you cut everything out financially that looks bad on a spreadsheet?

But ultimately, some of those things give you joy.

Some of them don’t.

Those are the easier ones to cut out.

I think that personalization largely is lost in these digital tools because it’s only getting a snapshot of some data.

One of the things I’m really excited about is how AI can actually start to pull some of that personalization back in.

I got my career started at a credit union.

I was still in college as a loan officer.

The number one thing that we were taught was, look at the person across the table and look at the data, not one or the other.

I think that’s largely lost in digital transactions today.

Well, tell me more about the AI.

How do you think it can shape it up into a better experience for the consumer?

Yeah.

From a belief-system standpoint, I think AI has an opportunity to just continue to automate mundane things that really limit us and eat our time as humans.

So I’m excited about that piece.

The part where I think it can be a thought partner is help pull out more and more creativity from us.

We’re seeing that in our internal teams, which is super exciting to watch play out because basically it allows our employees to optimize themselves and work on the things that only they do great.

So I think thinking about it through that lens is, how does it unlock my creativity versus how do I use it for creativity?

I think that’s a really important piece.

But I think how that should come up in potentially how we interact with our money is it can automate a lot of those mundane things.

I think about my career in finance.

I’ve been around for almost 30 years now, and I still couldn’t tell you when I need to refi my mortgage.

I think I remember my rate.

It’s a good one.

I think I remember my terms.

But at what point do the points play a role?

When you think about those kinds of things, to have somebody always on and looking to help you optimize the moments when they arise, I think there’s a ton of opportunity.

I think the transaction data is an area where the ability to see how your spend plays out, how it impacts your financial stability, and then ultimately, can it nudge you at times to be like, “Hey, you told me a long time ago, Joe, that you don’t like to spend money at McDonald’s. Maybe we should pull back on that lever.”

I think trying to understand and interact with AI in a way that helps it work with you, I think, is that always-on tool that can just really make you much more mindful with how you spend your money.

I like that idea.

I even remember a startup that had their users mark, like, this purchase made me happy or not happy.

That’s definitely not for everybody, but I do think there’s something to be said of, yeah, I’m very okay with, I don’t want to use the word overspending, but spending more in certain ways that someone else might say, “What are you doing on Uber Eats?”

Mary, that was the company I came from.

Yeah.

So, Happy Money.

A long time ago, we had a behavioral science-based app that allowed you to rate your spend happy or sad.

The reason, and I would say I give the founder, Scott, a ton of credit on being a real visionary on this front.

What was fascinating about that dialogue, though, is it simplified money.

I think of my own family.

I grew up in finance.

I understand it.

I build financial products that make sense to me, but ultimately they’re not as simple.

So when you think about something as simple as budgeting, think of how simple the conversation becomes of, hey, maximize happy spends, eliminate sad spends.

That’s it.

How do you feel about these things?

It’s an oversimplification, but it allows you to not get so complex with a budget.

Again, going back to diets, the more complex it is, the harder it is.

If I have to drive to Weight Watchers every three days for a weigh-in, the sustainability factor goes down.

So I really applaud that early work, and I think there’s a ton of opportunity ahead because AI wasn’t there then.

Yeah.

It is interesting because I can’t remember this, I think this happened from the U.K. and it must have been a challenger bank or something like that, but at the end of the year they did, like how there’s the recap of your top songs that you can get from Spotify, they did it for purchases.

But then it was like, oh, you’ve got to be careful because maybe that’s child support or something.

You know what I mean?

It’s not like, happy holidays.

Yeah.

There could be some weird stuff that shows up.

We would show your top 10 sad spends and your top 10 happy spends.

In aggregate, sad spends typically were fast food and quick jolts of satisfaction and regret afterwards.

Then the happy spends were primarily experiential.

I think none of that’s really a surprise to anybody.

But I do think if you can be more mindful in the moment, that creates a lot of ability to manage your money well.

I think the other thing it does is it puts the personalization in your own hands.

You’re not relying on some tax advisor or some financial advisor constantly just scolding you.

Who’s going to applaud you in the system today, right?

I think that’s where there’s opportunity.

Well, I think that’s so important because even, you know, I remember in the earliest days of Digit, which was one of the first, if not the first, automated savings app.

It started as a text thing.

But I remember when you saved even maybe a dollar or something, well, just moved your money, it’d be confetti or Scrooge McDuck jumping out of the gold thing.

They had to back out of that because that was a copyright problem.

But I’m like, oh, yeah, you can inject joy into, if we call it a budgeting system.

But yeah, it is that.

So yeah, a company can do that.

I think the really important piece, though, is you almost have to throw a little bit away.

There’s a loose framework for what works for people to bring joy, to manage stress associated with our money.

But it’s loose.

I think starting with a loose playbook and not trying to overly categorize people into buckets is important.

Money is complicated because people’s lives are complicated.

I’ll use an example of BNPL that I think is a really stark one for me.

When I first got here, I saw the amount of spend that was happening on grocery, and my immediate reaction, being in finance for a long time, was, oh my, are these people overextended?

I had to take a step back and put it in my own childhood.

When you think about what’s really happening in a paycheck-to-paycheck consumer, there’s a very skinny margin you’re operating with from an operating cash flow week over week, month over month.

So any unexpected expense can throw off all of your calculus.

Imagine this person gets a flat tire.

The calculus they’re going to go through, which we’re blind to, and when I say we, the financial system, is they got a flat tire.

They now need $400 to service that.

But they have this grocery bill that they know they need to get groceries on.

They might have $500 in their savings account.

So what do they do?

Well, we judge them that they’ve used credit for groceries when they probably used cash for their tire.

We probably wouldn’t have judged them had they used the credit for the tire and cash for groceries.

That’s just not the right way to think about it.

They’re optimizing in the moment and using credit to facilitate the working capital they need to just manage their day-to-day life.

I think that’s where BNPL is really emerging and playing a role.

We’re meeting the people where they’re at and we’re saying, use it how you need to use it.

Ultimately, we’re here for you.

The payback behavior shows up.

We have over 98% of our loans get paid back in full.

So it’s not this stigma where it’s buy now, never pay.

Our customers appreciate the flexibility we provide.

I think that’s where, without the judgment, it is really causing an acceleration here.

Joe, I’m glad you brought up the groceries because it also brings up another controversial example that got everyone talking, like DoorDash.

It’s the overall journey.

I’m curious if you see more heat coming down on buy now, pay later because of it being used for smaller transactions.

I know you just sort of illuminated an example of how you still can’t judge it.

But talk to me about how it is being used for smaller items now and how you think about it.

No, I love the question.

They took a ton of heat for, what is it, burrito now, pay later?

Yeah.

Again, I got to enjoy the...

But in reality, it’s the system making a judgment that you shouldn’t use credit on something.

That same system doesn’t seem to blink an eye that you used a credit card at Chipotle the day before.

We all use credit cards from a credit-privilege standpoint.

We use credit cards to finance all our day-to-day stuff.

We leverage that 30-day float.

We get a couple rewards from it, and then we pay it off at the end of the month, hopefully, if nothing unexpected happens.

I think if you think about it through that same lens of, hey, using BNPL for smaller purchases to leverage the float because I don’t trust credit cards, and if a credit card goes sideways on me, I’m going to be rolling it at a very high interest rate.

This is a simple product and easy to understand.

So you think about those smaller purchases.

It’s just another form of credit that gives that working capital to an everyday, what I would say is underestimated American when you look at the traditional financial system’s treatment.

Now, Joe, one criticism I have heard over the years about buy now, pay later is there’s worry, or in some cases evidence, of consumers stacking different buy now, pay laters from different providers and then maybe innocently even forgetting a payment, or it’s just trickier to manage.

So I’m just curious how you view that criticism.

Yeah.

So from Zip’s lens, I think we treat our customers with what I would consider a low-and-grow mindset from an underwriting perspective.

We approve you for a small-dollar amount.

If you pay us back in full and on time, your spending power can increase.

If you don’t, your spending power disappears.

One late payment, you can’t access additional credit.

I think when you look at this idea of loan stacking, one, it’s largely been disproven already that it doesn’t happen.

Now, certainly it does on the fringes.

But I think the way I look at it is there are bad actors in every industry.

If it’s intentional, it’s just a different form of fraud.

Largely, what we see across the industry is consumers are using this responsibly.

You look at the payback behavior on our asset compared to a typical credit card, we outperform.

I think that comes back to there’s an inherent incentive alignment in the product to me, which is if I underwrite their affordability appropriately, they’re going to pay me back.

If I don’t, I lose.

They lose access to credit as well.

So we always stay in relative alignment, which I think keeps people on the right journey for the right reasons.

But I think that was largely a myth that started because the bureaus don’t see the data.

I think the way the traditional industry thinks about this is the bureau is a source of truth for all debt everywhere.

This idea that this isn’t on there, I think, is really difficult for the traditional system to handle.

Joe, I don’t know why, but I just wanted to say bada boom because you led me into the next question, which is one of the hotter debates right now, incorporating this data into FICO scores.

You’re seeing different buy now, pay later vendors have different views on this.

Is this actually going to hurt the consumer if it’s being used in underwriting them?

How do you view this?

So let me start with the bureau.

The bureau, I think, one is we treat it somewhat as the financial wellness indicator for consumers, especially in the U.S.

I don’t view it that way.

I think it is a debt management indicator, which is fine.

But it’s largely a longer-duration debt management indicator of how well somebody can pay back debt over time.

I think it’s built that way.

It’s slow to react to new data.

It doesn’t get cash flow data.

It doesn’t have income data.

So when you think about managing both sides of the balance sheet for an individual consumer, it only handles the liabilities.

It doesn’t handle the assets.

So how can you get at affordability without that?

A lot of assumptions.

When I look at BNPL, it’s a short-duration asset.

You pay it off over the course of six weeks.

So putting that into a bureau, one, I don’t think it adds a lot of credibility to somebody’s ability to manage long-term debt.

So I don’t know where the value really lies for the consumer there.

But I think the other thing that I’m really passionate about, especially when you think of these underestimated paycheck-to-paycheck consumers, if you’re operating with a really tight paycheck window, you’re bound to have late payments, sloppy payments.

Anything, any inconsistency in that paycheck-to-paycheck is going to cause issues.

I think not being overly punitive is important.

So for me to report a late payment, or anything that damages the consumer’s view of credit from a FICO perspective, that spirals in all sorts of ways on their lives.

Think of a low FICO score.

I’ve got to have a bigger down payment for an apartment.

Every cost of credit everywhere in my life is more expensive.

My car insurance, my life insurance, everything becomes more expensive because FICO is such an important piece of underwriting models.

So to me, I align much more with, look, if we can do consumer good with reporting to the bureau, I’m there.

But I think there’s a lot that I can’t see how it’s going to help the consumer in this moment in time.

Again, I’m open to that continued conversation.

But I just believe it’s gamifying debt.

Think about it.

You can’t get a FICO score if you don’t take out some debt.

That means people that never take out debt have null FICO scores and can’t get credit anywhere, which is just a bizarre thing.

It is a bizarre thing.

I mean, it is a really bizarre thing.

But what would it take, do you think, where you’d be like, oh, I’m more open to this?

Because I do see a possibility here of maybe this individual isn’t using credit and needs to build up.

It’s a great question.

I actually had this debate with a good friend of mine that’s at one of the big bureaus.

He and I were going back and forth on it.

I think one of the places that could make sense is charged-off loans.

Once a loan’s charged off, a consumer can’t get credit from me again until they pay off that charged-off balance.

That is a sign that they’re not handling credit responsibly.

But I think there’s an element here that I would love to, I’m becoming more passionate about, which is how do we be in the forgiveness game?

If somebody does run into hard times and we have to charge off their loan, if they come back and pay me off, I’d love to wipe that off their bureau, assuming I reported it.

I look at this idea that people’s circumstances change, largely for reasons out of their control.

I think where BNPL can play a really good role is on these folks that need that forgiveness.

Go up against tough times, recover and come back.

I think we’re not looking to catch them in some booby trap.

I think we’re looking to engage them and make sure they stay in the lane that keeps them operating, but not operating with an overwhelming amount of stress.

Yeah.

I really like that idea because certainly circumstances change.

Sometimes they’re pretty bleak for a moment, and then hopefully they get a little bit better.

Yeah.

Well, I mean, you look at all the collections.

They’re largely medical.

If you think about it, usually there’s this underlying unexpected expense.

I guess, look, I live maybe a little naively in a view of the world where most people are doing the best they can with what they have.

There are bad actors, of course.

But most people have good intent.

I think meeting them there with that same mindset as a company is something we can do differently.

Joe, it’s interesting you bring this up.

One of my first writing jobs in financial services was covering the technology debt collectors use.

One bizarre thing, so I followed all those stories, but one, this was another country, it might have been Spain, but they were using shame for a debtor.

The tactic was dress up as Zorro and follow them around.

That’s always what comes in my head.

I’m like, oh my gosh.

I don’t think that’s going to get results.

Other than...

No.

Yeah.

Other than someone wasting their time dressed up.

It could be hot too.

Joe, I wanted to ask you about, because Zip’s roots are in other countries, Australia, New Zealand, I’m kind of curious how that might have informed the product differently in the U.S., if at all.

Just having a broader geographical reach.

Yeah, look.

So it feels like the birthplace of BNPL was probably Australia.

I think Afterpay started there.

A few others have.

It’s super interesting.

I’m actually headed there next week.

Cool.

I would say what’s fascinating about learning about this business and learning about its origin story is most countries aren’t as addicted to consumer credit as the U.S. is.

We have this massive consumerism here that served the economy well.

But largely, you go to Australia, I think the average age for a credit card customer there is in their late 40s, early 50s maybe.

That certainly isn’t the experience I had growing up.

I think Capital One was all over my college campus making sure everybody had a credit card by the time we got out.

So I think this version of using credit is very different.

When you think about using credit in a society that isn’t overindexed on credit cards, the simplicity of this product, you can see the attractiveness.

You know, applaud Klarna.

They’re very, very strong in Europe around this same thing.

The data point I always point to is BNPL still only makes up 2% to 3% of total transactions in the U.S.

If you look at Australia, it’s 15% to 18%.

Same as Europe.

Europe’s 15% to 18%.

So I still think we’re in the early days of consumer adoption and comfort.

I think even my last, I’ve been here a year now, but the last couple of years, I think you’re starting to see people understand the product and a lot of the negative stigma is starting to erode.

Look, I’m really excited and proud to work for a company like this because I do think we make such a bigger impact on this underestimated American than any financial services product that I’ve been associated with before.

Again, I think a lot of companies, a lot of people try to do this well, and I came from credit union land.

But once you start to dive into these more volatile income bands, it’s harder to do this at scale.

I think BNPL is just such a simple product to be able to do that.

Joe, just a couple more questions for you.

One is that I saw that Zip announced it was no longer letting customers fund buy now, pay later with credit cards, right?

No, that’s a good one.

I think the goal there aligns with everything else we’ve been talking about today.

We don’t want any perception even of credit funding credit because that does get into loan stacking.

So making sure that people aren’t either intentionally or unintentionally doing that.

Tying into a debit card or direct to the bank to make sure that the payments are not just credit to credit was important to us.

We really haven’t seen any consumer issues on that front.

We grew over 40% year over year.

That is, I think, a testament to the loyalty and engagement we drive with our users and the growth opportunity here in the U.S.

Joe, final thoughts, and also how should one reach out to you if one wanted to?

Yeah.

And the answer could be, don’t.

No, look.

I feel like my role, both in and out of Zip, is to destigmatize, I think, the perception that this product started with.

I think Zip is in a really unique position where we help merchants with abandonment rate because largely this customer base will end up in their checkout and have insufficient funds or inability to access other forms of credit.

One of our largest merchants, 18% of their customers would have had to abandon their cart had Zip not been the checkout lane.

So merchants are a really, really critical partner for our company.

Same with consumers.

Once we engage a consumer, we try to do right by them all day, every day.

I think it’s exciting to work at a company like this.

So I would welcome the conversation with most anybody.

Let’s go down an asterisk.

Yeah.

The simplest way is to go to our website at Zip.co.

There’s always an ability to access the folks here.

I spend a lot of time with customers, merchants, and I love to engage in conversations like this, Mary.

So thank you for having me and indulging my opinions.

No.

It’s lovely.

And just the last thing is, what’s the image on your phone’s lock screen?

Oh, it’s a funny one.

It’s my two kids.

We were on a family vacation and there were bunk beds in the bedroom.

At one point, they opened the door.

They’re both in there, and it looks like they’re stacked on top of each other because one was kind of leaning, and both their heads are just out of this dark room peeking out.

That is my lock screen.

I’ve got a seven- and five-year-old, and they are a handful in a lot of fun ways.

Well, that sounds like the perfect image.

So Joe, thanks so much for being on Money Isn’t Everything and spending your time and dishing out your thoughts here.

I really appreciate it.

Yeah, thanks, Mary.

I appreciate it as well.

So, okay, one thread that I find especially interesting is how it’s for the consumer to decide whether a purchase was worthwhile, not the banker.

It’s a good reminder that even with data, you may not know the full story.

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I’ve got more great conversations coming your way, and you don’t want to miss them, I hope.

Next up, we’re talking to a fintech CEO who’s bringing in the views on TikTok talking dams.

Catch you then.