👉 Background: Zip Co was founded in 2013 as one of the OG buy now pay later companies in Australia. But it hasn’t all been daffodils and rainbows for Zip after it went on an acquisition spree between around 2016 and 2022, particularly Spotiii, Twisto and PocketBook.

👉 What happened: When interest rates shot up, investors suddenly cared a whole lot more about profits than promises. As a result, Zip's share price dropped 12.35 all the way down to 27 cents or a drop of 98%. So, over the past 2 years, Zip focused solely on its Australia and New Zealand business as well as growing in the US.

👉 What else: Now, Zip has announced a quarterly EBITDA of nearly $32 million, which was up more than 200%.Off the back of this news, Zip’s share price jumped more than 10% on the news and grown more than 9x in the past 12 months — largely off the back of the US growth and their excess spread growing by 6.1% in Australia.

What's the key learning?

💡Excess spread is the margin that a finance company earns after covering its borrowing costs. In simple terms, it's the difference between the interest charged on its Zip loans and the interest the company pays to fund those loans.

💡Zip doesn’t just magically pull cash from thin air – it borrows from banks, lenders, and fund managers. So a growing excess spread means:

• They're either managing their borrowing rates well
• Increasing the interest rate on their products
• Or a mix of both
  

💡With Zip Co now profitable, it’s clearly got investors quite relieved. Because it means in a lower-interest environment, its excess spread should be even wider, meaning even better margins.