The financial world loves a dramatic turnaround. A company teetering on the brink of collapse, a bold new CEO, and a dramatic climb back to the top - it's a narrative that sells books and fills conference halls. But sometimes, the most profound shifts happen quietly, almost imperceptibly, like a slow tide reshaping the coastline. And that's precisely what's happening at Zip Co, the Australian buy-now-pay-later giant.

While analysts focus on the company's admirable progress toward cash EBTDA positivity, a subtle shift in their customer base is unfolding - one that points to a potentially explosive surge in profitability, one that may have been overlooked by even the most astute observers. The key lies in Zip Co's "loan growth strategy" - a deliberate approach to cultivating financially responsible behavior among their "underserved" American customer segment. This strategy, as revealed in the recent Q2 2024 earnings call transcript, is quietly transforming the risk profile of Zip's U.S. customer base, laying the foundation for sustained, profitable growth.

Zip Co has made no secret of their target market: the estimated 100 million adult Americans deemed "underserved" by traditional financial institutions. This label, often misconstrued as synonymous with "high-risk," encompasses a far more diverse demographic than many realize. It includes individuals with "thin" or non-existent credit files, recent immigrants, and those who simply haven't built a robust credit history, despite their ability to repay. This is where Zip Co's strategy takes a fascinating turn. Instead of simply extending credit and hoping for the best, they're actively nurturing responsible financial habits among their customers.

Think of it as a financial literacy boot camp, delivered through innovative product features. Gamified repayments, for instance, incentivize on-time payments and encourage engagement with the app. Flexible installment options and self-service payment date changes empower customers to manage their finances proactively. The result? A customer base that not only repays consistently but also becomes increasingly engaged with Zip's platform, driving higher transaction frequency and revenue.

This "loan growth strategy" isn't just about building goodwill; it's about systematically transforming a perceived "high-risk" segment into a reliable engine of profitable growth. And the early results are nothing short of remarkable. As Zip Co cautiously opens the credit taps in the U.S., their credit losses remain stubbornly below their target range, defying expectations in a tightening economic climate. This outperformance, coupled with accelerating TTV growth, suggests a powerful dynamic is at play.

Diving into the Numbers: A Glimpse of Zip Co's Potential

To understand the potential magnitude of this shift, let's delve into some numbers. In FY 2023, Zip Co's U.S. business achieved a cash EBTDA profit, a significant milestone. However, their credit losses were notably below their target range of 1.5% to 2% of TTV. If we conservatively assume that their "loan growth strategy" enables them to maintain losses at 1.5% even as they expand credit access, the potential impact on profitability becomes evident.

Let's say, for instance, that Zip Co's U.S. TTV grows by 20% in FY 2024, reaching $3.7 billion (based on their 20% CAGR). Assuming a constant revenue margin of 7.8% (achieved in FY 2023), revenue would rise to $288.6 million. With credit losses capped at 1.5%, the cost of sales would be $55.5 million. This leaves a gross profit of $233.1 million, a substantial increase from FY 2023. And this is just the beginning. As more customers "graduate" from their financial literacy program, becoming eligible for moderate credit limit increases, the potential for sustained, profitable growth becomes even more compelling.

Visualizing Zip Co's Growth: TTV and Revenue Projections (FY 2024)

Zip Co's Financial Performance (H1 2024): Key Highlights

The recent Q2 2024 earnings call provided further evidence of Zip Co's quiet revolution. Here's a snapshot of their H1 2024 performance:

Q2 2024 Earnings Call Transcript

The Takeaway: A Revolution in Consumer Finance

Zip Co is quietly orchestrating a revolution in consumer finance, one that redefines the concept of "underserved." By actively fostering responsible borrowing, they're not just mitigating risk; they're unlocking a vast reservoir of untapped potential, creating a customer base that's not only creditworthy but also fiercely loyal and increasingly profitable. This silent surge in profitability may be flying under the radar now, but as the numbers continue to speak for themselves, Zip Co's quiet revolution is poised to become a roar.

"Fun Fact: Zip Co is a proud supporter of financial literacy initiatives, partnering with organizations like Financial Counseling Australia to provide free financial guidance to consumers. They also offer financial education modules through their app, empowering customers to make informed decisions about their finances."