Buy-now pay-later (BNPL) products are becoming increasingly popular with Aussies looking to the lenders amid rising costs of living, yet losses at Zip continue to mount.

Zip Co (ASX:ZIP) reported results last Thursday revealing to shareholders a loss of $1.1 billion in fiscal 2022 despite increasing transaction volumes by 50.3% over the year.

Morningstar equity analyst Shaun Ler says that even with a growing consumer base, the company’s failure to deliver on their promised strategy amid elevated costs has disappointed investors.

“Right now, investors do not want to fund the company so Zip needs to show investors that they can execute on the strategy to become profitable. So, in other words, they need to cut costs,” he says.

This loss of equity funding from a surging share price has had a profound impact on the company.

“I think what investors want to see is the company executing their cost cutting strategy which will reduce net losses,” Ler added. 

Zip shares are currently trading at $0.96, down over 90% since its highest price of $12.35 in February last year.

Despite the growing usage of these products, the company remains unprofitable. Ler explained that the company has high costs which wiped out increased revenue from growing transaction volumes.

“You can get lots of transaction volumes and people using products but behind every transaction, you need to spend,” he says.

Salaries and employee benefit expenses jumped 47% during the year whole marketing expenses rose 39%.

The mounting costs aren’t the only thing preventing Zip from making a profit says Ler. He believes the number of perks and discounts offered by the company to entice customers is expensive and has led to an increase in bad debts.

“It is very expensive to run a buy-now pay-later business because you always need to come up with something, you always need to give customers some perks and discounts. That is why they have been loss making,” he says.

“Zip’s terms are very, very generous. So, they’ll give you cash back, they’ll give you free deals, causing bad debts to go up,” he added.

Data collected by Power Retail in July; an ecommerce analytics provider suggested a 10% increase in BNPL usage amongst Australian consumers over the last two years. 14% of consumers saying they have paid a late fee versus 7% in 2020. Bad debts and expected credit losses at Zip just over doubled, increasing 52% in fiscal 2022.

In addition to growing operational costs and rising bad debts, the company has also been plagued by a surge in funding costs. The total cost of sales, which includes interest, bad debts and processing costs jumped 76% over the year as a result of rising interest rates.

“It’s going to be difficult for Zip because in the past funding costs have been very low. But right now, funding costs are going up a lot,” says Ler.

With consumers reducing discretionary spending amid rising inflation and rate hikes in combination with climbing operating and funding costs, Ler believes the company needs to reduce spending to grow profits and secure cheaper funding.