Sezzle develops pay-in-2019 option with online retailer Tobi

Sezzle Inc., a Minneapolis fintech startup focused on creditless shoppers, is offering a pay-in-2019 option to shoppers of online fashion retailer Tobi Inc. during the holiday season.

With the move, Sezzle is experimenting with extending the time it allows shoppers to repay purchases using its zero-interest, layaway-style payment tool. Since the company's start last year, scores of online merchants have adopted its payment tool as an option for young shoppers who don't have credit cards.

Sezzle last week obtained a $100 million line of credit to finance shoppers' purchases during the holidays and beyond.

Through the holidays, Tobi is a featured retailer on Sezzle's website. Tobi chiefly sells young women's apparel and accessories, and about 70 percent of Sezzle's users are women, mostly young women who don't have credit cards or are just starting to build credit histories.

"Their shopper is our core user," said Charlie Youakim, Sezzle's chief executive. "It's a perfect match."

Tobi is also one of the largest retailers Sezzle has attracted to use its payment system. It was first embraced by boutique retailers and artisans. Earlier this year, its top executives and sales teams began reaching out to larger firms to build its transaction volume and revenue.

Youakim and Paul Paradis, Sezzle's chief operating officer, visited Tobi's headquarters in Los Angeles several months ago with an offer to modify the payment system to test a holiday promotion that extends the pay-later concept.

"We have a lot of people coming to our door with ideas. I always ask 'Will they add value?' " said Kenneth Chan, chief executive of Tobi. But he added, "I'm from Chicago. There was some basic rapport, some knowledge, Midwest values and comfort with Charlie and Paul."

Through the end of the year, Tobi.com shoppers will get the option of using Sezzle to make purchases. Sezzle will require a 25 percent initial payment at the time of the purchase, with the remaining balance paid in three equal installments starting Jan. 2.

Sezzle started in 2016 as a developer of debit-card payment technology, aiming to save merchants the costs of credit card transactions. But it changed direction just a few months after releasing its first product when executives realized they would have better luck with a tool that helped merchants build sales.

"Cost-saving is always difficult to sell. It's not very sexy," Paradis said. "Increasing sales is sexy. Everybody wants to increase sales."

Before pivoting to the layaway-like payment system, executives explored its use in other parts of the world, including Latin America and Australia, where layaway payments are common. They even tested a "buy-now, pay-later" button with one of the merchants of its debit-payment tool, though the button just went to a "system unavailable" notice.

"We just put it in there to see how many clicks and we had like more clicks in a day with that merchant than in the previous month with all the others we had at the time," Paradis said.

Three months later, in summer 2017, Sezzle rolled out the tool for online shoppers to make payments with no interest in four installments over two months. Sezzle's revenue comes from merchants who pay a transaction fee that's about 3 percent more than they would to credit card providers.

"Because these young consumers are credit-starved, they tend to abandon their online shopping cart instead of clicking through to purchase," Youakim said. "With our option, those shoppers are more likely to convert to a sale. We even see them spending more and shopping more frequently."

Sezzle enrolls shoppers and extends financing without checking credit scores. Repeat customers are allowed to finance bigger purchases if they have paid off previous purchases on time. Sezzle executives are talking with rating agencies to develop a way for the payment performance of its customers to count toward building a credit record.

Sezzle closely monitors its approval rates for shoppers, the rate at which those shoppers convert from filling an online shopping cart to purchasing it and the rate at which they repay the firm for the purchase. Over the past year, they have become more refined at balancing the three metrics.

"Those are always in contention with one another," said Killian Brackey, the company's vice president of engineering. "We can approve everyone and have low repayment rates, or just the opposite. The team has spent a lot of time tweaking those to be where we needed them to continue to grow."

After the holiday season, Sezzle executives hope to be able to show that its tool provided enough of a sales lift to Tobi and other retailers that they will be able to attract some bigger merchants in 2019.

"The biggest pinnacle is right here in town with Target," Youakim said. He and his colleagues view Amazon as an unlikely user of its tool.

Besides, Paradis said, "They have a name in fashion. Of all the big retailers that sell everything, they have owned that fashion niche."

Evan Ramstad • 612-673-4241