The success of the seven-year-old company is a product of the chemistry between Diamond and Gray. This is Zip’s special sauce.
Unlike many tech founders, their relationship wasn’t developed in childhood, at school or in a university dorm. Instead it was facilitated by a recruiter. Diamond placed the ad for a business partner in late 2012. For a month, he’d been pitching to investors his idea that would, as he put it, change the face of consumer finance: leveraging technology to provide an interest-free alternative. But his pitches always fell flat.
“They all said to me: ‘It’s a great idea, you are selling a good story, but you have absolutely no idea about any of this’,” Diamond says. “So I hired a recruiter to find me a credit specialist.”
Gray had been made redundant from Once Credit, a point-of-sale finance company, when FlexiGroup acquired it after the GFC. He knew the ins and outs of how to sell credit to someone when they’re in a shop, but came from a world that relied on paper forms. He answered Diamond’s ad and the two met in a cafe in Sydney’s CBD.
“The thing that struck me most was how young he was. I had an idea of someone older than me,” recalls Gray, who is now aged 48, 10 years older than Diamond.
The pair couldn’t be more opposite. Diamond: bullish, instinctive, fast-moving. Gray: measured, thoughtful, considered. Larry: a flurry of ideas, wants to do everything. Pete: has the deep credit experience. While Diamond buzzes around in a T-shirt and baseball cap, Gray always wears a suit to the office.
Gray, who had been searching for his own fintech idea, knew quickly he and Diamond had been thinking along similar lines. Giving customers the ability to sign up for credit in three minutes at the checkout would be compelling. There was a big opportunity to get closer to customers – if only they could find a way to compete with the banks.
At least once a week for the next six months, the two met at the Commodore Hotel in North Sydney and, with the help of the free Wi-Fi, a business plan started to take shape. But more importantly, so did a camaraderie, a deep connection.
Gray describes it thus: “We have an ability to have a heated discussion – a blue – about one thing, and then five minutes later for that to be gone and to be in sync again. There’s no sulking or going to sit in the corner. We intuitively understand each other’s thinking.”
Zip’s chairman, barrister Philip Crutchfield, QC, says it’s this trust between the two founders that forms the crux of the success of the business. “I tell the guys, like I do all young people: It’s not the mistake you make, it’s what you do after that, the next decision you make, that matters. Larry and Pete know that intuitively. I trust them both – and they trust each other, completely.”
Like many entrepreneurs in the new economy, Diamond jumped onto the personal computing bus at an early stop. His father, a doctor, and his mother, a preschool teacher, had the foresight to put an Apple IIe in their eastern suburbs Sydney home by the middle of the 1980s. At Moriah College, a Jewish school near Queens Park, Diamond learnt to code in BASIC from Year 8.
He was pushed to do advanced maths for the Higher School Certificate while in Year 11. In Year 12, he did advanced computer studies, building a desktop program from scratch which included a calculator and games. He finished high school in 1999 amid dotcom mania and took a scholarship for a Bachelor of IT at the University of Technology, Sydney.
Coding provided Diamond with a sense of power and control, while also being an outlet for creativity and a source of fun. “You can create something out of nothing. It gives you a sugar hit,” he says of programming.
There was no urgent pull into the workforce. Curating a sense of adventure, Diamond put uni on hold for a year to travel around the world. In Israel, he lived on a kibbutz and learnt philosophy. He listened to Bob Marley, hip-hop by Jurassic 5, and grew his hair right down his back. “I always mix the serious with the fun. I am very OK with that.”
Back in Sydney in 2001, he decided to prolong the travelling vibe, keeping the long hair and getting it dreadlocked. The dreads ran down to his hips.
The three-year UTS course included a six-month work placement at American Express and another at PwC. Diamond enjoyed how his look challenged the establishment and found inspiration from being underestimated. “I was in a suit with full dreads. People judge the book by the cover: they can’t help themselves. People profile you and I really enjoyed that.”
But in 2004, a group of mates held him down to cut off the hair – although he still has the dreads in a container in his basement – and encouraged him to grow up a bit. Knocked back by the investment banks, Diamond joined Pacific Brands as an IT manager, studying a Masters of Commerce at UNSW at the same time.
He spent two years as a business analyst, which taught him to probe into how things work. “You can ask any question you want, and that is how you build knowledge. I saw how technology enables business right across the value chain.”
In 2006, he figured it was time to crack into investment banking. This would require special measures. He called Geoff Levy, an influential corporate adviser who was running Investec, and offered to work free over the summer.
I realised how toxic corporate worlds are. For two years I did not enjoy going to work. It was soul destroying.
— Larry Diamond
“On the fourth day, they said ‘Thanks, but we are kind of done here’,” Diamond recalls. But he was playing the long game. “That was enough to put on my resume: ‘Summer internship at Investec Bank’.”
With his strong marks in maths, a door opened at Macquarie. Diamond found a match. It is an institution filled with clever oddballs; its bankers are given plenty of autonomy to find ways to extract profit from new markets.
Macquarie’s culture and work ethic had a permanent impact. “Even though you had high pressure, you supported one another: stronger together. Macquarie was very formative because it is very entrepreneurial. It was a very steep learning curve for me – and I mean very steep.”
The work was on the investment banking side, advising companies on what to buy, preparing information that would go to the board. He did research, financial modelling and prepared investor packs. Many days ended at 2am. “Five pm is midday,” he says. “A day in the life at Macquarie was two days at Pacific Brands.”
But these halcyon days were soon brought to an abrupt end in the form of the GFC. Diamond survived the multiple redundancy rounds at Macquarie but then decided to leave, unhappy with how the lay-offs had been handled and the impact on the team’s culture. He decided to try his hand at Deutsche Bank; but he never felt at home in the German-style bureaucracy.
“That is where I started to lose faith in the corporate world. I was always afraid of what to say on the floor. The trust was very weak. I realised how toxic corporate worlds are. For two years I did not enjoy going to work. It was soul destroying. But I was trying to work out, who am I?”
In the middle of 2012, Diamond was made redundant. But life is about the journey, not the destination. “You have to be pushed sometimes. At that point, I started networking extensively with people I hadn’t spoken to for a long time.”
Diamond rolled with a few more punches. He looked for a gig at various fund managers but was knocked back by all of them. With his cousin, he bought a T-shirt screen-printing business in Alexandria, making shirts for music festivals and doing embroidery on jerseys for the South Sydney Rabbitohs.
He also started to spend time with a mate, Greg Moshal, helping to develop and raise money for his own start-up, which is now the ASX-listed small business lender Prospa. “Getting retrenched from Deutsche was in hindsight the best thing that has even happened to Larry,” says Moshal.
“After that, he was entertaining a few ideas. We did a lot together and that gave him the confidence to give it a go. He’s an excellent operator, a super-intelligent guy, full of energy and optimism. It’s obviously worked out very well for him.”
It took me a long time to find my place in the world and understand what I wanted to do and knuckle down and apply myself.
— Peter Gray
Diamond started to get excited about the digitisation of financial services. His younger brother, Dave, was into e-commerce, creating products for the Groupon website. They worked out of the same office in Bondi Junction.
At meetings at the pub, Gray and Diamond discussed how the model of interest-free finance, supplied by the likes of GE Finance at Harvey Norman stores, was broken.
“The processes were clunky and it was predicated on the old credit card,” says Diamond. “We realised we couldn’t compete with the banks. We had to find an unfair advantage. And the way to do that is partnering with retailers. It’s a win-win: they get a customer, the customer gets to spread the payment over time, and we also get the customer.”
Peter Gray moved to Sydney in 1978 as a seven-year-old. He attended Barker College on the upper north shore, where he captained the rugby union 1st XV and became a stalwart at the Eastwood Rugby Club as a player and coach. He only lasted for six months of a UNSW commerce degree, dropping out to find work to sustain a social life that includes owning race horses.
“I am probably what you would describe a late maturer,” Gray says. “It took me a long time to find my place in the world and understand what I wanted to do and knuckle down and apply myself.”
Meeting Diamond, Gray saw an enormous opportunity, but knew establishing Zip presented big risks. Both men had young kids at home, mortgages, and had been the major breadwinners. Setting up a start-up meant they wouldn’t earn a decent income for a while; in the early years, both worked for nothing.
After six months of building trust, Gray remembers “a final eyeballing of each other to check, after doing all the hard work, if we were willing to put everything on the line with the other guy”. In April 2013, they decided to pull the trigger. Then, a month later, the long hours working out of a draughty Bondi Junction office caught up with Gray and he contracted pneumonia.
Gray remembers it clearly. One of his horses, Tax Me If You Can, had just won the Scone Guineas, a half-a-million dollar race, at 22-1. “It was the biggest fill-up in history, but I couldn’t drink. I was as sick as I ever have been with this bloody pneumonia and ended up in hospital.”
Surrounded by elderly men on ventilators at Royal North Shore Hospital, Gray put together Zip’s Australian credit licence application for ASIC on a laptop he had smuggled into the ward.
Zip was incorporated in June 2013, raising $170,000 from families and friends. Diamond tipped in money from the T-shirt business. The message from several early investors was: “We don’t know if this is going to work, but we like you and Pete”.
Many of the early days were spent pitching to small retailers. Chappelli Cycles was the first to come on board, using Zip to sell a $500 bike. The same model of bike sits today just outside the door of Zip’s Sydney CBD office boardroom, named the Commodore after the hotel where the business was hatched.
By early 2015, they needed more funding. Despite early signs of traction with retailers, several venture capital firms turned up their noses at the concept. “They were very risk-averse; they were not keen to come on a journey,” says Gray. “The deals they came up with were so unappealing in terms of what they would give us for what they wanted.”
But revenue was far too small to pitch for a public listing. So they reverse-listed Zip via the shell of Rubianna Resources, a gold miner with West Australian tenements that turned out to be duds. The deal raised $5 million. It also provided Zip with its chairman: Phil Crutchfield, who had frequently advised ASIC on corporate law, was chair of Rubianna.
At the time of the takeover he resigned from that role, although he did become a shareholder in the fintech. He grew more and more interested after applying for a Zip account only to be rejected by the system at the onboarding stage. Because he had no friends on Facebook, the system thought he was a robot.
Crutchfield thought the credit-checking technology was impressive. He joined the Zip board as chairman in December 2015, three months after the ASX listing.
The funding allowed Diamond and Gray to shift from the Bondi Junction warehouse to the CBD. In an office in York Street, tech staff worked around a table-tennis table in basketball shorts in an overcrowded annex – and the culture of Zip was created. For Diamond it’s a culture built on “working together, trust, open dialogue, quick feedback, wearing different hats, experimenting”. Says Gray: “You could feel something special was happening, everyone loved being there.”
In their current modern digs on Spring Street, Diamond and Gray work on a shared, long desk that cuts off the corner in an open-plan floor. When Diamond sits at his laptop, he’s only just socially distanced from Gray amid deal tombstones, a few bowling pins and, on Diamond’s side, a plastic menorah, a candelabra used in Jewish worship.
Observing Shabbat, Diamond is not contactable between sundown on Friday and sundown on Saturday. He takes off all the Jewish holidays. Crutchfield says his cultural focus, and focus on family time, is admired by everyone and has helped him navigate the pressures of the business.
“It has given Larry a balance that I have seen in times of high crisis, like when COVID hit. His calmness comes from an understanding that there is more to life than work.”
That said, when asked to reflect on the $3 billion global payments player that he has built in just seven years, Diamond says it’s mainly been the product of really hard work. His priority now is imbuing the start-up mindset – which Zip calls “build and fly” – into an organisation which has become much larger as it pushes into the US.
Like founders of many start-ups that are rapidly scaling into large businesses, Diamond and Gray are trying to keep that “something special” as they expand to a workforce of 520 across five countries. It’s a challenge that Diamond seems to feel most acutely.
“Internally, it has been chaos. Under the hood, having to scale ‘building and flying’ has been hard. Not everyone is used to the environment. Zip is transitioning from family to a high-performance team,” he says. “What we know now is actually irrelevant.”
We are fighting against the credit cards, and the PayPals of the world – those dinosaurs.
— Larry Diamond
With the virus crisis shifting more people towards e-commerce and paying without cash, Zip expects 2021 to remain hectic. It struck a deal in October with Visa, Apple and Google to allow Zip to be used in any physical retailer accepting a Visa card.
Plans to ramp up in Britain, delayed by COVID-19, are back on track. Its US business, QuadPay, is solidly growing user numbers despite more intense competition from the likes of Klarna, a Swedish fintech part-owned by Commonwealth Bank; PayPal, which entered the buy now, pay later space in September; and, of course, Afterpay.
While Afterpay’s valuation has surged ahead of Zip, after it hit the US market first and attracted more customers to its simpler product, Diamond describes the relationship between the two Sydney rivals taking on the world as one of respect.
“We are not fighting against each other,” he says. “The world, and payments, is a huge market. We are fighting against the credit cards, and the PayPals of the world – those dinosaurs. We are part of a coalition of Australian tech, changing the face of certain industries, and it’s exciting.”
After rehiring some of the staff laid off by Operation Lungfish and getting back on the growth train, Diamond recognises the experience of managing through this pandemic will be seared into his memory, just like the GFC at Macquarie, and that Gray has helped him develop a new sense of perspective.
“There have been lots of lessons along the way where Pete’s been right from the beginning, and those experiences give you a sense of balance,” Diamond says. “I am always glass-half-full, positive and very trusting. But you need to be mindful. And there’s more balance there now, to understand the downside.”
A tale of two fintechs
Zip has recorded impressive growth over the past few years, albeit in the shadow of Afterpay, which attracts far more attention. (Zip listed on the ASX eight months earlier, but Afterpay has grown faster.)
The buy now, pay later fintech’s payment system is embedded into the sales platforms of 35,000 retailers, which pay a fee based on the cost of goods to accept the service. It has 4.5 million active users.
Over the past financial year, Zip Co almost doubled its revenue while keeping bad debts low. It’s also gone global, nailing the transformative acquisition of QuadPay, which is based in New York and run by two mates of Larry Diamond’s; one of whom he met at school, the other at Macquarie. The $403 million all-scrip deal, which completed in September, will let Zip chase growth in the much larger United States market.
Also operating in Britain, South Africa and New Zealand, Zip is a rare example of an Australian software company cracking markets overseas. Indeed, it is helping create an entirely new category of credit – shifting more of the cost of the transaction to merchants – in a multitrillion-dollar payments industry dominated by the likes of Visa, Mastercard, PayPal and Ant Group.
Zip has two products: Zip Pay, an interest-free wallet for everyday purchases (there’s an account fee if repayments are not made in full by the end of the following month); and Zip Money, for larger purchases (which offers an interest-free period then charges interest on outstanding balances, like a credit card).
These tap the desire of younger customers to access finance in real time with smartphones, or at online retail checkouts. It’s a vast improvement on clunky bank processes to get a credit card.
Zip’s market cap is just 10 per cent the size of Afterpay – but Zip’s fans see plenty of upside with a business model that gives it more options, including lending for bigger-ticket items. Unlike Afterpay, Zip requires customers to undergo a credit assessment, putting Zip on surer ground when it comes to the risk of regulators slamming on the brakes.
A key plank to the expansion strategy allows users who shop online through its app to use Zip to pay at any retailer that accepts a Visa card, a feature Afterpay doesn’t offer.
Jessica Farr-Jones, a portfolio manager at Regal Funds Management which bought into Zip in 2016, says the QuadPay deal brings together two great management teams.
“We believe that not only is the buy now, pay later sector likely to continue to outperform, but that the significant discount at which Zip currently trades versus Afterpay should narrow over time.”
“We are particularly excited about their runway in the US market after landing partnerships with players like Fiserv/First Data,” she says.