Scalapay is the Italian startup taking on Klarna, Afterpay and PayPal. The buy-now-pay-later (BNPL) fintech has just raised a massive $155m Series A funding round with the aim to beat the established players at their own game.
The phone has been ringing off the hook for co-founder and CEO Simone Mancini since the news broke. “It’s been insane,” he tells Retail Banker International. “There’s just been a never ending stream of emails and phone calls.”
Journalists and market stakeholders’ interest is understandable. The BNPL sector has grown tremendously in the past decade. Covid-19 also acted as another energy shot for the industry thanks to online shopping growing in popularity. The success stories have come as a result.
In this year alone, US-based Affirm listed on the Nasdaq and Klarna has became Europe’s biggest privately-owned tech company after securing a $45.6bn valuation on the back of $639m investment round.
Analysts expect the sector to keep growing to be worth $166bn by 2023, according to recent GlobalData’s thematic research.
Even so, a $155m Series A round at a $700m valuation for a startup that was only founded in 2019 is unusual. So what is it with Scalapay that encouraged investors like Tiger Global, Baleen Capital and Woodson Capital to bet on the business?
Scalapay strategy against Klarna
At a glance, Scalapay works like other players in the sector. It signs partnerships with merchants who can use its technology to offer customers to pay in instalments. The difference, according to Mancini, is in the details of the startup’s long-term strategy.
Companies like Klarna and Afterpay have expanded their services over the years. They have launched banking services like deposit accounts to expand beyond their original BNPL services. To some extent, this has put them closer to becoming digital banks a la Revolut or N26. BNPL businesses have also launched apps where shoppers can check out different vendors.
Scalapay has a different idea. “We don’t want to create a super app where customers go to and then complete the purchase,” Mancini argues. “We actually want to support direct-to-consumer businesses as much as possible.”
The company wants to avoid shoppers leaving merchants’ sites to finalise purchases. Instead, the startup aims to create an immersive and smooth shopping experience. For starters, that means providing merchants with BNPL options at the checkout and to make payments quicker to get through for customers. Eventually, the plan is to go beyond that.
“We think of the shopping experience as anything from you know, when the customer comes on to the merchant site to when the customer leaves that and then gets the product,” Mancini says, hinting that there are already new features in the pipeline.
However, he remains tight-lipped on the details.
European expansion plans on the horizon
Since Mancini founded the Milan-headquartered startup together with CTO Johnny Mitrevski two years ago, the company has already expanded from Italy to France, Germany, Spain, Portugal, Finland, Belgium, Netherlands and Austria. The new capital raise will be used to tighten the startup’s grip in those markets. Eventually, the company plans to expand to the UK, but that’s for further down the line.
The rapid success of Scalapay has already put it ahead of Mancini and Mitrevski’s first two startups – homemade dinner marketplace EatTonight and cake decorator marketplace Sweetly – but the founders believe these ventures pushed them towards the idea of launching Scalapay.
Dealing with smaller merchants via the startups taught them a valuable lesson. “It’s actually very difficult as an independent small retailer to set up and start selling online,” Mancini says.
He argues that especially smaller merchants would be at a disadvantage when trying to set up online shops, especially when giants like Amazon already have a head start and can provide a smooth experience.
Following the closure of their startups, Mancini and Mitrevski went to work in the Australian fintech industry. This gave them a front-row seat to the nation birthing BNPL businesses like Afterpay, Zip and Openpay.
They spotted not only the growth of the sector but the benefits it provided to merchants. The benefits included uplifts in basket sizes, better conversions and improved customer experiences. Recognising the opportunity of the sector, Mancini and Mitrevski decided to muscle in on the action.
Seeing the biggest opportunities for merchants specialising in smaller baskets such as fashion and cosmetics, they decided to launch Scalapay in Italy, rather than Down Under. “Where better than Italy that has a lot of the fashion brands?” Mancini says.
Scalapay rejected acquisition offers
The strategy seems to have worked so far. The new cash injection is testament to that. So is Mancini’s claim that the startup has already been approached to be acquired by two other companies. He won’t share any details about the would-be buyers, only hinting that one of them is already offering instalments services.
“They both wanted to move in the space and saw a strategic advantage in being able to be the number one in southern Europe through acquisition,” he says.
This is unsurprising. As players like Klarna and Affirm have grown, the market has started to consolidate. In May, Australian Zip announced plans to buy European BNPL provider Twisto Payments. In August, digital payments giant Square announced plans to buy Afterpay for $29bn. In September by PayPal, which launched its own BNPL service in 2020, revealed it would buy Japanese instalments firm Paidy for $2.7bn.
At the same time, there has been no shortage of new entries in the sector. UK-based Zilch, for instance, raised a $80m Series B round at a $500m valuation in April.
Tougher scrutiny and looming regulations
The increasingly crowded sector is just one of the challenges Scalapay is facing. Another is the threat of tougher regulations and stricter scrutiny.
The UK’s Financial Conduct Authority, for instance, has recommended stricter rules to minimise the risk of customers living beyond their means as a consequence of using BNPL services. Similarly, the UK market watchdog Citizens Advice has warned that one in 10 BNPL shoppers have been chased by debt collectors.
In the US, 40% of customers who’ve used BNPL services have missed a repayment. Market experts now expect the Biden administration to tighten the rules around the sector.
Because of the growing focus from regulators, BNPL companies have lately been hard at work trying to prove that they’re doing everything in their power to keep users from falling into debt traps. Usually, this is combined with claims that at least they’re not as bad as traditional credit card companies.
“[It’s] not about using Scalapay to live a different lifestyle that you can’t afford”
Klarna has launched a number of initiatives to make it easier for customers to manage their payments and Zilch has more than once championed the soft credit checks it performs on its users.
Scalapay does not perform any credit checks. What it does is allowing customers to essentially level up. The first couple of times people use the Scalapay solution, they can only make smaller purchases. That enables merchants and the startup to gauge how well customers pay back the loan. The more they use the service, the more they can put on credit.
Similarly, users unable to pay back are blocked from the service, but without incurring any interest fees. The incremental increases and the hard blocks enable people to use the service without living beyond their means, Mancini argues.
“It’s about being able to buy better and align with your lifestyle, not about using Scalapay to live a different lifestyle that you can’t afford,” he concludes.