Earnings Call: Q2 2021

Aug 17, 2021

Thank you for standing by, and welcome to the Sezzle Inc. 2nd Quarter Results Conference Call. All participants are in a listen only mode. There will be a presentation followed by a question and answer I would now like to hand the conference over to Mr. Charles Huicham, CEO. Please go ahead. Good morning, everyone. For those of us joining from here in the United States, good evening, and welcome to the Suddenlink's 2021 Second Quarter Presentation. My name is Charlie Elakim. I'm the CEO and Executive Chairman of Sezzle, and I will be leading the presentation today. We're incredibly excited to report our 2nd quarter results today. I've got to say it's an exciting time to be a part of this industry. There's news every day as many of you can relate to. But I thought all the listeners would appreciate that our product launched about 4 years ago today, plus or minus a few days. It's pretty amazing to come here today to give you these results when you consider that this business started such a short time ago. I'm joined on the call by our CFO, Karen our President, Paul Paradis our Head of Investor Relations, Lee Rain. I'll now move on to our presentation. If you haven't already had a chance to pull it up, you can find our presentation posted on the AFX website if you'd like to follow along. In today's presentation, we will discuss the following topics. First, a quick overview of our mission, our focus and our differentiation Then our first half highlights and growth plans. Next, an overview of new partnerships that will fuel us over the coming years, Followed by our progress with retailers and some accolades that make us proud. And finally, we'll go over our financial results. So let's get started. Please move forward to Slide 3, if you will. Slides 3 through 5 cover the key points of differentiation that we've developed over those first 1st, our mission. We've set a clear mission for our team and our stakeholders. Our mission is to financially empower the next generation. That's why you see our team launch products like Saddle Up, where we can help consumers build their credit scores while they use our payment products. Hitting on that mission helps fuel our team's drive and improve our brand equity. We're winning with this approach. Through that mission based focus, we built a differentiated payments business, which Slide 4 details. Our product improves consumer financial freedom Through simple budgeting accomplished through interest free installments. We promote responsible spending because our perfect alignment with good decision making. We don't gain from getting customers behind on their payments. So we need to ensure that we're giving the customers who can pay us back the access they deserve. The product not only helps these consumers, but it helps our merchants too. We drive significant increases in sales, conversions and average order values Through a simple integration and a partnership approach that stands out relative to our industry. This differentiation accelerates the 2 sided network effects that we're generating as Bella on Slide 5. The great features and value propositions of our core product attract Consumers to us, which in turn attract our merchant partners. Our product provides those merchants with some additional value propositions, Such as lower return rates, higher purchase frequencies, improved customer satisfaction and marketing via our affiliate solution. In fact, over 10% of our volume is driven to our directory towards our merchant partners. This is all additional to the core value proposition I've increased conversion sales and listing AOVs. These enhanced values attract more merchants, which makes our product even more valuable to the next consumer. Describe the virtual cycle that powers our business. And virtual cycle leads to the results displayed on Slide 6. As we just passed our 4th anniversary, these numbers are fun to report. We now have over 3,000,000 active consumers and nearly 42,000 active merchants who collectively have Transacted $1,400,000,000 in processing volume through SENSOR over the past 12 months. When we call a customer active, we mean it. Our top 10% of active consumers transacted at an average of 49 times per year. And collectively, our customers have downloaded our app 2,200,000 times. The Trustpilot ranking gives you some idea of why. Our customers love Sezzle. One of the biggest complaints we have is you need more stores, Which is something we prioritize daily. Slide 7 exemplifies the growth plans, some of which lead to that very point, adding more stores. First, we believe we have the growth potential due to expanding market penetration. Buy now, pay later is still very new to our geographic markets As is the installment megatrend, we should have a tailwind for a number of years as these trends continue. Next, we're forever Pushing the boundaries of product development and innovation. We've added long term installments in store payments and credit building, And we believe that there are more opportunities for innovation coming. We're at an early stage in the sector and that means that we need to keep innovating in order to win. Another form of expansion is planting more seeds in other large geographies. We focus on geographies that have asymmetric opportunities, Where we can make a smallish investment that can lead to huge upside for our investors. Canada, India, the EU and Brazil Are all examples of that asymmetric approach, all at different stages of maturity. In the key markets that we're already established in, namely the U. S. And Canada, We're also testing new verticals for payments. We're testing health, electronics, grocery and travel and a few other categories. Our view is that these categories could create more coverage for our payment platform, which in turn increases purchase frequency for our consumers. And finally, we're diversifying the types of merchants we work with. We're working on making Cesso much more than an online payment option. We want to be seen as a payment method that you can use everywhere with small and large merchants online and offline. Slide 8 gives you a bit more detail on our international expansion. Canada has already turned into a key market after 2 years And we believe that India could be headed in that same direction based on the progress at this point. It's worth noting that the EU market has been instrumental in helping us win enterprise deals, No, it's at a very early stage. So even though we're new to the EU, we're already getting some returns. On Slide 9, we wanted to share the depth and breadth of our partnership activity. We believe that our partnership activity has become a differentiating factor for our company. We picked our lane within payments and have created winning combinations with many different groups. We're going to dive into a couple of key partnerships on the next slides. 1st, Discover. Discover is an exciting partnership for us here at SEDL. Discover had a ubiquitous payment network in the United States and is allowing us to leverage their networks to expand our buy now, pay later solution across every merchant that accepts Discover, Which is just about every merchant in the United States. We're already growing rapidly online and once this capability is rolled out, We should be able to expand that growth into the offline world by turning on our solution rapidly across the Discover merchant network. Merchants will turn us on and get a promotional package that lets shoppers know about the ability to pay with Sezzle at checkout. We should also be able to reduce operational costs through this partnership by taking over many of the operational elements of our card program in partnership with Discover. We'll work with Discover to graduate our customers into their banking products, which we see as a natural step in financially empowering our key We think this partnership is a perfect example of how SaaS looking to work with existing financial institutions to create lens for SaaSle, Our partner and our customers. Next, we wanted to highlight our BigCommerce partnership, which you'll find on the next slide. We're partnering with BigCommerce to be the preferred buy now, pay later for their e commerce ecosystem. BigCommerce is giving us top presentment in their merchant dashboard And we'll be actively selling and marketing Sezzle to thousands of merchant customers. The partnership also makes it easy for their merchants to turn on our payment platform. The easier you can make the products turn on for merchants, the faster they come our direction. We've become excellent at servicing small e commerce merchants, And we think this partnership with BigCommerce will only help us raise the bar a bit further. On the next few pages, we call out some accolades for the company. The next slide covers many of the merchant partnerships that we're proud of. We can't list them all here as 41,000 some merchant logos will take up way too much space, Well, we've got some of the bigger retail logos here and some of you may recognize. I think you'll notice that these logos come from a variety of verticals And then we keep on adding new impressive logos to this slide. And on the next slide, we call it some industry awards and other accolades that we're proud of. My favorite is always the user reviews. We watch them closely at this company. And if we see Key issues, we fixed them. If you see a customer love, we celebrate it. We're obsessed with making our product great for our customers and we can get shows. I'm now going to hand off the presentation to our CFO, Karen Hartshyff, so that she can take you through our financial updates, which completes the presentation. Karen? Thank you, Charlie. Before we start the financial update, please note that our financial statements are prepared In accordance with U. S. Generally accepted accounting principles, 2nd quarter financial results for 2021 2020 are unaudited and presented Certain prior period amounts have been reclassified to conform to current period presentation format. The reclassifications were made to the income statement presentation to be more consistent with other U. S.-based SEC registered competitors in the industry. These classifications are summarized as follows: Amounts previously reported as cost of income are now classified as transaction expenses and reported within operating expense. Gross profit has been removed from the income statement. Selling, general and administration expenses have been disaggregated To reflect the primary components within this line, including personnel, 3rd party and data, marketing, advertising and trade shows and general and Administrative. These expense line items for prior periods were reported in the MD and A. These Classifications had no effect on operating loss for total comprehensive loss. Moving to Slide 14. We are reporting continued strong growth in total income in UMS. 2nd quarter 2021 UMS totaled $411,100,000 and was 2.2x the $188,000,000 for Q2 of 2020. 2nd quarter 2021 total income was $27,800,000 also 2.2 times the 12,600,000 Total income for the same quarter last year. 2nd quarter 'twenty one total income included $24,100,000 in peso income and $3,700,000 in account reactivation fees. 2nd quarter 2021 account reactivation fee income comprised 13% Total income. As a percentage of underlying merchant sales, total income was 6.8% for Q2 'twenty one, Up just slightly from 6.7% in the same quarter last year. As we previously mentioned, we expect to see compression in this rate as we bring on Even more enterprise merchants. Key drivers of growth include increase in active consumers, active merchants and repeat usage. As Charlie mentioned, we continue to grow our consumer and merchant base. And as of the end of July, June July rather, sorry, We had 3,000,000 active consumers and 41,800 active merchants. Active consumer repeat usage was 91.6% in June, reflecting the 30th consecutive month of growth. We've made continued progress with larger enterprise merchant partners, including Target, Lance Plus and Market America Worldwide. On to Slide 15, transaction expense includes all expenses incurred on a transaction basis, including payment processing, merchant affiliate program and partnership fees and consumer communication costs. The most significant of these is payment processing costs that dropped from 2.1% of UMS in second In June 2021, approximately 18% of all processing volume was via ACH versus approximately 3% in June of 2020. Total transaction expense as a percentage of UMS dropped Net interest expense in Q2 2021 was 0.3% of UMS, half of the 0.6% rate for Q2 2020. The Q2 of 2021 reflected the full benefit of the $250,000,000 line of credit debt facility that we closed during the Q1 of this year. Moving to Slide 16, the provision for uncollectible accounts. As a percentage of underlying merchant sales, 2nd quarter 2021 provision expense totaled 3.4%. As you can see from the chart, provision expense fluctuates on a quarterly basis. 2020 was not an ordinary year. The impact of COVID was reflected in lower provisioning rates in 2nd quarter driven by both 2020, driven by both our And the timing of stimulus payments driven by the CARES Act. Not knowing what to expect going into COVID, we tightened up our credit line assignment ended up favorably impacting our results in Q2 last year. The combination of these factors resulted in a historically low loss provision for Q2 of 2020 of 1.2%. In Q2 of 2021, we experienced higher For visiting rates with larger enterprise merchants, this was driven by expansion testing in our line assignment strategy with newer enterprise merchants as well as the impact of non integrated product offerings that create more friction for the consumer. We are currently reevaluating credit line assignment strategies. We are also working with our new enterprise merchants on direct integrations that will remove the friction or at least reduce it in the checkout process for the consumer in the future. Regarding net transaction margins, underlying merchant sales is a key operating metric discussed in our MD and A, and we reviewed that on Slide 15. Total income less transaction expense, less provision expense, less net interest expense As a percentage of UMS totaled 0.8% in Q2 2021 versus 2.1% in Q2 2020. The difference of 1.3% was driven by 2.2% increase in provisioning rate, partially offset by improvements of 0.1% in total income, 0.5% in transaction costs and 0.3% in net interest expense. Year to date through June, total income less transaction expenses less provision expense less net interest expense As a percent of UMS totaled 1.3% in 2021 versus 1.7% for the same period last year. The year to date difference of 0.4% was driven by higher provision expense of 1.2%, partially offset by improvements of 0.1% in total income, 0.4% in transaction expenses and 0.3% in lower funding costs. Moving to Slide 17, other operating expenses. Personnel, including equity compensation expense, is still the most significant element for other operating expenses at 68% of the total other operating expenses for Q2 'twenty one compared with 76% in Q2 'twenty. The increase in personnel expense costs is due to our overall growth in employee headcount. The increase in equity and incentive based compensation We are used by our employees in the ordinary course of business as well as costs associated with fraud prevention and data related to failed loan applications. The increase in marketing, advertising and trade shows in Q2 'twenty one from Q2 'twenty It's a result of increased initiatives in digital marketing, co marketing the brand with our merchants and for expenses related to various social media promotional campaigns. Since the onset of the pandemic, there's been basically no trade show activity for obvious reasons. The increase in general and administrative expenses from Q2 'twenty one from Q2 'twenty is due to third party implementation costs, Legal fees associated with SEC filings and other public company reporting costs. On to Slide 18, We believe we are well capitalized for the future. As of the end of June 2021, cash totaled $58,200,000 and we had $21,000,000 drawn against our line of credit with unused borrowing capacity of $56,800,000 This compares with our year end position with a total cash of $89,100,000 $40,000,000 drawn against our line of credit with unused borrowing capacity of $23,900,000 Our total line of credit is $250,000,000 compared with the prior facility in place at year end of 100,000,000 The new facility lowered our borrowing costs, extended the maturity of the facility and increased borrowing capacity. Certain merchants elect not to receive their transaction accounts payable from us upfront and leave the balances with several And it's state for interest. This amount totaled $79,000,000 as of June 30, 2021. Subsequent to quarter end, Sezzle received a $30,000,000 investment from Discover in exchange for the issuance of 4,000,000 559,270 shares of our common stock. Excuse me. I'll turn it back to the operator now for Q and A. Thank Your first question comes from Phil Chippendale of Ord Minett. Please go ahead. Good morning, guys. Thanks very much for your time. I just want to get back to Slide 16. Karen, thanks for the extra commentary around the bad debt trend there. Can you just unpack a little bit this friction you're talking about at some of the emergencies integrated with? And why is it that Karen, do you have a second? Excuse me. I'm barely copying the tech right now. Yes. I would say, Michelle, but okay. Thanks. Okay. Yes. So, Phil, Good to talk to you, by the way. But yes, so there's a few reasons behind what's going on. So first of all, our move into enterprise You gave us the opportunity to basically expand the universe of testing, which basically means you get a little bit more aggressive in terms of our underwriting because we felt it would be a good approach. But then we also had a non ideal integration with our enterprise clients, which is this virtual card solution. And so between the combination of those activities, we believe that, that led to some of this lift in provision. And the main reason for that is to think about the user experience. If you go through some of these checkouts, the user experience is not ideal Because it's not a direct integration, which leads to adverse selection in the clients that will come through the checkout because there's a bit more friction in the process. And so between these two elements, this is a lever we can control. And so what we're doing now is basically adjusting As a company towards this solution, understanding the difficulties with it in terms of the integrations. And then in these cases, We're pulling back a bit, which will help us target lower principal loss rates and lower provisions. Our goal going forward is to Go back to the low 2s in terms of loss rate provision, principal loss rate provision. That's tough to target. Are you targeting Q3 to give that sort of target? It's to near term. But we think towards the end of the year, You can start to think this is a target that we're going to have in our line of sight and we'll have the time to pull that off. It's difficult to call it for Q3 because the provision itself has a lag to it in terms of how we account for it. And so right. It's a little bit more difficult to predict for Q3, hitting that sort of a target. But longer term, we believe we can do it. Okay. And just in terms of that change in the integration process, is that underway yet? Or is that still work ahead of you? Well, we're also dependent on our partners. So the retail partners that we're working with in enterprise, it's On their agenda in terms of integration activity. And so the only item that we have in our control It is our underwriting in these situations, which we are controlling. We have no changes. Yes. Okay. So when you guys have disclosed the July performance, which You saw customer additions that were above what we saw on the June quarter on a monthly basis. So it looks like July growth is Quite strong. That does take into account some of these additional conservatism that you didn't take into account on the underwriting side of things. Yes. That's right. I think we're really excited by July because July is typically a lower retail month. We're doing quite well and we're already undergoing a lot of the changes that we've talked about in terms of changing underwriting in virtual card situations. Okay. Just obviously, you guys have highlighted in the past that you're pursuing a U. S. IPO. These materials don't make any mention of it, note of the SEC filing yesterday. I'm assuming that There's a restriction in terms of what you can talk about here, is that right? And if not, can you give us any color around timing or what that could potentially look like Yes, that's correct. We still cannot give any sort of timing estimates for anyone listening. All I can say is that we're diligently working towards that path. I wish I could tell you, it just really be bound till the last. Yes, I understand. Okay, thanks. I'll let somebody else ask a question. Thanks. Thank you. Your next question comes from Chris Brendler of D. A. Davidson. Please go ahead. Hi, thanks. Good morning, Scott. Good afternoon, and thanks for taking my question. I want to follow-up on the previous question in terms of some of the credit markers and delinquencies in particular. You saw a pretty marked increase from the Q1 and 2nd quarter, obviously, you had some stimulus impact in the Q1, maybe depressed that number. But I was wondering if you could maybe help us think about how much of The latest comments you're seeing today is from some of these newer pilot testing for new retailers or some of this non integrated versus the Your business that had been in place for some time. Are you seeing deterioration across the book? Or is it more just sort of more than half of the So It really is focused in this non ideal integration solution. And That's at this time, it's north of 20% of our business now. That's coming through that sort of integration. And so that's why It's become important for us to focus on it and make sure that we get the underwriting handled in that sort of scenario. You are right though, there are some elements of stimulus During COVID, that had made it a little bit more difficult to write models that are predictive of the future. So we've had These off and on stimulus checks coming through, pulling volume back and forwards and of course helping with payments As they come through. And so I think there's a bit of that as well as March was the last stimulus check that came through, pulling forward volume into Q1, Pulling improvements in payments into that month. And so there's a bit of both, but I'd say that the area that we're focusing on is that Virtual card solution and adjusting underwriting and controls there. Thank you. My final question would be on the broad need, I guess, from these pilots is So it's more time for the comments, but the bigger picture is, several has really sort of stepped up and started to resonate with larger retailers. And get the impression that it's not just targeting your working days in terms of these pilots. So can you maybe talk about the potential for I don't know, I give numbers, but just sort of how we should be thinking about the growth outlook for the next 6 months and both in terms of Roger, if I can tell you is maybe some commentary on volume. And I feel like there's a little bit of a lull in the second quarter That may be followed by an acceleration that you did some of these growing pains in 2020. Yes. Yes, great question, Chris. I can't give exact in terms of what we expect for volumes, but I can tell you that Our approach in the enterprise is working quite well. I think the breadth of our product, embracing the idea that customers and retailers do like The availability of both the short term product, our core product, along with long term installments, that has resonated. Our brand has resonated Because we're a very high class brand in buying our pay later space, it's very safe for new retailers to put on their website because Our mission based approach, our B Corp approach to business. Additionally, our partnerships approach, we're open arms. We'll work with financial partners of the retailers, especially enterprise retailers, that's important. So all of this approach and our team really working diligently on the enterprise side, They've pulled forward a handful of really impressive pilots for us here in the second half of the year, Many of which we're very excited about. We're talking to significant retailers. And so we feel really good about our pipeline in the enterprise space. We have some things to work through with this virtual card solution, which we're on and we're fixing. But we know that this Important element of our growth is getting an enterprise and these pilots are going to be critical for us. So we're looking towards that and excited by the pipeline. And our viewpoint is that what we're doing is working, which is exciting. Can I just give you one quick follow-up on that Just Charles, with respect to the competitive environment and how have you changed? Or is it still sort of resonating for a company like SEDAR where you've got A very unique offering that a lot of competitors don't have. Obviously, it's got more credit, but I still think several kind of unique place. Is that true? It is true. I think it really depends on the retailer you're talking to though because we're all starting to carve out unique differentiation in this space. So if you've got Just more like the core buy now, pay later product, which has a sweet spot from US100 dollars to US300 dollars That's going to resonate More with some retailers. Having a full breadth type product is going to resonate with a different set of retailers. I think that we're finding that we resonate stronger with The full breadth type retailers that are looking for full spectrum product, I think that's what we're doing quite well and that puts us up against different competitors And other spaces. So it really depends on the scenario. We are getting conversations going with both, but I think the differentiation is starting to lead us into certain directions. Yes. And but the directions that it's leading to are impressive. We're happy with them. That's great. Thanks so much for taking my questions. Thanks. Thank you. Your next Question comes from Nikolay Dale of Evans and Partners. Please go ahead. Hi. Thanks for taking my questions. Just on the merchant interest program, Are you able to give us a bit more color there in terms of popularity of the program? We can obviously see the growth in the economics on the balance sheet. Maybe you can give us some more detail as to sort of what rough proportion of the merchant base use of the program and its existing users of the program sort of increasing their usage? Thanks. Yes, sure. Karen, are you able to take that one? Yes, I'd recover. Yes. I would say that I don't have the numbers in front of me, but we have a large percent of our merchants that participate in this opportunity to defer their accounts payable in exchange for interest. And so it is primarily A large number of merchants with balances with a distribution across that base that large merchant base. What I would say further about that program is that the Deferred paint, we have controls on the program. We use the portion of the payables that are available under our cash And the deferred payments are due upon demand, and we have Limitations on the program and can make changes to it without notice or limits. And so this program is very flexible. I think from our perspective in terms of managing our financing and cash management strategies, And then it's a win for the merchants since we've spoken to many times before. Yes. Nicole, I just want to follow-up on that. I think the merchant interest program has become more and more important to us as time has progressed. When we first IPO it was really a small percentage of our business, but just continue to grow and grow and grow in popularity. And it looks so nice about the program is it's just a win win. We're allowing our merchant partners To leave their balances parked with us in exchange for an interest rate that they would not get with their banking partner, nowhere near at that level, That creates a win for our merchant partners, helping them drive their businesses. For us, it helps us on the receivable side, it helps us with Reducing our costs in terms of our borrowing costs. And it's already backed by our line of credit, so we've got redundancy there. And so for us, it just seems like a great program where we can create a win win. And our view is any kind of business you can create win wins for your stakeholders, it's a good path to go down. We're really happy with the program. It's a big win for all of our stakeholders. And I hope some of the questions become more and more prominent of the program. I hope that everyone kind of is following along on how good of a program this is for the business. Yes. Thanks. That's helpful. And then just on the Discover partnership, why do you sort of think they've chosen you to partner with? I mean, there's clearly many other emerging And then I guess, so secondly on that, banks typically like to have control over their investments. Do you foresee a path to control there for Discover? And what sort of milestones are they looking for you to achieve? Well, I can't really speak to the second half of the question. But I think the reason to think is we've been in active dialogue with them for quite some time. We've been talking to Discover for over 2 years now, I think, in terms of partnership. I think they've been impressed by what we've been able to accomplish as a company. We've shown interest in taking advantage of this partnership and scaling up buy now pay later on their network. I know they're excited about their networks and what it can do for FinTechs. And I think because we've shown interest, they've shown interest, We've just been developing this over time and that's what's really led to the launch of the partnership. And so I think that's probably More than any. What led to it is that we've been talking to them for quite some time about building this out. Just like enterprise retailers, Enterprise partnerships take some time to develop. And so it's really about getting those conversations started early, having conversations in-depth conversations over time And really understanding each other before that you kind of turn into fruition. Okay, correct. Thanks. And just one final question for me. Maybe you could just comment a bit more on the Target partnership, how that's tracking so far. And I guess, if volumes are sort of in line with what you're thinking 3 or 3 months ago, Yes. Just how you've seen the progression there? Because I know at the time, you viewed it as quite a transformational partnership. Yes. No, it is an important partnership for us. I'll pass it off to Paul Perdis. He's really the lead For us on our team in terms of that partnership. Paul, are you there? Yes. Can you hear me? Yes. Yes. Yes. So the target relationship is obviously an extremely important one for us. To my knowledge, they're the 1st top 10 retailers in the U. S. To adopt a paying for solution. And we've been working with them for a number of years now Or at least starting dialogue and then going back to their accelerated program. What I'd say is that so far, The volumes look quite good, and I think they've been very impressed by the value you've brought to them. But I do think that there's a lot of room to grow. Like any large retailer, things take time to unfold. And so I would expect our relationship there to deepen and our volumes to increase over time as we gain better presentment On the Target site, as we gain a better integration and have a better customer experience in the checkout flow. So I think it's off to a really good start, but I think we have great expectations for its improvement over the next several years as well. Great. Thanks for taking my questions. Thank you. Thank you. Your next Question comes from Suraj Ahmed of Citi. Please go ahead. Thanks. Hi, Charlie. Hi, Kamen. This is Anshul. A couple of disappeared questions. First thing, can you take a step back? Just in the June quarter There is a bit of a slowdown in customer adds. Can you just talk to that? And clearly, it's improved in July. So can you just give us what dynamics you saw in the June quarter and what you No. Yes. Actually, just looking at the numbers here recently, in 2021, we actually had 3 of our top 6 months in terms of customer adds. So and the ones in the back half of twenty twenty are very probably second during the holiday season. So I think we are still accelerating that the trend towards customer adds is still upward. We'll need some work on the tail end. I think it's customer churn, Which Mary, we're focused on the tail end. But I think as we increase ubiquity of our merchant partners, we get a lot of help there In terms of keeping customers active. And I think that's where the work needs to be done as a company and that's where we're focused. But as you the customer adds, we continue to pace upwards. And what's changed since you're saying the July performance, I guess, Charlie, does the churn have come down? Is that what you think? No, no, customer adds. So new customer adds to our actually July was our 6th best Month in history in customer adds, and the 3 of those are this year and we had 3 at the tail end of 2020. Got it. And secondly, on the provision stuff, right, so you said 20% of volumes are non integrated merchants. I mean, part of this is your is the FDA program, right, through Sezzle offer, I forget whether you are not integrated in using the FDA networks. So what can you do there? Are you going to take a step back from that sort of an arrangement? It's a little bit of a different scenario, Suraj. So it's really when the customer onboards with this situation. Because when the customer onboards with the situation, it's just it's a more friction filled process. If we have a direct integration, It's just click, click, click right through the checkout, easy. So when you add friction into a process, Well, you basically who you turn away are the customers that you may want the most, the ones that are looking for easy, simple conversions. They like the product, but they're not willing to go through an extra minute to make the checkout happen. And that's what I was referring to the adverse selection. When you turn away those customers, they tend to be good customers and you're left with a higher ratio of customers that You may have more need and that leads to potentially a higher loss rate shift for those new customers coming on board. So it's not really a virtual card Versus ACE issue, it's because the virtual card is used for affiliate. It's more of the virtual card on boarding. Does that make sense? Yes, yes. And the FCA is actually only for existing customers, right? Yes. That's right. Exactly. Thanks. And last one, just on processing costs, clearly that's improving. Can you just talk to I mean, you didn't put in the volume coming from ACH. Where do you think you can get to over the medium term? And just on that, what would the run rate be in June? Because Obviously, you've seen improvement in June. So heading into 3rd quarter and how should we think about it? So I think we haven't had much change over the first half in terms of ACH processing. And I don't know if you really expect significant change In the next few months. And it's really it really comes down to creating incentive structures. And I think we talked about this in the past, is we needed we've done some incentive structures In the near term, the immediate term, I don't think that there's anything that would create a dramatic shift, but it's something that's always on our mind And we'll be thinking about how do we create more and more shifts towards adding ACH. Just I wouldn't expect it here in the next few months. What you've been seeing, I think, is probably where it'll be. Got it. That's helpful. Thanks, John. Thank you. Your next question is a follow-up from Phil Chippendale of Ordinance. Please go ahead. Hi, Charlie. Just wanted to go back to the Ali partnership. Can you just give us a sense of the progress on this? I'm assuming it's still pretty early days, but Yes. Just a sense of how that penetration is going amongst your merchant base. And then a sort of follow on question is, I'm assuming that We'll have to sort of wait until like it becomes of size before you separate it down in terms of your disclosures. Is that fair enough? Yes, that's fair. At this point, Phil, it's really not a big percentage because it's really just post launch, but it is a part of some Important pilots for us. This product has become important, especially with enterprise that's looking for more full spectrum. And so I think if we find success And those enterprise pilots, we do expect that product to grow probably pretty significantly post pilots, if these convert. So I think in the near term, I wouldn't expect much in terms of changing significance for their products. We're going to scale it up. But just like launching a new country, It takes time for that to become a significant portion as you roll it out. But if we get some chunkier activity through Enterprise merchant converting because of that product then you could see a lift. Okay. Thanks very much. No problem. Thank you. Your next question comes from Manrup Sin of Jardan. Please go ahead. Hi, Charlie again. I appreciate you taking questions today. Just a couple from me. So if I demoed the gross loss, I'd appreciate you guys have had quite a few questions on this earlier. If I look at the arrears by number of days It looks like you guys have got a reasonable increase in your greater than 2019, greater than the 60 days. If I apply that lens in terms of losses you're experiencing, is it mostly still on the customers you've picked up in the last quarter? Or is it The order customers you have as well. And then just following on from that, it looks like obviously very positively that your percentage of orders made return to customers is rising. It looks like to be about 92% now. Does that have the positive effect of Repeat customer usage on lower loss levels and it's entirely played out. And we would think these losses are more of a Steady state minus, obviously, the point you quoted earlier regarding the non integrated. And then the second question I've There was a mention in the 10Q about 1 merchant now representing almost 8% of the income for the Quarter, where is that, December, the MAX is 2. I was just wondering if you could add any color around potentially what industry that It is. I assume you probably can't give the name, but just a bit more color around how that's changed so quickly. And then thirdly, Just in terms of the UMS, there was a sorry, the Merchant Services, there was a comment earlier about an expectation of decline in back Income as a percentage of UMS from 6.8% lower. Sean, get a feel for where you think that might be over the next 1 to 2 years as you As a greater percentage of your UMS comes from the enterprise merchants. All right. Gurnifer, remind me of some of these questions as we go. I'm going to try to think. Sure. The 8%, we can't make any clarifications on who that might be. And so I don't want to misstep this. But on your first question in terms of the buckets, Karen, if you have anything to add to this, please do. But The provisions that we do there, as I mentioned earlier in the call, there's a lagging effect on them. And so, Yes. These are probably newer customers, but they're newer customers from a few months ago. The provision, the way it works is through cohorts Federal forward that we measure. Sharon, would that be an accurate assessment in terms of how that's done? Yes. I mean, we look at delinquency bucket And then, we look at vintage performance, order origination vintage and then forecast forward based on recent vintage performance basically? Right. So would that be fair to assume that the and I'm seeing this to be a confirmation, what you said earlier is that the newer customers I think your point about the 9% Sorry. Go ahead, Karen. Go ahead. I was just going to say, we talked about the newer merchants that we're bringing on, the newer enterprise merchants. And so think it's fair to say that a lot of those are newer customers. And Your question about the 90% range, I think it's a fair point. I think you're having small, Tiny increments of improvement in repeat usage and repeat usage. So I think you're right. There's some sort of like diminishing return from that. But I still think there is control. So I wouldn't expect where we're sitting as a steady state because this product, our business, We have quite a bit of control in terms of where we want to drive our principal loss rate to through decisioning. And I think that's why we're confident that we can say we're targeting a low 2% principal loss rate in our future. It's just When Phil asked the question the first time, I don't want people to expect that for Q3 because there are lagging Drivers of provision. And so that's more of like a Q4 type Target in Q1 2022. I'm not saying we're not making changes to make that improvements in Q3. I just don't want people So think about those for Q3 because of the lag on provision. Does that make sense? Yes. Perfect. And just the last one, I guess, just on the back of CEC, trajectory going forward? The what fee? Just the income you receive as Underlying merchant sales, it's about 6.8% at the moment. I'm just keen to kind of get your thoughts on where you see that going Just as you get a great percentage of your volume from the enterprise merchants? Yes, it really depends on the enterprise mix. So as enterprise mix rises, they tend to be on the lower MDR, which will pull that down, of course. But we also roll off our merchants off of our SMB merchants off of deals, like we tend to do, like give and get deals for our SMB merchants and as they roll off them that helps to lift it. SMB pricing them in the past. And then as a company, we're Constantly thinking about what can we add to the product in terms of new features and new revenue streams to increase lifetime value. So I think over the long term, it's hard to predict what that does to the top line. But if you increase lifetime value Of the customers, through other product extensions, etcetera, naturally that's going to do some lift to the top line on NTM. So I think that's not a near term activity, but long term, pulling that up through lifetime value increases will help us with NTM, of course. Cool. Appreciate that. Welcome. Thank you. There are no further questions at this time. I'll now hand back to Mr. Ewelikim for closing remarks. Thank you. In closing, I'd like to thank our investors and our team at Sezzle. To our investors, we thank you for all the continued support. We work hard every day to build a company that makes you proud of your investment. And to our team, I want to personally thank you for your hard work, your positive energy and your act like an owner mentality. Thank you to all of you listening in. Have a great remainder of the year and we'll meet again soon. Have a great rest of the day. Bye now.