The number of Australians using Buy Now, Pay Later (BNPL) products such as Afterpay or Zip Pay has more than doubled in the past year, according to new insights on global payment trends from data from the Worldpay from FIS 2020 Global Payments Report .
The data shows that nearly two million Aussies, or almost one in 10, used a BNPL product in 2019.
If you are talking about BNPL you can talk about it without mentioning AFTER PAY (APT.ASX) the global leader right now in BNPL.
This stock has had a massive growth in the last couple of years specifically in the last 6 to 8 months and has made many thousands or even millions on dollars. In fact the whole gamut of BNPL stocks (for which Australia is taking the lead) has been on a bit of a uptick with their share prices.
The ‘buy now, pay later’ sector is yet to turn a profit, but that hasn’t stopped investors pouring money into it amid the COVID-19 crisis. Shares in ASX-listed fintech stocks have fallen weekend ending 5 Sept 2020 on news of a brand-new buy now, pay later (BNPL) platform from online payment giant PayPal.
Below let’s take a deeper look into the players in this niche in the Australian market, how the BNPL market works, what are the pros and cons of holding such a stock, regulation and what the future looks like for these companies.
BNPL PLAYERS IN AUSTRALIA
- Afterpay Touch Group (APT) 30 June 207
- Zip Co Ltd. (Z1P)
- Splitit Payments Ltd. (SPT) listing on 31 January of 2019
- FlexiGroup Ltd. (FXL) (Humm payment platform)
- Sezzle Inc. (SZL) listing on 29 July
Currently in the Australian markets APT and Z1P have billion dollar market caps, but this could change as the sector grows and deals are made.
International , Smaller players or yet to be listed BNPL players
- Klarna (BNPL Company from Europe)
- Laybuy (NZ)
- Quadpay Inc (US)
- Lime Pay
- Zebit (Payment platform Zebit is looking to float on the ASX as a BNPL brand)
- Paypal (Pay in 4)
Let’s take a closer look at APT.ASX
On 30 June of 2017 a newcomer Afterpay Touch Group (APT) joined the new disruptive ASX “fintech” players list and had a debut on the ASX with its first day of trading at $3.18 stock price.
It is now trading around the $ 88.75 mark as of writing, and comfortably sits in the ASX top 20 shares by value, joining heavyweights such as CSL, the Commonwealth Bank and BHP.
UBS predicts Zip Co, a competitor with 1.6m customers in Australia, may be better placed to cope with bad debts because it conducts credit checks on its customers. In a March 13 note, UBS said it believed Afterpay did not know the employment status of its customers. https://www.ft.com/content/b
As of 12th July – the BNPL sector has seen its own fierce bull market in recent months. Since the March lows every player in the space has skyrocketed in value – Afterpay (up ~745%), Zip (up ~448%), Splitit (up ~600%) and Sezzle (up ~1000%). Stock market prices for these stocks has risen up much further since
Are they Fintech ? Banks ? Tech Companies
The new breed of these finance provider companies is a new entry into the finance sector. It’s been listed and named as Tech companies, finance companies and even fast-growing banks due to them providing credit but would comfortably sit under the “Fintech” niche.
In fact, we might soon see banks and big finance companies merging into these newly defined sectors from the visa news and Klarna + commbank news out recently this year. (read below for more on this)
How does BNPL Companies make money?
Afterpay, the biggest player, makes around 25 per cent of its profit from late fees, with the balance coming from surcharges on its 20,000 retailers.
Browsing online or even in shops during this COVID crisis, Sue’s Friend spotted a pair of Oakleys sunglasses she liked, but the price tag made the 26-year-old Sydney resident think twice.
What persuaded her friend to click ‘buy’, was the short-term credit offered by Afterpay, which split the $75 payment into four interest-free instalments.
Afterpay, Zip, Split it are among a handful of alternative credit firms which offer small loans, mostly to online shoppers, and make their money by charging merchants a 4%-6% commission.
With a BNPL service, you buy something online or in a store, then pay it off in interest-free instalments. Generally, there are no added-on fees, provided you stick to the payment plan.
Their business models vary but typically rest on providing small amounts of unsecured credit — normally up to about A$1,000 (US$580) — to consumers at no cost and charging merchants a fee to process transactions.
Though credit cards are a popular way to pay for items over time, this new method is an in-expensive and easy route to take for people who can stick to timely repayments. The moment you begin to carry a balance, you start accruing interest that’s can cost you over time. That’s one big reason buy now, pay later (BNPL) services are gaining popularity.
Customers of BNPL (age demographics)
The Millennial’s carry lesser credit cards than their Generation X counterparts and make up the single-largest demographic group using BNPL solutions. 87% of consumers aged 22 to 44 have expressed interest in breaking large purchases into monthly instalments in the US.
Among other reasons- poor credit and insufficient credit to apply for a card in the first place are also reasons for people signing up for this as many BNPL’s don’t require credit checks nor do they affect credit scores, so long as customers promptly repay their debts.
This niche certainly takes advantage of the impulse buying to provide a customer what they want right now.
INTERNATIONAL & US BNPL PLAYERS
Klarna, Europe’s biggest fintech start-up, said that since March enquiries from retailers who may want to partner with it jumped by 20% on average globally. Klarna, a $5.5 billion Swedish startup bank backed by rapper Snoop Dogg, has 1 million active BNPL users in the UK, according to Citi. Rapper Snoop Dogg stars in the company’s commercials urging users to “get smoooth.”
As part of Dogg’s deal, which is a secondary investment and the size of which was not disclosed, the famed artist will also become the face of Klarna’s latest marketing campaign, changing his name to Smoooth Dog
Afterpay, Zip Co and CBA’s ‘buy now pay later’ partner Klarna offer their services at the checkouts of major retailers and department stores.
Founded in 2012, Affirm’s business lies in offering shoppers the ability to pay for goods in instalments via short-term loans. Affirm has managed to score a partnership with Ecommerce firm shopify to expand its online presence.
PROS AND CONS
Below we look at some of the Pros and RISKS(CONS) OF BNPL (Downsides|Dangers|Financial Risks ) of investing as a stock trader as well as the benefits ans risk to consumers using the BNPL products. This should give you an idea of where this market is headed or how much it could grow over the longer term.
- The BNPL model is a great alternative to credit cards in situations where you want a little cash-flow flexibility and know you’ll be able to stick to the repayment terms.
- With a large number of people moving into online buying now, It’s perfect as customers can just link to credit card and because it’s 4 payments, they pay it off over 2 to 3 credit card statements and this can help them manage and budget better.
- Australian BNPL’s have first mover advantage in local and some overseas markets
- Given that some buy now, pay later services do require credit checks and show up on your file, using them well and making payments on time can improve your credit score.
- Customers who default on their debts to Afterpay and other BNPL providers are typically kicked off the payment platforms, which could dent revenue growth if a large number are excluded during a steep downturn. This could be a pro for customers or a con for the credit company or vice versa.
- Low barriers to entry, the relative ease of replicating the product has a risk of big players like banks or credit card providers replicating this business model.
- Can Afterpay continue to prohibit merchants from surcharging
- Could Afterpay be considered a provider of credit in the future? (Changing their rules of engagement)
- If you fail to stick to your payment schedule, fees and interest apply, and in some cases, the interest on a buy now, pay later purchase will well exceed what your credit card would charge.
- BNPL services can lead to impulse spending, and they make it easy to go over budget on items you don’t actually need.
- In unsecured lending, you only need 2-4 percent default to take away any profit. Its not easy to chase small amount from a customer who do not pay. They will just use another BPNL. Default rates will possibly be much higher in the USA compared to Australia in the future.
- Would banks who consider these companies rivals resort to stonewalling BNPL against credit cards.
- Industry surveys have found more than 40 percent of BNPL users were unaware missed payments could affect their credit scores.
- The more successful these new products are the more likely they will attract regulatory scrutiny in the future.
RECENT BNPL NEW UPDATES
01 Sept 2020
PayPal announced it was releasing a new “pay-later” product dubbed “Pay in 4” overnight in the US.
According to PayPal, the new payment service will offer interest-free loans to US customers on purchases between $30 and $600 with repayments over a six-week period.The new BNPL player, known as Pay in 4, allows consumers in the U.S. to pay off transactions in four interest-free instalments.
What really makes the PayPal platform stand out, however, is that merchants won’t have to pay when consumers use Pay in 4 to complete their purchase.
31 August 2020 – SMH
Sezzle revenue up 384%, losses up 71% – Merchant fees made up 84 per cent of the Minneapolis-based company’s income. Buy now pay later outfit Sezzle continues to soar, delivering record revenue of US$20.8 million ($27.19 million) up 384 per cent on the back of the online retail boom.
31 August 2020 – UBS
UBS adamant Afterpay shares are worth less than $30 – While current stock prices for APT have climbed to $95.97 UBS has a sell rating on APT citing short-term COVID-19 volatility and longer-term regulatory, competition, and execution risks among the reasons for maintaining a ‘Sell’ rating on the tech stock.
26th August 2020 – Live wire
Looking to capitalise on huge demand in the burgeoning buy-now pay-later segment, New Zealand fintech Laybuy is gearing up for a tilt at the boards of the ASX. Laybuy’s $80 million IPO, has been priced at $1.41 per share, with $30 million in cornerstone support secured before the offer opened.
24 Aug 2020
EML Signs Contract with Laybuy to Launch 0% Interest Buy Now Pay Later Solution in Australia With Plans for the UK
2 June 2020
Aussie BNPL Firm Zip Co Inks Deal With QuadPay To Reach US Market – Australian buy-now-pay-later (BNPL) company Zip Co Ltd said it will buy New York rival QuadPay Inc in an all-share deal that values the target at $269 million, joining a rush of Australian companies to tap the world’s largest consumer market.
The move pits Zip against larger Australian BNPL provider Afterpay Ltd , and others, in the U.S. consumer finance market which has boomed as younger shoppers seek low documentation alternatives to interest-charging credit cards.
BNPL Regulations in Australia
In Australia, where the industry first took off on the back of easy funding, the corporate regulator is set to release a follow-up report this year to one it issued in 2018 ( Report ) raising concerns about users becoming overextended and calling for BNPLs to be regulated in line with other credit services.
ASIC – Links to updates from ASIC for BNPL
20-047MR ASIC update on enforcement and regulatory work: September 2019 to February 2020
19-249MR ASIC update on Royal Commission implementation
Code For BNPL
According to reporting from the Australian Broadcasting Corporation (ABC), some of the ASX’s biggest disruptive payment platforms have committed to a new ‘Code of Practice’ that will govern controversial practices like late fees and clients’ financial vulnerability, age and ability to pay.
The ABC quotes AFIA chief executive Diane Tate, who has stated: “We have heard criticisms that young people could lose control of their spending, so the code includes a clause which says buy now, pay later products won’t be available to people under 18… There is another area of concern, which is about people getting over-committed, so we’re doing an upfront assessment to make sure the customers are suitable for the product. And another area which is really important in this code also is putting in a cap on late fees.” At this stage the sector is advised to self -regulate in Australia.
Update (11 June 2020):
ASIC expects to release its report in Q3 2020. Asic has said – This work will continue but ASIC is deferring the finalisation and release of the follow-up report until further notice. ASIC will be engaging with the sector on their responses to COVID-19.
How regulators see them , including overseas regulators (UK and US ands ASIC)
- Some BNPL companies are not considered credit providers for the purposes of the National Credit Code and can engage in behaviour that would be illegal for regulated banks, such as banning retailers from passing on surcharges to customers.
- The corporate watchdog is currently reviewing the sector and is due to report back in October on how it can better protect consumers. The sector will be reviewed on an ongoing basis.
- The Australian Securities and Investments Commission (ASIC) is looking at how other countries, including Sweden, have built in legal protections.
With so much going on int his space, this investment niche is going to be a bit volatile for investors for sometime now based on new entrants entering this space vs rapid increase in customer base based on current financial climate.
If your a investor good luck with your trading and if your a BNPL customer happy shopping! Let us know what you think about BNPL in the comments below.
Links to Buy Now Pay Later Companies
Below is the direct links to the websites of the BNPL players
- Affirm – https://www.affirm.com
- Afterpay – https://www.afterpay.com/en-AU/index
- Z1P – http://zipmoneylimited.com.au/
- Split it – https://www.splitit.com/
- Klarna – https://www.klarna.com/au/
Ibis world report on BNPL – https://www.ibisworld.com/au/industry/buy-now-pay-later/14769/