Digital wallets have now overtaken the annoying leather wallet. In Australia, we are not too many years away from becoming a cashless society. The US and others are a little further behind, but are quickly catching-up.
Afterpay is a must-have item in any self-respecting Millennials or Gen Z's digital wallet. The customer love is a unique competitive advantage, which might be difficult to quantify but makes it no less real. Afterpay ushered in a new way to shop, whereas the laggards and pretenders, such as Citi, are attempting to directly compete by only offerring installment payments. Lacking the networks effects powered by a platform, they are destined to fail.
"Younger people ... are very happy to have 100 per cent of their banking relationship with a smartphone, and never go into a branch at all." UBank CEO Philippa Watson
Millennials and Generation Z banking habits:
- Typically experiment with several banks – less loyalty
- Survey from PwC that found 27 per cent of Gen Y and 21 per cent of Gen Z are open to switching their main banking relationship in the next year.
- A global survey by KPMG found that globally, 41 per cent of Generation Z customers would rather lose their wallet than their smartphone.
- A generation of tech-savvy customers who do their banking on smartphones, expect slick digital features and are not particularly loyal to established brands.
- For banks, the upshot is a wave of tech-savvy, disloyal consumers who are much more open to having accounts with multiple banks and fintechs. This is known as “multi-banking”.
- Yet another key change is that younger generations are more debt-shy, especially when it comes to credit cards. As BNPL has taken off with the young, the number of personal credit card accounts has fallen by almost 2 million in the last two years, RateCity says.
In view of the above trends, Afterpay Money is about to launch (which came out of leftfield and was certainly not on my radar as a possibility a couple of years ago). It is no exaggeration to view Afterpay Money as a game-changer, as this opens-up so many other possibilities ... financial well-being services ... foreign exchange services ... insurance ... digital currencies ... mortgages ...
In my view, Afterpay has to evolve (which it is doing), otherwise it will succumb to the threats and risks that you outline. There are similarities and lessons to be drawn from Amazon's evolution. Whilst I am certainly not suggesting that Afterpay is comparable to Amazon, if we recall Amazon's humble beginnings as a small on-line book store and how it has branched out, we can at least see that global domination is possible.
One thing you may be underestimating, is that the total size of the pie is growing well in excess of 10% per annum (e.g. shift to digital transactions, ecommerce growth, taking market share from credit cards, growing global middle class, conspicuous consumption etc.).
In hypergrowth markets, competition is a given. Whilst hypergrowth persists - let's say for the next 2 or 3 years - both BNPL leaders
and laggards will generate positive returns for shareholders (baring catastrophic management decisions).
For the time being at least, the downside is limited (distinct from volatility) and I am more than comfortable placing an asymmetric bet on Afterpay, but to quote Warren Buffet: "Only when the tide goes out do you discover who's been swimming naked". In 2023/24 or whenever BNPL enters mainstream adoption, that is when it will start to become apparent which of the global providers have durable network effects. For the rest, their share prices will get annihilated as they battle with terminal decline.
All the best with your investments and enjoy the weekend. It's now time to sink a few beers.
