There are 23,000 retailers using the platform, mostly in Australia where it launched in mid-2015. But 1400 are onboard in the US and a further 2200 there have signed up or are in the process of turning it on. It is also about to switch on in Britain.
Because of the network effects that govern the economics of technology platforms, the sheer number of Millennials using the service - it allows them to pay for goods in four instalments and does not charge interest - has become too large for retailers to ignore.
"Afterpay is becoming ubiquitous in the market," says Paul Tinkler, the Australian managing director of Lululemon, a retailer of yoga gear. "Providing it has gone from being an advantage to an expectation."
"Could you imagine running a fashion store without being able to take Visa or Mastercard?" says Russell Zimmerman, executive director of the Australian Retailers Association. "Afterpay has got to the same proportion for retailers."
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By Luke HousegoDavid Hancock, the group head of Afterpay, says the disrupter's future success will depend on its ability to make sense of copious amounts of payments data, to make the linkages between buyers and sellers more meaningful. This will allow retailers to grab new sales from a wider base of customers. A myopic focus on regulation is missing the bigger picture.
"People have looked at us and said 'It's all about the payment', but that's just a product, that's the small game," Hancock tells AFR Weekend in an interview after the Senate grilled founders Anthony Eisen and Nick Molnar this week, who split with rival Zip on whether this modern form of layby is offering credit.
"The big game, and what we have always been building towards, is the utility of the platform," Hancock says.
"It is quite clear the bigger value for our stakeholders, including shareholders, is connecting merchants and customers together."
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By ChanticleerData is the holy grail of both banking and retailing, and the growing popularity of Afterpay's network means it's generating plenty of it. Payments with Afterpay, which can be made on a website, or in-store via a barcode sent to a smartphone, represent a material amount of volume in the Australian payments system.
Last year, the company estimated it was processing more than 10 per cent of all online retail in Australia, and more than 25 per cent of all online fashion and beauty purchases. Furthermore, 20 per cent of its revenue comes from in-store purchases - and this is growing.
Afterpay received $88 million of fees from merchants in 2017-18 on underlying sales of $2.2 billion; merchants pay it an average of 4 per cent of the sales (it can be 6 per cent for smaller retailers) - more than four times the cost when a customer pays with a credit card.
For now, retailers are willing to pay the inflated fees to connect with elusive Millennial customers. This cohort has been demanding retailers turn on the service, to give them an alternative to building up debts on credit cards for purchases just out of reach.
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By Misa Han and Luke HousegoPowerful channel
But retailers are just as keen to get inside the Afterpay app, which not only provides payments functionality, but also a digital directory that allows users to scroll through various retailers by category, directing them to websites to browse for goods.
"The asset in the Afterpay arsenal is its ability to allow retailers to engage with Millennials by providing them with a service they can relate to," says economist Andrew Charlton, a director of Alpha Beta, which has conducted research for Afterpay including a recent report on how Millennials manage money.
"It's a platform, but it's a different kind of platform. Think of it as a channel - and a potentially powerful channel.
"The joke in retail has always been, 'I am wasting 50 per cent of my marketing budget - but I don't know which 50 per cent'. Retailers have been asking existential questions about whether to focus in-store or online. But here is a different channel, defined by the customer by supporting their payment method. But unlike traditional marketing, with Afterpay the numbers are clear. There is direct data, and they can compare baskets and shoppers, and see how much they are selling."
It is Afterpay getting in between customers and merchants that most worries the banks. Most Afterpay customers have linked their bank debit cards to the service, however from the banks' perspective, when a payment is made on Afterpay, they lose sight of what the customer has bought. It could put banks at a competitive disadvantage in a world where retail spending data is being used to deepen customer relationships.
Afterpay has been making a big push to broaden from its female fashion roots, adding more blokey retailers like outdoor merchants BCF and Supercheap Auto, and moving into healthcare: for example, its app shows users a range of options for dentistry.
Millennial connection
Primary Dental rolled out Afterpay into 62 sites four months ago. Dental treatments are up 5 per cent on the back of the service. CEO Michelle Aquilina says one-third of Australians don't see a dentist based on cost, but Afterpay has helped connect with younger patients and lifted transparency around the cost of procedures.
"We want to put customers at the forefront of everything we do and by enabling the patient to pay over a period of time, without paying interest, this has addressed a need in the market," she says. "This is about getting patients who have not been to a dentist before, and think about it by making it affordable, convenient and accessible."
Afterpay is also building up high-profile fans overseas. It launched in the US in May and soon attracted the interest of socialite Kim Kardashian. In November she tweeted to her almost 60 million followers that Afterpay had been added to her sites "to make purchasing easier".
While Afterpay faces competition in the US from other instalment plans such as QuadPay, Affirm, Uplift, and Klarna, US fashion magazine Glamour wrote this week that "Afterpay is quickly becoming the most popular".
Afterpay said last week it had acquired 650,000 customers in the US over the six months to December and it was used for $260 million of sales, a level that took 28 months to achieve in Australia. Its global platform ambitions extend to Europe. It recently hired the former head of competitor PayPal in the UK to run its operations there and said last week "discussions with retailers have been progressing well and responses have been positive".
Data the new oil
But its new team working from Silicon Valley is creating the future of Afterpay.
Last year, it hired Akash Garg as chief technology officer from Uber, where he had been director of engineering (and before that was senior director of engineering at Twitter).
Providing the first public insight into Afterpay's data strategy, Hancock says the core focus of Garg's team will be using data being generated on the platform to find out more about customers' habits and interests. These profiles will then be used to present with more relevant retailer recommendations. Retailers may also be able to use the personalisation to target particular groups of customers.
"We have heavily invested into data analytics," Hancock says. "At the core of it has been reinterpreting the transactional data and serving it back up. We are trying to connect customers who want to discover new stores and new brands and we are investing heavily in personalisation. What is increasingly becoming apparent is retailers want access to our customers that they would normally not get access to.
"The data we get today is being used to assess risk - do we take this customer on, accept them on the platform and how much do we give them in terms of a spending limit? Increasingly, we are taking that data set and starting to consume that and build products and services by which we can serve up easily things that are most relevant to those customers.
"For example, if I'm a bloke who has only been buying at Boating, Camping and Fishing and clearly like auto, I have no interest in scrolling through to find Lululemon or Princess Polly. Everything needs to be broken down, so the mass is managed down to a customer of one. You need to be offered up things relevant to you at the relevant points of time."
New frontier
While parliamentarians and regulators consider whether Afterpay customers need to be protected by responsible lending laws, the next frontier for scrutiny could be around the use of data.
Afterpay got a taste of that this week, when The Sydney Morning Herald ran a story on its front page pointing to its use of the Commonwealth electoral roll to confirm customer identity. It is understood this is normal practice for companies that need to comply with anti-money laundering laws and who seek to prevent fraud. Afterpay said there was no commercial use of the data.
But the bigger challenge will be managing the governance of data generated by the platform and the potential use of external data sources to enhance its profiling of customers to make them more valuable for retailers.
"This data has a huge value to those outside the company," Hancock says. "But the values by which we have set up the company have said we want to use it appropriately, we don't want to be like a Facebook selling the data to a Cambridge Analytica. This is about, at the core, helping retailers be more successful by giving a free service to customers."
As its role as a retail platform becomes better understood, Afterpay will also face scrutiny about its market power. Amazon's arrival in Australia was met with paranoia among retailers, who feared its customer data would result it in directly competing in the marketplace.
Hancock says that does not form part of Afterpay's thinking. "Unlike an Amazon, we are not going to compete against our retailers. We see ourselves more like a digital mall," he says. "We are about making it easier for customers to access brands and stores, rather than single goods.
"We are not a deals site. This isn't about driving margins down lower for retailers. It is about trying to curate and to deliver at full price to customers."
But historians of platform economics raise the prospect of Afterpay's data morphing into something else.
"If you own the payments interface, you have many options," says Sangeet Choudary, a global expert on platforms and co-author of Platform Revolution.
"A platform that gathers superior data about Millennials' consumption habits could get into retail itself by working with brands directly, allowing them to create specific products targeted at the Millennial market using this data. As long as they open the customer interface and gather data, it makes business sense to seek interesting profit pools in their value chain without having to be a marketplace."
The Australian Retailers Association's Zimmerman says Afterpay also has work to do to keep retailers comfortable on cost. "Retailers are using it to their advantage to make extra sales. But in other instances, the retailer might have made the sale anyway on a Visa or Mastercard.
"The biggest single complaint from retailers is that the cost of operating Afterpay is huge. But their thinking is they have to have it, because if they don't, their competition will and they will lose the sale altogether anyway."
Afterpay co-founders David Hancock, Anthony Eisen and Nick Molnar, in their Surry Hills office last October. Louie Douvis
Afterpay CEO Nick Molnar at a public hearing of the Senate economics committee in Brisbane on Tuesday. Attila Csaszar
Andrew Charlton, director of AlphaBeta: "Retailers have been asking existential questions about whether to focus in-store or online. But here is a different channel defined by the customer by supporting their payment method." [email protected]
Sangeet Choudary, CEO of Platformation Labs: "If you own the payments interface, you have many options." Peter Braig
Russell Zimmerman, executive director of the Australian Retailers Association: "The biggest single complaint from retailers is the cost of operation of it is huge." Louie Douvis
