Found some time over the weekend to digest all the recent announcements and thought would share my main takeaways.
1- Power of the maturing customer base (lower default %, higher order frequency)
Confirmation that the power of the Afterpay model is the base of its returning customers who have previously settled on their payments on time and on budget. 90% of all transactions are by returning customers who by the virtue of being able to return (and not having their account suspended) have demonstrated their ability to repay.
The sales value of these customers is likely even higher than 90% as their limit would have increased over time. As Afterpay states, “repeat customer behaviour remains strong and represents well over 90% of monthly GMV”.
The brilliance of the model is that Afterpay has created relatively low barriers for customers to sign up, but at a low initial credit limit. This allows Afterpay to assess the customer’s ability to repay on relatively low-value orders and therefore at minimal financial risk.
Over time, the customer base matures and the bad customers are weeded out. Now what’s particularly great for us investors is that:
Longer tenured customers have lower default rates
Returning customers increase their order frequency over time. The January 2017 cohort of new customers have increased their frequency from 1.5 in Feb 2017 to 2.5 orders per month now. This is extremely significant.Returning customers increase their order value over time as their credit limit increases.
2- ASIC
Well-documented by others. The dark cloud of potentially being brought under the National Credit Act has now been removed. The media seems to remain its focus on the exciting, new kid on the block instead of the high-interest rate credit card and loan rip-offs which has been happening for decades. Be prepared for more noise by this bunch of under-researched sensationalists.
3- US growth
The number of new customers is accelerating with ~150,000 added in the month of November. If we can continue at this rate it won’t take long for the U.S. business to dwarf Australia & New Zealand.
On the retailer side it’s difficult not to be impressed by both the number of merchants signed up and more importantly in my opinion the quality & size of these brands. To enter a new market and have the big-name retailers adopt Afterpay is a major endorsement which will encourage other merchants to join + consumers to trust the Afterpay brand.
And all of that in only 6 months.
