IS there room for one more
Who will win the buy now, pay later battle?
When Lucille Ruehland saw thatPayPal had launched its buy now, pay later featurethis week, she realised her e-commerce site checkout page was soon going to look pretty crowded.
With Afterpay, Zip, and Klarna already activated to give her customers ways to pay in instalments for her online children’s print store, Ruehland was expecting to add in CBA’s StepPay over the next few months.
“I’ve had to redesign the checkout page a bit so they all fit in there and not look too crazy,” says Ruehland, founder ofTiny Art Club.
Lucille Ruehland runs a childrens art e-commerce business and says buy now pay later companies help drive traffic to her store. Jessica Hromas
“To showcase you’re a legitimate business, buy now pay later needs to be an option, and because each company is tailored to a different type of customer, I want to capture all those different customers.”
Buy now, pay later companies are targeting a whole range of demographics with different purchasing behaviour, ranging from Millennials to Boomers, and are rolling out new add-on features to differentiate themselves in the seemingly endless sector.
Some are rolling out new ways for paying merchants such as Ruehland to get more traffic to her site, while others have indicated they may add personal finance tools, crypto and stock purchasing capabilities and flexible repayment terms.
It’s these different demographics and functions that lie at the heart of the battle for this new, growing payments segment that has exploded in recent years.
The $9 trillion opportunity for payments in Australia, New Zealand, the US, UK and parts of Europe has investors salivating, with Credit Suisse expecting global online retail sales to deliver 15 to 20 per cent compound annual growth rate through to 2023.
The buy now, pay later model is completely commoditised in Australia now; innovation is no longer the competitive edge.
—Siraj Ahmed, Citi
Demographically, buy now, pay later businesses are actively hunting Millennial and Gen Z’s spending growth. As it stands, these generations account for around 45 per cent of the labour force, but make up only 25 per cent of total retail spending.
In the past, banks and larger credit card providers dominated this type of spending, but they charged hefty interest fees or around 20 per cent and had rigid repayment terms.
The buy now, pay later offerings instead allow people to make purchases instantly but pay it off in instalments, avoiding such fees.
Homegrown heroes Afterpay and ZipCo are busy building out retail ecosystems, where they feature their paying merchants in online shopping centres and offer new streams of “free” traffic to merchants, who are likely also paying Google, Instagram and Facebook for eyeballs.
The moves by big tech and big banks not only indicate a broad-based acceptance this payment feature is here to stay, but that there is a much more lucrative revenue stream on offer. In short, many realise they can’t afford not to be in the race.
The share price reaction just encapsulates the fear of techno-feudalism.
—Matthew Wilson, Evans & Partners
The buy now, pay later segment is becoming more and more crowded, with operators including Openpay, Splitit, Humm (and its co-company Bundll) and Oxipay in Australia alone. Earlier this month,Butn shares popped upon ASX listing, as investors cheered the arrival of the buy now, pay later company targeting small business.
“The buy now, pay later model is completely commoditised in Australia now; innovation is no longer the competitive edge,” says Siraj Ahmed, head of Australian technology research at Citi.
“The competition now will be on what features each can offer, and their attractiveness as a demand-generation engine so merchants will keep paying for them.”
This week, Apple, partnering with Goldman Sachs, announced it isdeveloping an instalment repayment function called Apple Pay Later.Just hours before, PayPal hadturned onits Pay in 4 feature for around 9 million Australian customers.
The move sent sharesin Afterpay and Zip plunging, wiping off millions of their collective market capitalisation. But analysts around the country were unfazed, pointing to the underlying origination – where new customers can come from – and customer engagement as the real competitive landscape.
“That share price reaction just encapsulates the fear of techno-feudalism,” observes Matthew Wilson, senior research analyst at Evans&Partners, referring to thefiefdoms of warring tech platforms.
The spread of buy now, pay later to the US has been quick. US-based Sezzle, whichthis week attracted a $US30 million ($40 million) investmentby US-giant DFS Services, has signed up 2.6 million users, and the likes of Swedish-Klarna, Affirm and Quadpay (which is owned by Zip) are rapidly signing up merchants too.
Local player Splitit recentlyinked a dealwith Middle Eastern buy now, pay later player Tabby to white label its credit card-based service throughout the United Arab Emirates and Saudi Arabia.
When Commonwealth Bank announced it wasrolling out StepPaylater this month, BNPL stock prices across the board took a hit, fanning the fear that, while slow to the party, big banks are catching up in terms of their buy now, pay later capabilities.
Citi now has a FlexPay option, American Express has Pay It, Plan it, and Westpac has entered into a deal with Humm to bring buy now, pay later to New Zealand.
But the competitive risks to buy now, pay later companies such as Afterpay and Zip are often misunderstood, argues Matthew Wilson, and these are critical to deciphering who will survive and who will die in the growing buy now, pay later sector.
Replicating the buy now, pay later model is relatively simple, he says, and meets changed customer expectations. But replicating Afterpay’s merchant-value proposition, where they help generate new leads for businesses using the service, is much harder. And that’s where the value lies.
“The merchant, who is the paying customer, derives benefits from Afterpay’s user network and user information,” Mr Wilson says.
“These are not being exactly replicated by Apple and PayPal, given there is no shopping portal/retailer ecosystem underpinning the buy now, pay later functionality.”
Lucy Huang, equity researcher at Bank of America agrees, adding announcements from the big players entering the sector tend to create noise in the short term, but without giving the merchant something new, they don’t pose a serious risk just yet.
“The market can sustain several players given the low level of BNPL generally,” she says.
“And this week’s Apple product seems to be very “payment option-like”, rather than a leaders/marketing tool, nothing like an Apple shopping directory targeting Millennials.”
That retailer ecosystem, or shopping directory, is what e-commerce merchants such as Lucille Ruehland are tapping into in droves, widening Afterpay and Zip’s moats and differentiating them from the big players offering a simple buy now, pay later function.
Ruehland’s print store has been placed in the Afterpay Merchant Index, which gives her a profile among thousands of other merchants. Zip has its own shopping app.
“It doesn’t cost anything and it’s another form of traffic for me,” Ruehland says.
“And while it’s not the biggest influx of traffic, it’s some. Most of my traffic comes from Google, Facebook and Instagram, and I have to pay for all of those.”
The ability to generate new leads, and the resulting network effect, also means Afterpay can outperform copycat fintechs, and co-exist with the proliferation of new companies taking the buy now, pay later model and translating it across industries and demographics, say analysts.
Not just about Afterpay
Australian-made Afterpay has first mover advantage, with founders Nick Molnar and Anthony Eisen growing the business from a scrappy start-up in 2014 to a business worth almost $30 billion with around 17 per cent of all Australian adults using the services. They are also targeting markets in the US and the United Kingdom.
But while Afterpay dominates headlines, other buy now, pay later companies are performing well on the sharemarket thanks to their separate strategies for targeting different demographics within the market.
Afterpay, Zip Pay, Sezzle, Bundl, OpenPay and Klarna tend to target customers making lower-value purchases, such as clothing and homewares. These services all operate on smaller credit limits, with varying repayment terms.
Buy now, pay later revenue tends to come from fees charged to the merchants. In Australia, the average fee is around 4.1 per cent, while the US is trending towards 3.6 per cent and the UK charges around 3.5 per cent.
Merchant fees are commissions, calculated as a percentage of transactional value, and a fixed fee per transaction. A survey of merchants across the US and Australia last year found 95 per cent of those surveyed thought buy now, pay later services were good value.
“The value proposition extended well beyond a payment service, with other benefits including increased basket size, the attraction of new customers and improved customer satisfaction,” said James Cordukes, equity analyst at Credit Suisse.
Some players generate revenue via late fees, and establishment and accounting fees, and as new players appear on the scene, pressure on fees remains a risk.
As it stands, Afterpay charges a late fee of $10 plus $7 more if an account is unpaid for seven days (customers are prevented from using it again until they are up to date).
Zip Pay charges a $5 late fee once an account is 21 days overdue, but they are not levied at the transaction level, while Zip Pay has an ongoing fee of $6 when there is an outstanding balance on an account.
At Humm, the late fee is $6, and there is an ongoing fee of $8 a month. At CBA-backed Klarna, late fees depend on the transaction size.
Profiting from late fees has caused a storm of controversy. Last November,ASIC reportedthat 21 per cent of buy now, pay later users had missed a payment in the past 12 months, with 47 per cent of these aged 18 to 29.
Openpay, Oxipay and then Afterpay had the highest proportion of transactions incurring late payment fees in 2019: 10 per cent at Afterpay, 14 per cent at Oxipay and 19 per cent at Openpay.
But while Afterpay and Zip target lower ticket items, Openpay allows customers to borrow up to $20,000, serving higher-end verticals such as healthcare, dentistry, auto servicing, and home renovation.
Humm offers the largest lending limit, up to $30,000, and made a splash when it became the first buy now, pay later provider to fund In Vitro Fertilisation (IVF) procedures.
“It all depends on what kind of business you have as to what buy now, pay later service you need,” Ruehland says.
“But rather than focus on the payments in instalments, which is kind of old news, the platforms who can help me get eyeballs to my site will be the ones who ultimately will win out.”
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