Richard Coppleson Comments

Afterpay{$12.95; 160; 14.10%} BUY

1. Mkt was worried yesterday  that a “Senate inquiry” has been announced, reviewing a number of areas not covered by the recent banking Royal Commission. This includes payday lenders, consumer lease providers, and unlicensed financial services providers including “Buy Now, Pay later” providers and short term credit providers.
2. The inquiry is, to assess the impact of these services, and to determine whether current regulation of these providers meetscommunitystandards and whether reform is needed. It is to report by 22 Feb 2019.
3. Those who have followed Senate Inquiries (which do not have the powers of a Royal Commission) have said that the reality is that they are great theater but little if anything comes out of them.
4. It is the ASIC review that does matter - not the Senate inquiry.
5. Now the big issue that is causing all the uncertainty is that the Buy Now, Pay Later sector is not covered by any regulation or ASIC & until there is the worries (for some) will remain as to what comes out.
6.  It should be stressed that Afterpay have been in contact with ASIC for over 18 months & Afterpay have been saying for a long time that they are happy for ASIC to be given powers to intervene.  
7. If ASIC had any real issues then – as they have in the past with other products – voiced their opinion – but in this case they have not raised any concerns.
8. Afterpay do not charge interest but late fees (but so does Telstra and others when you don’t pay on time - so its quite normal)
9.  Afterpay does not undertake  credit checks, so if  they were made to then 2.3m customers already may be exempt & so it could be for new customers.
10.  But if they were to have to do credit checks on their 2.3m existing customers – then given it apparently costs about $1 to do a credit check that’d be a $2.3m cost – the stock lost $600m in mkt cap yesterday & mkt is essentially is now valuing the US & UK at ZERO. 
11. So stock is way oversold down here.
12. Also don’t forget Afterpay’s average transaction is about $150 of which 90% are repeat users & 95% of them pay on time ..
13. Afterpay is seen by many as a “great budgeting tool”

14. The majority of Afterpay’s revenue comes for the “retailer” - not the users.

15. Also may look at the fact that there are worried about these companies putting people into a “debt spiral” that comes about because the interest charges continue & rise over time if not paid off.
16. But with Afterpay as soon as you miss a payment they suspend your account & more importantly the debt is frozen & never increases – so it does not “spiral” out of control.  
17. Afterpay charge a 25% late fee, BUT more importantly the maximum late fee that can be charged is $68. So say someone had a $400 debt they don’t pay 25% (which would be $100 late fee) BUT instead only get charged $68 – that is the maximum late charge.
18. Why would they do that ?? Why – because it’s the “right thing to do”& it’s a reminder that their main aim is the revenue that comes from  the retailer & returning customers (90%) using their service. 
19. Since 95% pay on time –late fees are never paid & thus they incur NO cost to them in any way…
20. Some have mentioned a GS report about Afterpay having US competition. In the US its so big you could have 5 or 6competitors without even noticing. But also Afterpay are in a smaller $ market in beauty & fashion, others are targeting bigger ticket items.  Also its been noted that the new competitors in the US are more like Zip Money – where its more like a “credit card” look alike
21. In Australia they have a huge advantage over any competition  – they have 2.3m customers already signed up & 90% are repeat customers who love the service. Any competition is years away (just to build the technology & systems) & say they come in & they promise  the retailer a lower charge 3% rather than APT’s 4% - is it worth changing for that & losing the loyal Afterpay customers you have buying your products – I don’t think so – why change a winning formula ..
22. Afterpay will come out of this well - the fact that 3 months interest free credit for a pair of trousers has been lumped with the murky world of desperate people needing "overnight" money for 6 weeks tells you it was prudent to yield now rather let the issue dangle. They will be differentiated from these other companies.
23. Australia is not the big story, the ASIC stick (and now they are making noises on the Senate inquiry) has been the only weapon the Bears currently have left – once this issue is resolved we can get back to looking at the fundamentals of the company & its growth potential in the US, UK & later other parts of the world. Many just do not understand this company & as such it will  be a volatile road for a while yet.

Afterpay came out today and responded – a few comments they made..

•  Afterpay welcomes the opportunity to participate in any industry review and is supportive of appropriate regulation
•  Afterpay’s customer centric service is highly differentiated from other operators
• Afterpay supports appropriate regulatory oversight from ASIC
• New Zealand Government recognised Afterpay’s model is different to traditional credit and recently decided not to include products like Afterpay under local credit regulations
• Our transparent and trust-based approach is reflected by our strong growth (over 2.3m customers and 17,000 merchants) and high levels of customer engagement and satisfaction
• Our model is unique in that we provide a free service to customers if payments are made on time, we do not charge interest or monthly fees, our instalment periods are short, and if payments aren’t made on time we immediately suspend a customer’s account which means they will never be caught in revolving debt. The vast majority of our revenue is derived from fees paid by retailers and merchants which allows us to offer an interest-free product to consumers.
• The overwhelming majority of consumers pay on time and have never incurred a late fee. Afterpay’s late fees are capped, minimal and in total are lower than the costs Afterpay incurs when consumers don’t pay on time. This means Afterpay, unlike other services, is incentivised to promote responsible use and discourage late payments.
• Since its inception, Afterpay has supported regulatory certainty for its unique business model that has benefited millions of Australian consumers. Afterpay has been working with ASIC for some time as the overseer of our sector and the administrators of the National Credit Code (NCC).We have been actively involved and continue to be supportive of ASIC’s review into the “buy-now, pay-later” industry as we expect it to highlight the key differences in the services offered across our emerging industry.
• In a recent submission to the Senate Economics Committee (August 2018), ASIC outlined key differences in “buy-now-pay-later” products. ASIC said that companies like Afterpay do “not meet the definition of credit within the National Credit Code” as we “extend funds without charging fees or interest.”
• Afterpay recognised that the provision of such a power to ASIC would promote higher levels of consumer trust in newer services such as ours, and afford consumers an additional layer of protection without compromising our business model.
• Afterpay prepared a submission to the Senate Economics Committeebefore the announcement of the Senate inquiry was known, regarding ASIC’s suggested intervention powers (Refer to website), stating that the company supports extending ASIC’s intervention powers. This would give the company, our merchants and consumers regulatory certainty as well as increase public confidence in our product.

There is one bit of new information in Afterpay's media release today that we weren’t aware of:

Quote 

• “In recent submissions to the Economics Committee (August 2018), ASIC outlined key differences in “buy now pay later” products. 

•  ASIC said Afterpay do “not meet the definition of credit within the National Credit Code” as Afterpay “extend funds without charging fees or interest””.

• This is important, as it is the first indication of where ASIC’s thinking is with regulation on the sector and whether Afterpay should be captured under the credit code.

Lafitani Sotiriou said to to recap where things are at: 

• We expect ASIC to be given powers to regulate the sector. 
• The sector will move from no regulation, to some oversight. 
• We do not expect Afterpay to be considered a credit product (New Zealand hasn’t, and ASIC’s recent submissions indicated it shouldn’t be considered). 
• This would be a good outcome as it will be less administrative burden on sign-up of clients. 

BUT 

• even if Afterpay is captured by the Credit Code, APT can adjust their product to comply with the new parameters. 

• It is NOT a game changer.