When Covid-19 struck the world economy investors initially punished Afterpay, a “buy now, pay later” fintech claiming to change how people shop. But six months on, the Melbourne-based company is confounding critics by capitalising on surging ecommerce, rapid growth in the US and a shift away from credit cards.
Afterpay doubled its customer numbers to 10m in the US, UK and Australia in the year to end of June. Last month it began a push into Canada, Singapore and southern Europe, as it rushes to capture market share before a growing band of competitors can catch up. Urban Outfitters, Anthropologie and Levi’s are among the big retailers in its network, offering customers quick and easy access to credit at the checkout.
The company’s shares hit a low of A$8.90 in March but are since up almost 800 per cent, for a market capitalisation of A$22bn ($16bn). However, on Friday the stock closed at A$78.20, down almost 12 per cent over the week, after US payments giant PayPal said it would launch a BNPL product. In July, Visa said it was doing something similar.
Nick Molnar, Afterpay’s 30-year-old co-founder and one of Australia’s youngest self-made billionaires, is undaunted by rising competition, saying that the pandemic has accelerated structural changes.
“What you saw was ecommerce growth rates that took 11 years to take place, repeated in just eight weeks during Covid, in terms of the uplift in online as a percentage of total retail,” he said.
“The online tide has risen and it will remain.”
Afterpay’s sky-high share price — which puts it at an enterprise value of 24 times forecast revenues for 2021, about three times the multiple of Facebook — has made it one of the most talked-about stocks listed on the ASX. The Australian market has become a global hub for BNPL companies, such as Zip, Sezzle and Splitit.
Afterpay’s profile got a boost when Chinese tech giant Tencent snapped up a 5 per cent stake in May. Last October, the appointment of economist Larry Summers to Afterpay’s US advisory board added heft to its push in that nation to reduce consumers’ reliance on credit cards, where average annual interest rates are about 16 per cent.
The company’s business model relies on providing small amounts of unsecured loans — typically about $150 — to consumers at no cost, while charging merchants a fee to process transactions. It does not perform credit checks on prospective consumers, who pay for their purchases in instalments over 56 days. Late fees generate about 14 per cent of Afterpay’s revenues.
That distinguishes it from other point-of-sale loan providers, which often charge rates of interest based on quick checks of a customer’s borrowing history.
“We didn’t start life as a credit provider, doing soft credit checks and pulling someone’s file. We don’t sell credit,” said Mr Molnar, when asked about the threat posed by PayPal and Visa.
Mr Molnar says Afterpay is tapping into a broad shift away from traditional credit products that began with the 2008 financial crisis and is accelerating during the pandemic. In the US, for example, credit card balances shrank by $76bn in the second quarter — the steepest decline on record, according to the Federal Reserve Bank of New York. In Australia, credit card account numbers dropped by 1.6m to 14.09m in the year to end June, according to the central bank.
BNPL providers are reaping the benefit. In the 12 months to the end of June Afterpay doubled revenues to A$519.2m and now claims 10m active customers, including 5.6m in the US, 3.3m in Australia and New Zealand and 1m in the UK. It reported a A$22.9m annual loss, down from A$43.8m a year earlier, as it prioritises growth over breaking even.
In a research note late last month UBS expressed scepticism about Afterpay’s valuation, citing near-term risks related to the Covid-19 recession that would hurt its millennial customers when government stimulus was withdrawn.
“Longer-term, regulatory, competition and execution risks remain,” the bank said, adding that the market was perhaps underestimating or ignoring the capital required to fund continued expansion. The bank set a price target of A$28.25 for the shares.
For now, regulation of the BNPL sector lies outside of consumer credit laws in most nations. Consumer advocacy groups warn that users of such services are vulnerable to getting into debt, prompting Australian, UK and US authorities to launch reviews.
“”An increase in regulation is a risk to the sector, which could impact growth rates,” said Siraj Ahmed, analyst at Citigroup in Melbourne.
Anthony Eisen, Afterpay’s co-founder, says any future regulation needs to be tailored — recognising that default rates are low and the amount of money advanced to customers small.
“We’re not selling mortgages. We are not selling $50,000 personal loans . . . It’s very low value,” he said.
Mr Molnar stressed that the real value of Afterpay was its ability to push up sales for merchants.
“In lots of cases with global brands we are a more effective traffic driver than Google or Instagram,” he said.