Is AfterPay / BNPL a Bubble? (ASX: APT)


We’re back with another deep industry dissection this week, looking at the growing Buy Now, Pay Later (BNPL) industry. This is an incredibly fast moving industry, which has really emerged into prominence over the past six months or so.

  • What is BNPL and why has it become so popular, particularly with millennials
  • The increasing saturation in the BNPL market and diving into Afterpay as a case study
  • The future of BNPL and other payment providers
  • Source: Klarna


What is Buy Now, Pay Later?

Easy to get your head around given the catchy name - Buy Now, Pay Later is a payment method which allows customers to defer payments for a product or service but still get their product or service at the time of the transaction. Usually customers will pay a part of the cost upfront, receive their item and then pay the remainder over time.

For example, Afterpay is one of the bigger players in the BNPL field. If you buy a jacket online through Afterpay, you’ll pay 25% of the cost upfront, the jacket will come in the mail, and then over the next six weeks, you’ll pay the remaining 75% in installments (25% payments every two weeks).

Now you’re thinking, isn’t this just a credit card? Notably, the difference between a BNPL payment provider and a credit card are interest payments. A credit card provider will charge you interest on the balance of your credit card, whereas a BNPL does not charge interest. If a customer pays on time, there is no interest charged on their BNPL balance. But, if they don’t pay on time, they incur a late fee.

How do BNPL providers make money?

Source: Hayden Capital


Most BNPL providers are B2B2C businesses (Business to Business to Consumer). This means they have ‘two’ customers, the first are merchants - these are the retailers or providers of goods and services which bring BNPL onto their websites and in-stores as a payment options for customers. BNPL takes a clip of the price tag of anything bought using the service, usually 3 - 6% which is the basis for how they generate revenue. So for example, if the BNPL provider takes a 5% clip, a customer purchase of $100 will translate into the retailer receiving $95, while the BNPL provider receives the remaining $5.

Source: RBA


The second ‘customer’ of BNPL providers are actually the end users - the consumers who use BNPL to purchase products. While most BNPL providers don’t generate revenue directly from customers (except late fees), they can leverage their relationship and customer information to do targeted marketing, advertising or even on-sell customer data to vendors and retailers.

Why has BNPL become so popular?

Source: Illion Direct


Amongst millennials, BNPL has become one of the preferred ways to pay for products (particularly fashion products), rather than using credit cards.

A few key tailwinds are driving the increased adoption and use of BNPL:

  • Firstly, millennials are more debt-averse when compared to previous generations and are reluctant to take out credit cards. Limited penetration of credit cards within this age bracket has opened the opportunity for alternatives such as BNPL to come in and target this demographic
  • Secondly, the shopping experience with a credit card is less user friendly. You need to have the card with you when you shop. Once you’ve got the card out, you’ve got to type in 16 digits, and then your card CVC and expiry date. It’s not seamless
  • Thirdly, online shopping is often driven by impulse. Retailers and payment providers want to remove friction between shopping and payments - the easier the purchase process becomes, the more consumer are going to buy because there are fewer areas of friction and space to reconsider the purchase

What does the BNPL competitive landscape look like?


The BNPL market is slowly becoming saturated, not just in Australia but increasingly around the world as these companies enter new geographies or acquire local providers to expand their presence. We’ve started to see three core groups of competitors in the space:

  • Incumbents entering BNPL - Institutions such as Commonwealth Bank of Australia or payment providers such as humm group (formerly FlexiRent) who have existed for a number of years with other products and are moving into the BNPL to see if they can leverage their existing customer base, brand and reputation in the market to compete
  • Specialist BNPL players who emerged in the last 8 years - Companies such as Afterpay, Klarna and Zip who have emerged recently as BNPL providers. They compete based on price (the clip they take from merchants), quality of customers who use their platform (average spend of customers and the amount of times customers spend) as well as their relationships with vendors and retailers
  • Emerging, niche players trying to carve out their own market - And finally we have niche players. They offer BNPL as a way to finance and pay for niche products, such as Brighte offering a BNPL solution for financing energy solutions and home improvements and Art Money offering BNPL for consumers looking to purchase art

Who wins the ‘checkout’ wars?

Source: ABC


As BNPL continues to increase in popularity, they will continue to compete for how consumers pay for products and services in ‘the checkout’, but importantly they will also compete for their right to play in the checkout. We’ve outlined above how BNPL players take a clip of the cost of a product and often that cost is more than a standard credit card or debit card for a retailer.

As BNPL becomes a ‘must-have’ payment platform, this will go in one of two directions:

  • BNPL players continue their arms race to be the #1 player, reducing fees for merchants and competing on price - As more of these companies enter the market, with plenty of cash to burn from IPOs, VC funding or PE-backed resources, they can undercut their competitors to increase their usage and penetration. This competition will will drive down the clip that BNPL players take from merchants. This is a playbook we’ve seen happen time and time again, and happened in the payments industry with credit card surcharges, and no doubt could happen again. However, this assumes BNPL players remain ‘in the checkout’ and don’t move upstream in the retail value chain
  • BNPL players leverage user data and merchant relationships and become D2C platforms - Instead of simply ‘staying in the checkout’, BNPL players may become marketplaces or D2C businesses, where they become a platform to sell you products from the brands and providers you want to buy from, rather than a payments provider (and logo on the website). An example of this is how airlines have established their own platforms (websites and apps) to spend frequent flyer loyalty points on various goods. In this future, BNPL players move upstream and leverage their relationships with both consumers and merchants. Rather than adding onto the final part of a transaction, they become the marketplace for transactions. But in order to win this way, they need to have strong stickiness and consumer loyalty

What is your final verdict on BNPL?

Barring any major regulatory challenges, BNPL is here to stay. But there is only so much room for competitors. We expect that the industry will begin to consolidate in the next few years. For one provider to rise above the rest will require a truly differentiated product (e.g. on cost or experience) or a strong enough following to provide a network effect that prevents that player from being disrupted by others. On our podcast this week, we share opposing views on the BNPL landscape, so check out our latest episode to understand the pros and cons of BNPL.

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