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It is hard for today’s younger generations to imagine a world without digital devices from personal computers to tablets to smartphones. Yet the oldsters among us well remember a time when bill payments from personal and mortgage loans to credit card payments went to the traditional banking system via Australia Post.
The personal computer ushered in the welcome era of online bill pay, but it was the arrival of the smartphone than enabled the emergence of a new breed of companies collectively referred to as “Fintechs”, or financial technology stocks.
Fintechs have disrupted traditional banking in major ways, from loans to payments to investing and corporate funding.  As is the case with virtually all newly arrived “hot” sectors, investors quickly learn corporate membership in one of those hot sectors is no guarantee of success.  
Among the more than one dozen Fintech stocks operating in the mobile payment and consumer finance sector the undisputed share price performance leader is relative newcomer, Afterpay Touch Group Limited (APT), listing on the ASX on 30 June of 2017 with a first day of trading close of $2.95.  Over the past year the share price increase dwarfs the impressive performance of accounting services Fintech company, Xero Limited (XRO).

A better comparison comes from an ASX Fintech also operating directly in the mobile payments sector, Mint Payments Limited (MNW).  Both MNW and APT have analyst consensus BUY ratings.

Comparing companies in the same sector often fails to provide an “apples to apples” comparison given different business models targeting different niches with divergent products.  Afterpay has a direct competitor, also operating in the mobile lending “buy now pay later” consumer segment – Zip Co Limited (Z1P), a company originally listing on the ASX under the name ZipMoney (ZML) in September of 2015 with a first trading day close of $0.30. 

Retail investors who bought Z1P when it traded as ZML on its first day have seen share price appreciation of 217%.  Impressive, but first day investors in Afterpay have seen share price appreciation more than double that of its once larger rival – up 451%.
Lay-by, or layaway, purchases are still available throughout Australia, the old-fashioned way.  Consumers put down a deposit at a lay-by service desk in a retail location, make the spaced monthly payments, and get their merchandise once it is fully paid.  
Both Zip and Afterpay essentially reverse the process, with the companies directly paying for an item to the retailer and subsequently receiving payments from the consumer, a service for which the retailer pays a fee.  In the modern age when consumers have little patience to wait for anything, the ability for quick access to material goods with deferred payments is ideal.
The share price performance clearly indicates investors prefer APT over Z1P, but why?  What differences in the business models of these two successful companies account for one vastly outperforming the other?
Both offer streamlined credit approval when compared to traditional financial outlets, but the key difference between them could be their target market.  In its early start-up days Zip was concerned about being compared to the suspect payday lender and other loan providers catering to the financially challenged at seemingly exorbitant rates.  Zip targeted, in the words of the company, “prime, near prime and emerging prime borrowers” providing a revolving line of credit in contrast to a loan.  
In practice this limits the company’s reach to higher end consumers, although one of Zip’s two “digital wallet” offerings – Zippay – allows online and in-store interest free purchases up to $1,000.  For purchases up to $30,000 the company offers ZipMoney, also interest free.  The advantages to retailers are obvious, as fees paid to Zip enable the retailer to avoid the overhead of operating its own credit or loan facility.  The company counts 3,000 retailers among its customers, willing to pay commission fees higher than credit card rates.  To sweeten the partnership, Zip pays its retailers daily for consumer purchases via the system and allows retailers to use the Zip platform to offer consumers financing periods extending beyond the period allowed by Zip. Typically, consumers have a full 60 days to repay their purchases to avoid accruing a $6 monthly service fee.  After three months, standard interest rates apply to unpaid balances. The company has grown revenues substantially over the last three Fiscal Years, rising from $4.3 million in FY 2016 to $16.4 million in FY 2017 and more than doubling to $40.2 million in 2018.  However, the company remains unprofitable, with analysts not expecting Zip to turn profitable until FY 2020.
The company remains successful in attracting new retailers, with the likes of Super Retail Group and Kogan, among others, coming onboard in 2018. Zip saw a 149% increase in consumer customers along with a 139% rise in retail partners during the year.  In addition to zipMoney and Zippay, the company offers Pocketbook, an award-winning personal financial management tool, that added more than 530,000 customers. The company claims its proprietary credit approval technology kept the company’s bad debt and payments in arrears “below industry standards.”
The share price recently got a boost as the company announced its partnership with Virgin Australia Holdings (VAH), supplementing the earlier agreement with Virgin subsidiary Tigerair. 
A little more than one year ago two companies – Afterpay and Touchcorp – joined together and listed on the ASX as Afterpay Touch Group Limited (APT).  This gives the company both a pay later (Afterpay) and a pay now (Touchcorp) presence in the consumer purchase and payment sector.  Afterpay had listed on the ASX as an independent entity in 2016, more than doubling in value at the time of the union of the two companies. 
Touchcorp was also an ASX listed company, providing online software payment platform technology solutions to a variety of customers in the telecommunications, health, and convenience retail sectors, including working with Afterpay to develop its platform.  Touchcorp will continue to develop online software payment platforms for customers, leaving some investors concerned about the contradictory nature of the business models, although Afterpay Touch sees the joint company as providing growth opportunities.
The Afterpay “buy now pay later” platform differs significantly from the Zip offerings.  As opposed to granting an open-end line of interest-free credit to customers, Afterpay approves purchase on an individual transaction.  There are two parts to the system; the Transaction Integrity Engine that assesses a customer’s repayment capability and checks for fraud history in real-time; and the Afterpay Operating Platform.
The Operating Platform allows participating retailers to include Afterpay as a payment option for checkout, both online and in-store, with the end-consumer agreeing to pay for the merchandise in four bi-monthly installments with no fees and no interest.  Afterpay currently serves more than 2.2 million end customers through its network of more than 16,500 retail outlets, an increase of 2,500 outlets over the last three months.  At the end of FY 2017 Afterpay had 6,000 retail partners, a year over year increase of 175%.
Revenues increased 289% from FY 2017 to $2.18 billion, with $11 million coming from the company’s mid-May entry into the US market for the month of June.  Afterpay already has 400 US retailers under contract, with another 200 using the platform.  Afterpay’s ambitious growth plans extend beyond the US market, with plans to expand the domestic traditional retail market into health, beauty, entertainment, and travel markets. The company already has a five-year agreement in place to add Afterpay to the practice management platforms of a major dental provider, as well as in 500 brick and mortar beauty shops and in Dreamworld theme park.
Afterpay was named the “Fintech Organisation of the Year” by Fintech Australia at the recent 2018 FINNIES awards event.
One could make a very strong case that these two companies have succeeded based, not on the software platform, but on the buy now pay later target market. Mint Payments Limited (MNW) was a very early entrant into the omni-channel – online, in-store, in-app – payment sector, listing on the ASX in 2007.  The company offers four different payment solutions, from mobile payments for corporate customers to automated collection systems.  Once a market darling when its company name was Mint Wireless and its flagship product was a smartphone attachment that turned the phone into an early version of a mobile payment system, the company’s skyrocketing share price quickly collapsed and remains a disappointment to investors. Punters might want to have a look as the company has a STRONG BUY rating from its sole analyst covering the stock, with a price target of $0.03.

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