The Competitive Landscape in the Buy Now Pay Later Sector

ON 30 June of 2017 a newcomer to the disruptive ASX “fintech” players debuted on the ASX, closing its first day of trading at $3.18. Today, trading under the name Afterpay Touch Group (APT) the stock price has climbed to $26.55, an increase of 740% in a little over two years.

Investor appetite for shares of APT remain unabated, fueled by the company’s entry into the massively lucrative US market in May of 2018. This despite the chilling effect of the launch of a Senate inquiry into the broad category of short-term finance operators suspected of preying on financially challenged Aussie consumers.

As its name suggests, Afterpay’s business model is a throwback to the once upon a time practice of layaway, with a twist. In a traditional layaway arrangement customers received their purchases following a series of payments. Credit cards made such transactions close to obsolete as the plastic allowed true “buy now pay” later transactions.

Some modern BNPL (buy now pay later) players eliminate the need for credit cards, paying the retailer upfront for purchased goods and then collecting payments plus fees from the consumer over time.

Regulators were concerned BPNL companies were luring consumers deeper into debts they could not handle. One of their concerns was the lax practices of screening consumers for their ability to pay during the application process for opening a BNPL account.

Investors in APT and its competitors breathed a sigh of relief when the Senate committee exempted BNPL operators from costly up-front credit checks of new consumers to their servicing platforms. In addition, the committee did not recommend including the BNPL sector under the National Credit Act.

However, the committee did recommend further regulatory action for the sector should come from the ASIC (Australian Securities and Investments Commission).

Apart of the Senate inquiry, the ASIC released its own report in November of 2018, highlighting the dramatic rise of the BNPL sector, finding sector growth of over 250% in “a few years”, with BNPL transactions rising from around 50,000 in 2016 to 1.9 million by June of 2017.

Industry insiders predict BNPL transactions are well on their way to becoming the “payment method of choice”, with that claim supported by the largest year over year decline in Aussie consumers holding credit cards in 13 years.

While the threat of regulatory oversight remains, there is a more pressing concern for shareholders of APT – increasing competition.

Afterpay remains the biggest player in the sector by a wide margin, two newcomers recently arrived on the ASX – Splitit Payments Ltd. (SPT) listing on 31 January of 2019, and US-based Sezzle Inc. (SZL) listing on 29 July. They join Afterpay and two other major BNPL players – FlexiGroup Ltd. (FXL) and Zip Co Ltd. (Z1P).

Sezzle shares closed at $2.19 on its first day of trading and rose to $2.73 before falling back to its current price as of 1 August of $2.50. Company management stated it opted to list on the ASX rather than in the US because Aussie investors know the BNPL sector better than their US counterparts and has no intention of competing here in Australia at this time.

Here is the year-to-date share price performance of the players on the ASX prior to Sezzle’s entry.

To further illustrate the increasing competition in the space, Business Insider Australia published an article about the heating up of the sector covering the Sezzle IPO and another newcomer, yet to list on the ASX, Payright. The company raised an additional $27 million, bringing its war chest up to a total exceeding $55 million. Run by two brothers, Payright has more than doubled its revenue in the last 18 months and is planning to enter the New Zealand market.

Payright focuses on higher end purchases with its merchant customers, with transactions ranging from $1,000 up to $20,000 and payment terms from two to 36 months.

Latitude Financial (the former GE Money) cancelled plans for a massive IPO – $5 billion – last year but some market commentators expect the company to try again this year. In December of 2018 Latitude acquired a BNPL platform called Genoapay available in New Zealand.

Finally, current BNPL providers should be looking over their shoulders as the largest credit card issuer on the planet – Visa – announced a pilot program set to launch in January of 2020 offering Visa cardholders the same installment arrangements offered by apps from the BNPL providers using their existing Visa cards. How much of a threat the convenience of using an existing card compared to signing up for a BNPL app remains to be seen, but it could spell trouble for Afterpay and its Aussie competitors.

With a market cap of $6.7 billion dollars, Afterpay Touch Group is the clear leader in the ASX BNPL sector. The following table lists price performance and other metrics for the major ASX players.

Both Afterpay and Zip Co showed year over year revenue increases but failed to show a profit. FlexiGroup’s revenue comes from a more diversified business model, with commercial and consumer leasing offerings as well as consumer interest free and no interest ever financing. The company’s BNPL platform is called Humm. The company combined two existing platforms, with the newly announced Humm having spending limits as little as $1 and as high as $30,000.

The company operates in Australia, New Zealand, and Ireland. Humm is a relatively new effort by FlexiGroup to compete in the BNPL space, with its no interest ever offer. The company’s interest free program is credit card based.

FlexiGroup claims to be Australia’s original buy now pay later provide with the newly constituted Humm platform getting 17% BNPL market share in Australia, serving over one million Aussie consumers at more than 13,000 seller or e-commerce locations.

The company’s Half Year 2019 results showed solid gains in both transaction volumes – up 19% – with a 9% increase in retail partners and a 17% increase in new customers. However, net profit dropped 22% attributable to a one-off impairment.

Zip Co changed its name from Zip Money back in 2017. It currently offers multiple payment solutions for its retail partners and consumers, including zip Pay, zip Money, and Pocketbook.

Zip Pay is interest free, for purchases under $1,000, with a $6 per month fee while zip Money offers 3 months interest free on purchases over $1,000 with promotional offers from 6 to 48 months and the standard $6 per month fee. Consumers apply for a zip account to use the platform. Pocketbook is a mobile app for budgeting and tracking spending.

The company’s Half Year 2019 results were hailed as “ground-gaining” on industry leader Afterpay, with Zip Co posting a 114% revenue increase and a 100% transaction volume increase. In addition, the company halved its losses, posting a$6.8 million-dollar loss compared to a prior loss of $14.6 million.

Afterpay Touch Group is the result of a 2017 merger between Afterpay and the Touch Group. The company has two major platforms, Pay Later and Pay Now.

Pay Later is a BNPL platform for consumers that breaks payments into four installments, with fees assessed only for late payments. The purchase limit is dependent on information in the consumer profile taken at the opening of an Afterpay account and on purchase and repayment history. Account approval is done online, with the company claiming instant approval. The platform is available in select retail outlets, online, and via a mobile app.

The Pay Now platform -Touch – “comprises innovative digital payment businesses servicing major consumer-facing organisations in the telecommunications, health and convenience retail sectors in Australia and overseas,” according to the company’s website.

Afterpay entered the US market in May of 2018 and according to the Half Year 2019 results is operating at a loss in that market. Afterpay has plans to launch in the UK in the second half of 2019. Although the company still posted a loss for the Half Year; it was 32% improved over the previous year. Other growth metrics were solid, with underlying sales up 147%, active customers up 118% and retail merchants using the platform up 101%.

In June of 2019 the company completed a successful institutional placement, raising over $317 million dollars to fund its aggressive expansion plans.

In what some investors may see as a troubling sign, the stock price dropped close to 10% on 28 June when Visa announced its intention to enter the BNPL space.

In its first month of trading on the ASX, Israeli-based BNPL provider Splitit (SPT) caught fire before cooling off.

A possible explanation is the company’s agonisingly slow growth rate, adding a paltry 72 retailers at the close of the Q2, a meager improvement over the 57 new retailers added in Q1.

The company’s platform relies on existing credit cards, allowing customers to “split” their payments into a maximum of 36 installments. Consumers can keep what they buy for 90 days before paying in full or initiating an installment repayment plan. Purchases up to $400 can be charged to a Debit Card, with three monthly payments. Higher purchases can be split across multiple credit cards.

Although Split offers attractive features not found in other platforms, the company’s pre-IPO financial performance was abysmal at best, which should have been obvious to investors not blinded by BNPL fever. For the year ending 2018 the company generated revenues of approximately USD$790,000 while posting a loss of USD$4.6 million, up from a 2017 loss of $3.4 million. Interested investors would do well to monitor the company’s operating expenses, decimating gross profit.

The Sezzle platform is a short-term interest free installment plan for consumers, with the company generating revenue from merchant fees, typical of all BNPL providers. The company targets younger consumers who may have difficulty obtaining traditional credit offerings.

The company entered the ASX with a strong balance sheet, with assets of USD$38.5 million and liabilities of USD$7.3 million. The IPO prospectus states the company grew merchant sales from USD$1.6 million at the close of Q1 2018 to USD$28.3 million for Q1 of 2019. Customers using the Sezzle platform have increased more than 4,300% from January of 2018 to the close of Q1 2019.

The Prospectus also notes Sezzle “has a competitive advantage in being one of the first to provide an interest-free, ‘buy now, pay later’ service to the US and Canadian online retail market.”