The $39 billion takeover bid sprung by US payments giant Square Inc. for Afterpay earlier this month has sparked renewed interest in the sector that Afterpay popularised, the buy-now-pay-later (BNPL) model.
The takeover offer for Afterpay – the biggest takeover deal so far in Australian corporate history – has rejuvenated a sector that was sold-off in July when the even-bigger payments heavyweight PayPal (which is more than twice the size of Square, Inc.) launched its instalment payment product.
That news took Afterpay shares back below $100, briefly. But the Square bid has seen APT jump back to $132.01. Because the currency for the bid is Square shares, the value jumps around a bit with the Square share price and the A$/US$ exchange rate.
There is quite a strong view in the market that Square’s bid for Afterpay represents full validation for the BNPL sector.
Afterpay’s rise from a $1 float in May 2016 to $132 – via a record high $151.92 reached in February 2021 – is one of the all-time great stories of the Australian share market. All along that rise, there have been grumbles about BNPL as a business model: that it is unregulated unsecured lending, without credit checks; and the convenience of buying things for a partial payment, and worrying about the rest of the payment later, only encourages consumers to get into debt.
There may be individual cases where this does happen, but overall, shoppers – particularly Millennial and Gen Z consumers – are voting with their feet, showing a clear preference for BNPL over traditional credit.
A recent (June 2021) National Australia Bank report showed that nearly 1 in 5 (18%) Australian consumers were holders of BNPL debt in Q1 2021, making it the fourth most common type of debt held after credit cards (41%), home loans (34%) and personal loans (19%). Under the age of 29, the BNPL proportion was 26% – compared to just 5% among over 65s.
On average Australian consumers hold 1.8 BNPL accounts, with just over half (51%) having one account, 31% holding two accounts, and 12% holding three accounts. Around 1 in 20 Australians have four or more accounts. Importantly, holders of multiple BNPL accounts are more likely among lower income earners (those earning less than $35,000 a year.)
Those could be worrying figures, but they’re not the key to understanding BNPL. It is not a business model based on trapping people in debt. It is all about the benefit to merchants, as a customer acquisition channel. Making it easier for customers to spend money, through BNPL, helps merchants – whether online or in-store – increase conversion, lift basket sizes, and boost sales. It’s the much-prized “network effect” – Afterpay’s growing consumer and merchant bases are designed to reinforce one another.
When you make it easier for consumers, they will be more comfortable spending more. Using BNPL is a proven way for retailers to build customer loyalty and repeat purchases. And in turn, greater purchasing frequency reduces defaults for the BNPL provider, as problem customers are filtered-out of the system.
The global opportunity is massive – online payments is a US$10 trillion ($13.5 trillion) market, according to IDC’s Worldwide New Media Market Model forecast for 2024, and BNPL penetration is still put at only about 2 per cent of point-of-sale retail spending. In Australia, BNPL accounts for 13% of all online transactions.
BNPL is also a story of “cohort economics” – the behaviour of platform users over time. That has driven recurring revenue and strong returns on investment for Afterpay: in the first year, customers tend to use the platform 3.9 times, on average. By the time the cohorts have been on the platform for more than two years, they are using it 15.7 times a year. Afterpay’s early Australia and New Zealand customer cohorts, who’ve been on the platform for more than four years, are transacting 29.1 times a year. There is very strong consumer retention, with existing consumers driving 90% of Afterpay’s gross merchandise value gross merchandise value (GMV), or the total value of merchandise sold using the platform.
For all the hype, Afterpay clearly states that it has penetrated the $US1 trillion ($1.35 trillion) of e-commerce spending, in the markets where it operates, to the tune of only about 2%. All the BNPL providers know this – the potential for growth is massive, and it is a market in which multiple providers can eventually be profitable.
1. Zip Co (Z1P, $7.86)
Market capitalisation: $4.4 billion
12-month total return: 28.6%
Analysts’ consensus valuation: $8.51 (Thomson Reuters), $7.94 (FN Arena)
Zip actually pre-dates Afterpay, having been launched in 2013, a year before Afterpay. Zip listed on the ASX (as ZipMoney) in September 2015 through a reverse takeover of Rubianna Resources. The fintech business raised $5 million through issuing shares at 20 cents each, in a heavily over-subscribed raise. The company changed its name to Zip Co in December 2017.
Market attention turned very quickly to Zip Co in the wake of the Square-Afterpay announcement: the shares jumped 60 cents to $7.24 and have continued rising. There is speculation that Klarna, the Swedish BNPL which is the fourth-largest BNPL provider in the US, has quietly taken a stake in Zip Co.
Zip Co has been chugging along very nicely: last year it bought the US-based QuadPay for $403 million, giving it a strong foothold in the world’s biggest retail market. At a stroke, the QuadPay acquisition was seen as a much better option than Zip Co trying to enter the US market in its own right.
Zip has continued this strategy, expanding its international presence by lifting its stakes in UAE-based Spotii Holdings and European business Twisto Payments, increasing its presence in Europe and the Middle East, which are both fast-growing e-commerce markets. It’s now going to buy-out both fully. Profitability is not seen before FY23, but all of Zip Co’s numbers are tracking very well.
2. Laybuy Group (LBY, 58.5 cents)
Market capitalisation: $148 million
12-month total return
Analysts’ consensus valuation: $1.146 (Thomson Reuters)
New-Zealand based BNPL provider Laybuy is different to Afterpay and Zip Co in that its main focus is the United Kingdom, which the company says has an addressable retail market of £394 billion ($740.7 billion), about 2.2 times the size of the Australian market in terms of overall spending. And the UK is also a market where BNPL is still in its infancy, but is expected to grow quickly.
For the financial year ended 31 March 2021), Laybuy delivered gross merchant volume (GMV) growth of 159%, powered by UK GMV growth of 504% year-on-year. That puts it firmly on track to exceed GMV of NZ$1 billion ($952 million) in FY22. The platform’s active customers increased by 87% for the financial year, reaching 756,000, with UK active customers up 202%,to 463,000.
In the first quarter of the current financial year – that is, to 30 June 2021 – the UK business continued to underpin growth, with its GMV more than doubling year-on-year to £49 million ($90.3 million), up by 107%. UK active customers surged by more than 143% in the year to June, driving a 43% annual jump in total active customers, to 829,000.
3. Sezzle (SZL, 8.24)
Market capitalisation: $2.4 billion
12-month total return: +17.4%
Analysts’ consensus valuation: $10.78 (Thomson Reuters), $10.60 (FN Arena)
While it is listed on the ASX, Sezzle is based in Minnesota, US, and its appeal is that it lacks competition in the parts of the US in which it competes. Sezzle is growing rapidly in the US and in Canada: in the June quarter of 2021, underlying merchant sales (UMS), active consumers, active merchants and repeat usage all reached record levels. UMS for the quarter increased by 118.7% year-on-year to US$411.1 million, and by 9.6% for the quarter. Over the 12 months to 30 June 2021, active customers increased by 95.5% to 2.9 million. It added more than 250,000 active consumers in the quarter. Active consumer repeat usage grew to 91.6%, in the 30th consecutive month of improvement. More than 6,200 active merchants were added in the quarter, bringing the total active merchants to 40,200.
Sezzle recently entered into a three-year agreement with Target Corporation. In early June, it said that it had concluded its proof of concept with Target. Under the agreement, Sezzle’s product will be used in-store and across Target’s digital platforms, providing users access to interest-free payment plans for purchases made at Target.
Sezzle has also struck a deal with US-based BigCommerce, a software-as-a-service (SaaS) ecommerce platform that provides services to retailers in 150 countries, to offer the Sezzle BNPL option as preferred partner.
4. Humm (HUM, 96.5 cents)
Market capitalisation: $525 million
12-month total return: –19.4%
Analysts’ consensus valuation: $1.25 (Thomson Reuters), $1.267 (FN Arena)
The former Flexigroup claims to have invented BNPL more than 20 years ago – it was the first company to have a finance product at the point of sale – but it’s had to reinvent and rebrand to be seen as a serious player in the space. The company’s BNPL offering comprises the “hum” and “bundll” brands, with the latter focused on lower-value purchases. A strategic relationship with Mastercard allows bundll to be accepted by any retailer that can accept a debit card, so individual integrations with retailers are not required. The humm product is targeted further up the value chain, including for larger-value items such as dentistry, automotive repair and veterinary services bills, and offer longer repayment terms.
Humm launched in the United Kingdom in June 2021 with a focus on the $200 billion home and home improvement, health, automotive, and luxury retail market segments. In July the company announced its first bundll partnership, with Westpac New Zealand: the companies will jointly distribute bundll in New Zealand. The company also plans to go into Canada, before 2022. Because of its other financial services businesses – cards, and commercial and leasing – Humm is also a fully franked dividend payer. The company expects to report a net profit for FY21 more than double that reported in FY20, although analysts expect a lower dividend.
5. Splitit Payments (SPT, 57.5 cents)
Market capitalisation: $331 million
12-month total return: –57.7%
Analysts’ consensus valuation: $1.80 (Thomson Reuters)
Splitit’s “secret sauce” in the BNPL space is that it allows customers to pay with an existing credit or debit card, holding the full amount on their card and taking an instalment each month. The customer can apportion the total cost across as many interest-free payments as they like; the Splitit system charges their credit or debit card every month until their payment is completed. This is different to other BNPL operators, which effectively lend the customers the full amount of a purchase at the checkout, and then allow that purchase to be paid off in instalments.
Splitit says that because it facilitates the use of issuers’ credit cards, it complements, rather than competes with, those credit cards: it says it is the only global payments solution that works using shoppers’ existing Visa or Mastercard credit cards.
For the June 2021 half-year, Splitit reported merchant sales volume (MSV) of US$172 million, up 93% year-on-year, with total merchants up 167%, to 2,800. Shopper numbers surged 13%, to 566,000.
Despite rising from its 20-cent IPO price in January 2019, Splitit has never really set the share market on fire like several of its BNPL peers. That could represent an opportunity for long-term investors.
6. Openpay Group (OPY, $1.315)
Market capitalisation: $172 million
12-month total return: –62.1%
Analysts’ consensus valuation: $3.40 (Thomson Reuters)
Launched in 2013, Openpay’s BNPL twist is that it takes the interest-free BNPL model and focuses on industries such as automotive, healthcare, home improvement, club and organisation memberships and education. Because of this, its purchase sizes can be much larger than other BNPL providers: it provides options for payments between $50 and $20,000, with payments over periods from two to 24 months. The flipside of this is that Openpay says its market sectors are less competitive than retail – and it also targets customers from older demographics.
(While this has its commercial benefits, it also caused bad publicity earlier this year, when it was revealed that a death provision in its terms and conditions meant that customers who had paid for medical treatment would have been in default of their BNPL contracts if they died in an operating theatre or after they were discharged from hospital. Openpay quickly had to drop those contract provisions.)
The company also operates in the United States, launching its business there in December 2020, and the UK; in June, it announced that it will buy UK BNPL company Payment Assist, which specialises in funding automotive servicing and repair bills. The Payment Assist transaction will lift Openpay’s total active customer numbers 33%, to 706,000, and more than double active merchant numbers, to 8,200.
The company also has a unique B2B offering, Openpay for Business, a SaaS-based platform that allows companies to manage trade accounts end-to-end, including applications, credit checks, approvals and account management in the one system.
Openpay is a nicely differentiated player in the BNPL space, and now that it has got rid of the bad publicity of its medical treatment contracts, it’s looking well-positioned to grow in its chosen market niches, in Australia, New Zealand, the UK and US.
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