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Afterpay shares look ready to crater on reports Visa is to offer buy-now-pay-later

The Afterpay Touch Group Ltd (ASX: APT) share price hit a new record high of $28.70 today and investors will hope that doesn’t turn into an all time high after a report in Forbes claimed U.S. and global payments giant Visa Inc is set to directly enter the buy-now-pay later market by January 2020. The stock plunged 10% to $25.07 in late trade on the news.

Perhaps the worst element of the news for Afterpay bulls is that Visa is reportedly considering offering the buy-now-pay-later instalment option to merchants for free as Visa still makes money on every transaction it processes.

By comparison Afterpay charges merchants a fee up to 4%, so it would make little sense for Afterpay’s merchants to use it over Visa’s option.

According to the Forbes article Visa is reportedly piloting the plan by using Cybersource as one of its subsidiary companies.

Another worry for Afterpay investors is the fact that Visa has the kind of eye-watering global scale to quickly take huge amounts of market share.

As if that news isn’t scary enough Forbes is also reporting that JP Morgan as the US’s largest consumer-facing bank will also “offer POS financing without the help of Visa, MasterCard or any card network. After a Chase cardholder makes a purchase, she can log into the Chase app and decide that, instead of letting the purchase fall into her revolving credit line, she’ll pay for it in installments. Activating this feature will be done on JPMorgan’s own technology rails.”

It’s also worth considering if JP Morgan can develop the tech to do this, then it’s likely most other major banks can globally.

This is gloomy news for Afterpay shareholders including myself, as for example its UK business is only just getting off the ground and could struggle in the face of competition from a blue-chip tech giant like Visa. If we consider then that the news means Afterpay never turns a profit then shares would start to look grossly overvalued.

Fortunately my own Afterpay shareholding is only a minuscule fraction of my investment portfolio and I also own Visa shares. 

As I warned before putting all your eggs in one basket or betting too heavily on a single business is a common investing mistake that often comes from overconfidence – especially in men.

As an analogy most men believe they’re better than the average driver, but often these men are the ones that crash due to overconfidence or reckless behaviour.

The consolation for Afterpay investors is that the Forbes’ article’s claims are for now only reporting and things may not turn out as the article predicts.

It’s also possible consumers or retailers continue to favour Afterpay ahead of rivals due to its brand and track record to mean Afterpay continues to grow at strong rates irrespective of the new competition, while Visa’s product may not take off for any number of reasons. 

However, I expect we’ll see a big sell off in the shares next week. 

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Tom Richardson owns shares of AFTERPAY T FPO and Visa.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Visa. The Motley Fool Australia owns shares of AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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