Afterpay Touch Group Ltd (ASX: APT) is not what you'd think of as a typical ASX banking stock. Our beloved ASX banks like Commonwealth Bank of Australia (ASX: CBA) are known for massive profits, dividends and more recently a certain Commission of the regal persuasion – so far nothing relevant to Afterpay. And yet we can consider Afterpay a banking stock – it does offer credit-fuelled buying power after all.
But I believe that Afterpay has what it takes to become a giant of not just ASX banking, but of our entire stock market. Let me explain…
What makes Afterpay 'different'?
As you probably know, Afterpay is the pioneer and biggest Aussie player in the Buy-Now, Pay-Later (BNPL) space. The first thing that draws me to Afterpay is hearing the use of the company's name as a verb (Just Afterpay it). This is almost always a good sign for a company (it worked out very well for Google) as it indicates a strong 'branding moat' – meaning there is always an association with Afterpay when using any BNPL service, even a rival one.
Although consumer credit has been cheap, easy and accessible for many decades now, Afterpay does it a little differently, and in a way that consumers have positively responded to. By not charging interest and making the retailer rather than the consumer responsible for collecting Afterpay's revenue, the company has found a lucrative 'middle ground' in the credit space.
What does Afterpay's future look like?
Traditional banks love to give out consumer credit to their customers and Afterpay is no different in this regard. Here's the kicker though – with a Commonwealth Bank credit card, the bank provides the credit facility, but a payments company – typically US giants Mastercard or Visa – provides the payment network that makes it happen. Commonwealth makes a profit from the provision of credit while Visa or Mastercard takes a small clip of every payment you make with the card.
It's this 'clip' that makes Visa and Mastercard the US $395 billion (A$560 billion) and US $265 billion (A$375 billion) behemoths they are today. By comparison, Commonwealth Bank has a market cap of A$145 billion and Afterpay just A$6.07 billion.
And this is where Afterpay is aiming. By establishing its own payments network, the company is taking a clip of every transaction that is 'Afterpayed' (or maybe its Afterpaid?) If the company can grow its network to anywhere near what Visa and Mastercard have, blue-chip will be an understatement.
Foolish Takeaway
If Afterpay can cement its growth numbers in the US and launch successfully in the UK, this is the kind of blue-sky that may lie ahead of it. Although Afterpay shares look expensive today, they still look dirt cheap if you take on an optimistic view of where the company could be in 10 years.
