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CBA announces challenge to Afterpay & Z1P Co. in UK and Australia in buy now, pay later sector

The Afterpay Touch Group Ltd (ASX: APT) and Z1P Co. Ltd (ASX: Z1P) share prices could come under pressure this morning after the Commonwealth Bank of Australia (ASX: CBA) announced a US$100 million investment in Sweden-based buy now, pay later rival Klarna.

“As part of our strategy to lead in retail and commercial banking and to extend our digital capabilities, we have signed an agreement with Klarna, a leading global payments provider with over 60 million customers and 130,000 merchants. Klarna generated US$627 million of revenue in 2018,” CBA revealed in its results announcement this morning. 

CBA’s US$100 million investment is part of a recent US$627 million capital raising by Klarna to mean this is a deep pocketed competitor for Afterpay and ZIP that will have an Australian partner with just about the widest consumer-facing financial reach possible in CBA.

This is an interesting move from CBA, but not likely to be a dial mover and if one were a little critical it would have been a much smarter move this time last year. Perhaps though the bank was too caught up in the Royal Commission and the like to really think ahead. 

On the buy now, pay later front Afterpay recently launched its UK business Clearpay, where it is effectively a challenger to Klarna that is the current market leader. 

Recently, US payments giant Visa Inc. also announced plans to push into the buy now, pay later space in the US market and globally. 

The fast-rising and deep-pocketed competition shows how Afterpay’s tech does not provide it with much of a moat or competitive advantage as in theory it’s relatively easy for any competitor to offer retailers cheaper fees to win market share. Afterpay typically offers up to 4% currently, which suggests there’s room for it to be undercut. 

I do own a very small portion of Afterpay shares as it’s breakneck growth through 2018 couldn’t be ignored, but I wouldn’t personally rate it as a buy today given the competition and valuation around $5.65 billion at $22.34 a share. 

Among the WAAAX shares I’d prefer to look to businesses in the software-as-a-service space such as Xero Limited (ASX: XRO), Wisetech Global Ltd (ASX: WTC) or Altium Limited (ASX: ALU).

This is because their platforms and services appear to have stronger competitive advantages and the software-as-a-service (SaaS) business model provides much better scalability. As such, I expect they’ve a better chance of posting strong long-term profit growth.

As always though investors must be careful what they pay.

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Tom Richardson owns shares of AFTERPAY T FPO, Altium, Visa, WiseTech Global, and Xero.

 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's parent company Motley Fool Holdings Inc. owns shares of WiseTech Global and ZIPCOLTD FPO. The Motley Fool Australia owns shares of AFTERPAY T FPO, Altium, and Xero. 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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