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Why CBA won’t be successful in disrupting Afterpay

The competition in the buy-now-pay-later (BNPL) sector continues to intensify with the Commonwealth Bank of Australia (ASX: CBA) announcing a $100 million investment into Klarna Holdings, a Swedish online financial services provider.

So, how does Afterpay Touch Group Ltd (ASX: APT) square up against the growing competition, which includes the recent Latitude Financial Genoapay threat, Visa’s entry into BNPL, FlexiGroup Ltd (ASX: FXL)’s in-house “Humm” and now Commonwealth Bank?

I believe it doesn’t matter whether you are a payments giant like Visa or backed by Australia’s largest bank. Afterpay is a market leader within the Australian market, and as of February 2019, had more than 23,200 active merchants and 3.1 million active customers. There are merchants out there that offer more than one BNPL service, such as co-existing Afterpay and Zip pay services. But could you imagine walking into a store or going to checkout and suddenly seeing an option to select Afterpay, Zip pay, Genoapay, Humm, Klarna, Splitit and Sezzle?

Afterpay has clearly leveraged its first mover advantage and built a brand name that not only rolls off the tongue, but one that customers can trust and use for free when they pay on time.

But let’s hypothesise and say that within 1–2 years, Afterpay does start to feel the pinch of a highly crowded Australian market and growth for the BNPL sector plateaus. After all, the BNPL market is only a bi-product of retail and online sales. I believe a key differentiator for Afterpay is its expansion into the United States (US) and the United Kingdom (UK). Australia presents an addressable retail and online market of approximately $350 billion according to the NAB Online Retail Index (December 2018). But the UK market has an addressable $850 billion and the US an eyewatering $5.6 trillion.

Afterpay has ambitiously raised capital to leverage its US growth capabilities, and to date, has achieved US growth rates that took the Australian business three years to achieve. What makes Afterpay fascinating is that it is more than just a platform that shoppers use to split their purchases into four fortnightly payments – it’s also a marketing platform that brings shoppers to the retailer. In a recent announcement on 8 August, Afterpay announced an ‘Afterpay Day’, a two-day sale by top fashion and beauty brands and retailers that offer Afterpay in the US. In just over one year, Afterpay is now partnering with, or onboarding, more than 6,500 local retailers, which represent more than 10% of the online fashion and beauty industry in the US.

Foolish takeaway

Current market volatility such as the Hong Kong riots and US–China trade war may rattle the equity markets. However, this could present a perfect opportunity to get on board Afterpay during a period of strong momentum both domestically and overseas.

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. 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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