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Is it a good thing that Afterpay, Zip and FlexiGroup are doing so well?

Buy now, pay later companies like Afterpay Touch Group Ltd (ASX: APT), Zip Co Ltd (ASX: Z1P) and FlexiGroup Limited (ASX: FXL) are performing very strongly – is that a good thing?

The way people pay for retail and other services is being revolutionised by Afterpay and others, they are particularly being targeted at millennials.

These BNPL operators are reporting excellent growth. In FY19 Afterpay’s Australia and New Zealand underlying sales grew by 99% to $4.3 billion. FlexiGroup revealed this week that the number of ‘Little Things’ purchases (up to $2,000) has grown by 67% in FY20 so far. In FY19 Zip said that its transaction volume of $1.13 billion was 108% higher than last year.

It’s certainly good for the companies and their shareholders, but I do wonder whether it’s good for the customers and the economy as a whole.

Is the rapid increase of the industry a sign that people are struggling to pay for goods and require instalment services to pay? Are consumers spending more than their budgets can afford on discretionary items to the detriment of other parts of their finances, even if they are making the repayments?

Every user’s financial position will be different, so it would be wrong to make a blanket judgement on the situation, and I’m definitely not suggesting the BNPL players are doing anything wrong for doing well – I just wonder about why they’re doing so well.

It’s not as though the customer is using magic to create more money to buy goods – if BNPL results in higher spending as they claim, it means less money in the customer’s bank account.

There’s also a question of sustainability for retailers. They already operate on such low margins, can they afford more of their profit to go to merchant fees?

Foolish takeaway

At the moment I think Zip Co is my favourite out of the BNPL operators due to its recent expansion overseas, but there are other growth shares I’d rather buy instead which don’t rely so heavily on discretionary spending.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO and ZIPCOLTD FPO. The Motley Fool Australia has recommended FlexiGroup Limited. 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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