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What’s next for the buy-now-pay-later sector?

Investment in the buy-now-pay-later-sector (BNPL) has boomed in 2019. Led by Afterpay Touch Group Ltd (ASX: APT), shares in companies that allow consumers to take the goods but defer the hip pocket pain have been massively popular this year. As a new contender, Openpay Pty Ltd, readies for listing, we ask whether the BNPL sector has peaked.

Major gains

Shares in Afterpay are up more than 150% since the start of the year, trading at $30.61 from $12 in January. Competitor Splitit Ltd (ASX: SPT) is currently trading at 80 cents, up 300% since listing at January at 20 cents. Zip Co Ltd (ASX: Z1P) is trading at over $3.70, up around 250% from $1.10 at the start of the year. 

Sezzle Inc (ASX: SZL) debuted on on the ASX in July and nearly doubled its initial public offering price of $1.22 per share on listing. It currently trades at $2.27. Gains amongst the best known BNPL providers have been impressive to say the least. 

BNPL services have been rapidly growing in popularity. According to UBS, Australians will spend $7 billion via BNPL services this year, and $12 billion by 2021. This has given rise to a multitude of competing BNPL providers, with differentiated offerings and markets. 

New kid on the BNPL block

Openpay Pty Ltd is the latest BNPL provider to plan its ASX debut. Aiming for a December listing, the company is seeking to raise $50 million at $1.60 a share. 

Openpay has more than 1,700 merchants and 30,000 customer payment plans on its books, number that have increased by 100%, year on year, for 3 years. As reported by the Australian Financial Review (AFR), total transaction value using Openpay for payment increased from $27.7 million in FY17 to $97.3 million in FY19. 

Openpay offers repayment plans for up to $20,000 that run up to 24 months across retail, healthcare, home improvement and automotive industries. Due to the higher limits and longer terms, customers tend to be a little older than average for the BNPL sector, with higher transaction values. 

Openpay’s ASX debut could serve as an indication of investor sentiment toward the BNPL sector. Recent weeks have brought mixed fortunes for BNPL shares. Regulatory concerns have weighed on the sector, however individual companies have been buoyed by news of inked deals.

Good news days

As BNPL becomes more popular with consumers, more and higher profile retailers are joining the trend. Earlier this month Zip Co inked a deal with Amazon Australia to provide a BNPL option at checkout. Zip Co shares soared on the announcement, increasing nearly 17% from $3.44 to $4.02 over the course of the day. 

The more widespread the adoption of BNPL technology by merchants, the better for BNPL providers. At a certain point consumers may come to expect BNPL payment options to be available. Of course, the more widespread the adoption of BNPL technology, the greater the pressure on regulators to manage the sector. 

Regulatory headwinds

In October, the Reserve Bank of Australia announced the forthcoming review of card payment regulation would consider the impact of BNPL services. BNPL providers do not allow merchants to pass the costs of the service onto consumers. Credit and debit card providers are forbidden by law from making the same demand of merchants. Speculation that regulators could alter BNPL providers’ no-surcharge rule was rife. 

BNPL providers operate outside the remit of consumer credit protection laws. By avoiding charging customers interest, instead charging account keeping or late fees, they avoid rules that prevent lending to indebted or unsuitable customers. Despite calls to extend these laws to encompass BNPL providers, the sector has so far avoided this level of regulation. 

Moving offshore

Eventually a limit to adoption must be reached, due to population constraints, if nothing else. At this point market share must be won not by conquering new territory, but by winning it from competitors. Already BNPL competitors including Afterpay and Zip Co have embarked on offshore expansion ventures. 

Afterpay operates in the US and UK, which are considered key growth markets for the company. As reported in their recent market update, Afterpay is onboarding an average of 9,000 customers per day in the US, and had 9,000 active or currently integrating merchants including Ulta, PacSun, and Madewell. In the UK the company has acquired more than 400,000 active customers since launching in May and recently partnered with Marks & Spencer. 

Zip Co entered into an agreement to acquire New Zealand-headquartered PartPay in August. The acquisition provides exposure to four key geographies – New Zealand, South Africa, the United States, and the UK. The acquisition will cost ZIP Co NZ$50.8 million in upfront consideration, and a further NZ$15 million if certain performance milestones are met. 

Sezzle, which listed in July, operates from Minneapolis. Although ASX listed, Sezzle is focused on the North American market and launched in Canada in April. Active customers increased by 49.9% over the September quarter to reach 644,509, while active merchants grew 48.7% to reach over 7,500.  

Future directions

Future growth in Australia will eventually become constrained as the market reaches saturation point. Operating in Australia may also become more difficult if regulatory hurdles increase. BNPL providers will then become reliant on offshore expansion to fuel future growth. 

The Australian market may not be big enough to support the myriad of listed and unlisted BNPL and deferred payment providers that have sprouted over the past few years. Eventually some consolidation may occur as customers and retailers move towards preferred providers.

Foolish takeaway

BNPL has become increasingly popular with both consumers and investors this year. Warnings from regulators and analysts have done little to quell the flow of funds into the sector thus far. Openpay’s debut will serve as a yardstick on investor sentiment towards the sector as 2019 heads to a close. 

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Kate O'Brien 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 Sezzle Inc. 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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