What does COVID-19 and the payment revolution mean for Afterpay and Sezzle?

What does the COVID-19 driven shift to online shopping mean for Afterpay and Sezzle? 

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

What does the COVID-19-driven shift to online shopping mean for Afterpay Ltd (ASX: APT) and Sezzle Inc (ASX: SZL)

Changes in the way we pay

Giving a keynote address at Morgan Stanley in June, Reserve Bank of Australia's Assistant Governor Michele Bullock explored the health crisis' disruption of the retail payments system and its implications. 

According to Bullock, "merchants and consumers have changed both their payment preferences and their mode of interaction." 

To support the contention, Bullock presented some staggering statistics that revealed the death of 'paper' payment instruments. 

For instance, use of cheques "has declined from around 50 per capita per year in the 1990s to around 2 per capita in 2019" as many payments became electronic. 

Inevitably, the shift to electronic payments is seeing the decline in the use of cash. 

In fact, Bullock cited RBA's recent consumer payments survey, which found that "a third of survey respondents did not use cash for any payments", although "around 10 per cent used cash for all their payments." 

Importantly, the decline in the use of cash and the rapid acceptance of cards was an "important enabler for online commerce, allowing payments to be made in a remote environment." 

Afterpay, Sezzle, BNPL, and the dash from cash

The dash away from cash, of course, boosted companies like Afterpay, which saw early adoption from online and e-commerce retailers. 

In fact, online sales constitute the majority of Afterpay and Sezzle's revenue pie. For example, in FY19, Afterpay's in-store cumulative underlying sales contributed 18% to Australia and New Zealand's combined underlying sales, which means that the vast bulk of Afterpay's underlying sales for Australia and New Zealand were online. 

But just because more people are making online purchases does not – on its own – mean that more people will make these online purchases using Afterpay and Sezzle. 

However, Sezzle's executive chair and CEO Charlie Youakim certainly drew that conclusion when announcing the company's record 2Q20 in a July 7 update, highlighting the change in consumer behaviour as a factor in Sezzle's performance. 

Youakim wrote that Sezzle's "performance reaffirms our product's utility to consumers looking for a smarter way to budget their personal finances and the overall market shift to eCommerce." 

The Sezzle update further stated that "with nearly 100% of Sezzle's transactions via eCommerce, the Company is well-positioned for the ongoing move to online."

Youakim then noted that Sezzle's strong performance in Q2 is "reflective of an improving consumer profile combined with an accelerated adoption of eCommerce due to the [COVID-19] pandemic." 

The emphasis on eCommerce and the shift to online certainly seemed to benefit Sezzle, as its 2Q20 represented the top 3 months of monthly underlying merchant sales in its history.

In its latest investor presentation, Afterpay echoed Sezzle and stated that "since the impacts from COVID-19 began, we have seen consumers shift further towards online spending."

COVID-19 and the new normal

Even when COVID-19 is contained or a vaccine disseminated, people are now likely to be more vigilant about hygiene and social distancing, cutting down trips to brick-and-mortar stores. 

This will compress discretionary in-store purchases, while boosting online retailers and retailers with a sound online presence. 

The new normal of COVID-19 will see consumers shift even more of their purchases online. 

RBA's Bullock similarly concluded that "the increased use of online shopping, either through necessity or preference during the 'stay at home' period, seems likely to be a permanent shift."

In my view, this shift could increase the volume of transactions that Afterpay and Sezzle process. 

Additionally, more consumers going online may mean more opportunities for merchants to sell more per consumer. This is because the more purchases we make online, the more tailored the recommendations become, and the more likely we are to make add-on purchases or get directed to products we did not realise we wanted. 

In the end, Afterpay and Sezzle seem well-positioned to succeed in the post-coronavirus world.

Motley Fool contributor kprakapenka has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of AFTERPAY T 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.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »