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.