The chief executive officer of Commonwealth Bank of Australia (ASX: CBA) thinks that Afterpay Ltd's (ASX: APT) merchant fee margins will come under pressure in the future. The Afterpay share price dropped 2% today.
Matt Comyn, the CEO of CBA, was talking to the House of Representatives economics committee on Friday, according to reporting by the Australian Financial Review.
He had a number of interesting things to say about Afterpay and the industry. Mr Comyn said: "Even though it is not referred to as credit, it certainly looks a lot like credit to me."
Mr Comyn spoke about future regulation being more likely: "Generally what happens, as industries or products become much larger and popular and usage expands, is there will be more scrutiny on the consequences and vulnerabilities customers may have.
"I will leave it to the regulators ultimately to make those decisions. But I have no doubt that given the size of the industry now, it must be being reviewed quite closely."
When asked about whether Afterpay's margins are sustainable in the long-term he said, according to the AFR: "No, I don't. When you think about credit cards, understandably the central bank and government have been very focused on making sure payments are low cost. What the buy now, pay later sector has done well and successfully is convince [merchant] customers … they are getting more than just the payment, that they are providing an acquisition channel for new customers, they are helping to increase basket size … Businesses are effectively funding the buy now, pay later opportunity for customers."
The CBA CEO may not have many positive things to say about Afterpay, but it does have an investment in Swedish company Klarna. Afterpay was changing the payment landscape so much that CBA decided it had to invest into a competitor.
My thoughts
CBA is one of the biggest businesses in the country. Though Afterpay is rapidly catching up.
I don't think you can argue against much of Mr Comyn said. It's the job of regulators to make sure they stay on top of financial businesses. Regulation is important for banks. If the buy now, pay later sector becomes an even bigger part of the economy then it's important to make sure that the buy now, pay later (BNPL) sector is doing the right thing by consumers.
There is a question of whether customers who don't use BNPL services should be effectively penalised if BNPL customers get a better payment deal. There is logic to the suggestion that merchants be allowed to charge (some or all of) the Afterpay fees to consumers.
The Afterpay share price has dropped materially back from above the $90 level that it saw in August 2020. The existing share price still has a lot of expectation built into it.
Under the current operating conditions, Afterpay may be able to justify the expectations. But what if the new PayPal 'Pay in 4' offering is popular and goes global? What if regulation causes Afterpay's margins to be cut?
I think it's important to acknowledge with a business like Afterpay that there are a few large risks that could derail the earnings growth outlook. There is also a growing number of competitors. Klarna is one. But there are also other names like Zip Co Ltd (ASX: Z1P), Splitit Ltd (ASX: SPT), Sezzle Inc (ASX: SZL) and so on. Competition could organically lower margins.
Afterpay has done a great job at growing into a global BNPL business. It would be a big business at a share price of $40 or $90. But, investors have to understand that there are potential downsides, which is why I wouldn't feel comfortable about buying shares today. There are other growth ideas I'd rather buy first.
