US buy now, pay later (BNPL) giant Affirm plans to enter the Australian market, according to rumours reported by the Australian Financial Review. This comes as market leader Afterpay Ltd (ASX: APT) reveals strategies to return more value to merchants. The Afterpay share price is already down by 6.68% since Monday after a report from the Australian Securities and Investments Commission (ASIC).
Affirm is a privately owned US BNPL company. Its CEO and co-founder is Max Levchin, who also co-founded Paypal Holdings Inc (NASDAQ: PYPL). At present, Affirm is the largest BNPL company in the United States by monthly active users. Where Afterpay leads in total US users, and Sezzle Inc (ASX: SZL) leads in total US merchants, the US giant operates a different business model with payments scheduled over longer terms.
What's weighing on the Afterpay share price?
The ASIC report highlighted a range of issues in the BNPL sector, focusing on consumer impacts. In particular, it pointed to the number of people missing payments. As well as those who are forced to cut back on essentials like meals to pay for BNPL purchases.
Nonetheless, Afterpay was quick to respond, pointing out that consumers benefitted from more choice as competition expands. As opposed to a previously narrow, bank-dominated payments industry. The Australian market leader went on to laud its built-in consumer protections, juxtaposing it to other BNPL providers. This includes never selling or enforcing debt.
Afterpay also revealed some of its own research that reached different conclusions. For example, that there was no causal link between spending on Afterpay and changes in spending on essentials. Also, that there was no statistical relationship between merchant growth in Afterpay and how much their prices changed.
Swimming with sharks
Affirm is only the latest giant to enter the BNPL sector, and it comes at an interesting time given the sabre-rattling by ASIC. On 1 September, payments giant Paypal announced it would be entering the market. It boasts an 82% better conversion rate than other forms of payment and it already has 237 million shoppers globally. After zooming up the charts in previous months, the Afterpay share price has slowed since close of trading on 31 August, rising by just 3.5%.
Furthermore, Commonwealth Bank of Australia (ASX: CBA) has already entered the BNPL market locally via its partnership with Swedish private bank, Klarna. In addition, there have been a raft of recent IPOs, into an already crowded marketplace, by companies with new twists on the business model. For example, an interesting twist is the approach by unlisted BNPL challenger, Limepay.
The Limepay technology allows companies to build their own BNPL capability. Thus preserving the relationship with customers, rather than having a third party sell them competitor products.
Moves to defend the Afterpay share price
The threat to BNPL companies is to merchant margins. Particularly as new market entrants try to gain rapid merchant coverage. In order to counter this, Afterpay has announced several initiatives in its AGM designed to add value to merchant partners. For example, its Cross Border Trade also builds on our global expansion by enabling all merchants to open their e-commerce sites to Australian, British, Canadian and New Zealand shoppers.
Moreover, the company has also premiered the Next Gen index. An economic series focussing on consumer spending and the role of BNPL. This has highlighted that Gen Z and the millennials have been the first to increase spending during COVID-19.
