ASX sector of the year: BNPL goes from strength to strength

The ASX buy now, pay later (BNPL) sector arguably gave the performance of the year in 2020. We take a look at the top players.

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The arrival of COVID-19 in early 2020 changed life as we know it. Forecasts for the year were blown out of the water as the pandemic spread globally. The S&P/ASX 200 Index (ASX: XJO) fell 36% between February and March as concerns about the economic fall out shook investors.

The share market has slowly recovered over the course of 2020, but the recovery has been uneven. While many ASX shares have suffered directly or indirectly as a result of the pandemic, one sector has soared on pandemic tailwinds. Share prices have risen to record highs as a confluence of factors drive customer numbers skyward. We're talking, of course, about buy now, pay later (BNPL) ASX shares. 

BNPL ASX sector of the year 

The BNPL sector gave the performance of the year with the top five ASX shares in the sector delivering serious share price gains. Let's take a look at their performance over the past couple of years: 

Company 2019 share price change 2020 share price increase
Afterpay Ltd (ASX: APT) 153% 283%
Zip Co Ltd (ASX: Z1P) 249% 48%
Sezzle Inc (ASX: SZL) -12% 362%
Splitit Ltd (ASX: SPT) 25% 70%
Openpay Group Ltd (ASX: OPY) -2% 86%

Customer numbers climb 

ASX BNPL shares have seen customer numbers boom over this period. The dual forces of increased digital consumption and millennial spending power have seen BNPL services go from niche to mainstream in just a couple of years.

Increasing numbers of customers are ditching credit cards in favour of the instalment solutions offered by BNPL providers. The pandemic pushed greater numbers of consumers into shopping online, driving more customers to BNPL solutions. 

According to Mergermarket, Australian BNPL revenue amounted to $680 million in FY20 and is expected to reach $1.1 billion by FY25. Nearly 2 million Australians used a BNPL product last year, with BNPL growing from 3% of ecommerce payments in 2018 to 8% in 2019.

BNPL solutions are gaining ground at the expense of credit cards, which are less popular with millennials. COVID has also driven more consumers to the BNPL space, both due to increased online retailing and as an alternative way to finance purchases.

ASX BNPL shares benefit

You only have to take a look at the customer numbers of ASX BNPL shares to see these trends borne out.

Afterpay's 6.1 million active customers at November 2019 had grown to 11.2 million by September 2020. Afterpay shares dropped as low as $8.90 in the March crash, but have staged one of the strongest recoveries in the ASX in 2020, rallying to above $120. Afterpay now has a market capitalisation of more than $34 billion and joined the S&P/ASX 20 Index (ASX: XTL) in the December quarterly rebalance. 

Afterpay is the largest BNPL player on the ASX. It reported $4.1 billion in underlying sales in the first quarter of FY21, a huge 119% increase on the prior corresponding period, which saw $1.9 billion in underlying sales. But Afterpay isn't the only BNPL player seeing huge increases in customers and transactions. Zip Co saw customer numbers increase to 5.3 million by November 2020, up from 1.8 million at the end of 2019. Zip Co recorded quarterly transaction volumes of $943.1 million in the first quarter of FY21, a 96% increase year on year. 

Similarly, Sezzle reported customer numbers of 1.79 million at the end of the September quarter, with transaction volumes of $318.2 millon. This is nearly a threefold increase in customer numbers and fivefold increase in transaction volumes in a year — in the prior corresponding period, Sezzle had 644,509 customers and transaction volumes of just $68.8 million.

It's a similar story for Splitit and Openpay — customer numbers and transaction volumes are increasing rapidly. 

Splitit reported 362,000 total shoppers in the September quarter, with 186,000 active shoppers. This was a 48% increase year on year. Over the same period transaction volumes increased 214% to US70.9 million.

Openpay had 372,000 active customers at the end of the September quarter, a 145% increase year on year. Transaction volumes were $68 million for the quarter, up 95% from $34.9 million in the first quarter of FY20. 

What's next for the BNPL sector? 

So what's next for the BNPL sector? According to Mergermarket, M&A activity is likely to take place in this space as players seek to consolidate market share. The number of competitors in the sector has been increasing over the past couple of years, with some retailers even offering their own BNPL solutions. Traditional finance players and neobanks are also looking at the space with interest.

Although there are some niche BNPL providers, many players are operating in the same space — financing small ticket purchases of under $1,000. BNPL providers need a critical mass of consumers to use their platform in order to attract merchants, so mergers would allow for consolidation of market share. 

BNPL shares performed strongly in 2018 and 2019, but came of age in 2020 as the pandemic pushed consumers to digital finance solutions. The regulatory concerns that plagued the sector have subsided for now, with industry players working with the Australian Securities and Investments Commission on a code of conduct.

As the sector matures, there is no doubt BNPL solutions are here to stay.  

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 ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Sezzle Inc. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Sezzle Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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