The Commonwealth Bank of Australia (ASX: CBA) is the latest player wanting a piece of the buy now, pay later (BNPL) pie.
As BNPL becomes an increasingly crowded space, will this pose a threat to the Afterpay Ltd (ASX: APT) share price?
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CBA's new BNPL product
CBA's BNPL product allows its customers to create a digital Mastercard via the CommBank app, which is accepted anywhere that accepts Mastercard. Customers can use the card for everyday spend for transactions less than $100 and pay in four fortnightly instalments for transactions higher than $100.
The bank aims to roll out its new product in the second half of the year, making it available up to 4 million of its customers. As for merchants, a report in the Australian Financial Review (AFR) has indicated that CBA will charge 1.4% compared to Afterpay's average 3.8%.
Goldman thinks Afterpay will continue to be the BNPL king
Goldman Sachs took a deep dive into the critical success factors for BNPL service providers on 17 March. In this report, the broker maintained a neutral stance on the Afterpay share price with a $127.70 target price.
Mounting competition may be a concern for many investors, but Goldman believes that there "is enough potential growth for several scaled players".
In the case of BNPL in Australia, the broker highlights the critical early mover advantage for Afterpay. Afterpay has already amassed 47% of the BNPL customer base, but more importantly, it "facilitates 66% of the industry's GMV and makes 76% of the industry's Net Transaction Profits".
Goldman thinks that while the new CBA product might offer a lower transaction cost to merchants, Afterpay "has likely aggregated a user base that is possibly different to the user base that CBA may appeal to".
The broker also notes that recent launches of Klarna and the National Australia Bank Ltd (ASX: NAB) no-interest card have yet to impact Afterpay's growth performance.
Looking over at the US market, Goldman notes that the December 2020 quarter suggests a current market penetration of 3-8% for BNPL transactions.
The broker estimates a potential A$160 billion to A$410 billion gross merchandise value (GMV) opportunity should market penetration increase to 10-25% in relevant retail categories. To add some perspective, Afterpay's first-half FY21 North American GMV was A$4.25 billion.
Could history repeat itself?
There has been a steady stream of big players entering the BNPL for the past few years. The Afterpay share price has always been able to shrug off the short-term negative sentiment associated with increasing competition.
In 2016, MasterCard announced its own MasterCard instalment product, which it described as an innovative way to pay, which offers consumers flexible and convenient access to funds when needed.
In 2019, JPMorgan began offering a point-of-sale (POS) finance feature in its Chase mobile app, while MasterCard acquired Vyze, a consumer financing solutions business, to pursue the same market.
In late 2020, CBA and NAB both launched a no-interest credit card to combat BNPL.
CommBank Neo and NAB's StraightUp card would provide customers with up to $3,000 of credit with no interest payments, no late payments and no foreign currency fees but with a fixed, monthly fee.
In light of increasing competition, Afterpay delivered more explosive growth in its 1H21 results. These results highlight a 106% increase in underlying sales to $9.8 billion, while revenue increased 108% to $374.2 million.
Surging sales and revenue translated to a significant 521% increase in earnings before interest, tax, depreciation and amortisation (EBITDA) to $47.9 million.
More recently, Afterpay continues to take leadership in the BNPL sector after launching in France, Spain and Italy.
