It was (is?) the hottest ‘darling’ stock on the ASX in many years.
The rise, rise, fall, rise and rise of Afterpay Ltd (ASX: APT) was a story that kept on giving — and for the true believers, turned into a phenomenal wealth generator.
The company is, of course, still on the ASX, but not for too much longer, assuming the proposed Square Inc (NYSE: SQ) takeover goes ahead.
Regardless, it’s an interesting time in the still relatively new Buy Now Pay Later area.
And there are few people with weakly held opinions on it.
In the red corner, the true believers who think BNPL can mortally wound credit cards, and become a perpetually popular payment method.
In the blue corner, the ‘it’s just a fancy name for what we used to call lay-by, even if you now get the goods upfront’.
So far, the red corner is winning. Just witness the Afterpay $40 billion market capitalisation, and the 50-fold increase in share price in a few short years.
New or not, Afterpay has spurred almost countless competitors and imitators. No less than global payments giant PayPal Holdings Inc (NASDAQ: PYPL) (I own shares, for the record) has its own version, Apple Inc (NASDAQ: AAPL) is rumoured to be launching something similar, and US lookalike, Affirm Holdings Inc (NASDAQ: AFRM), recently signed a deal with Amazon.com, Inc. (NASDAQ: AMZN) (I own shares of the latter company, too).
And I think the ‘lay-by by another name’ crew are right… and wrong.
It is, pretty clearly, just an instalment plan, with a key difference: you get the goods up front. They (and others) are also right that competitors like Humm Group Ltd (ASX: HUM) (previously Flexigroup) and major retailers have been offering 24, 36 and 48 months interest free for years.
So the mode of payment is hardly groundbreaking.
But I disagree with their conclusion.
Afterpay (and its ilk) are nothing new. And yet, they’re entirely new.
They have facilitated instalment payments at huge scale. And — for the retailer — very, very easily (even if the costs are pretty steep).
The retailer signs up, and gets paid (less Afterpay’s somewhat usurious fees) pretty quickly. It doesn’t have to put the stock aside, or manage the customer’s account, keeping track of what instalments have been paid. (If you reckon they could have easily done that themselves, you’re right — but the fact the very few, if any, retailers still offered lay-by tells you everything you need to know.)
It’s also unquestionable that offering Afterpay — at least in the early years — hugely boosted sales. The retailers offered it because customers wanted it. Who wants to turn away a sale?
Which tells us all we need to know about Afterpay’s rise. You can argue all you want about whether it’s truly new, or truly innovation. And you can argue that Afterpay should be considered a finance business rather than a technology one.
For what it’s worth, I agree with both criticisms, and have made similar arguments myself.
But those are somewhat extraneous arguments: even if they’re right (and I think they are), they don’t necessarily impact on the company’s ability to make money — or investors’ ability to profit from same.
The genius of Afterpay wasn’t inventing lay-by. It wasn’t even in inventing instalment plans (I’ve heard from both The Motley Fool’s own Kate Lee, and one of my social media correspondents that versions of both have been available in different forms in South Korea and South America for years).
No, the genius was in making it cool and accessible.
It was no more complex than that. Not to say that doing so was easy — it required imagination, marketing nous and engineering skill — but the concept was deceptively simple: make it desirable for consumers and, in doing so, unmissable for retailers.
Of course, the new breed of BNPL operators did get a little help from regulators.
They chose to pretend that BNPL isn’t actually credit (spoiler alert: it is).
And they chose to allow BNPL providers to have an unfair playing field. Credit card companies aren’t allowed to stop retailers passing on a surcharge. But Afterpay and its ilk have been — for now — allowed to contractually demand that retailers absorb the cost, rather than adding it to a customer’s bill.
And they have the benefit of being innovators. You reckon traditional taxi companies could have started an Uber-like service, even if they wanted to? Regulators would have crucified them. Reckon the banks could have started BNPL, offering unregulated credit and making retailers absorb a huge fee? The papers and consumer groups would have gone nuts.
But, for investors, that’s just information to help us decide whether or not to invest.
Of course, the other thing we need is a view of the future.
And that’s where things get a little cloudy.
Yes, the future is always uncertain, but in this case, there are some specific clouds on the horizon. They may pass by harmlessly, or they might bring the mother of all storms.
First, the regulators might eventually change their tone. If BNPL was to be regulated as credit, there would be meaningful cost burdens, process changes and, potentially, fewer new customers accepted if they didn’t pass the appropriate credit checks.
Second, how many new customers sign up — and how does it impact the spending decisions of current customers — if a retailer adds 3%, 4% or 5% to the purchase price if you want to pay using one of the BNPL options?
Third, how do the BNPL specialists fare if PayPal and Apple, for example, simply integrate BNPL functionality into their native payment gateways?
And lastly — and this might be the big one, even if the odds of success might be low — Suncorp Group Ltd (ASX: SUN) has recently given the banks a template of how they might compete — a fixed limit no-interest credit card which is paid automatically in installments from a linked savings account.
I think the banks could go further, by the way, using EFTPOS and/or a Visa Debit style solution to simply allow customers to pay now (up to a limit) and have those transactions put into a ‘pending’ state; one-quarter of which would be applied to a savings account each fortnight.
Now, imagine that’s available from almost every bank in the country. Consumers wouldn’t need a different app. Retailers wouldn’t need to pay extra fees. And it’d work wherever Visa and/or EFTPOS was accepted.
Will it happen? I don’t know. Even if it did, would consumers use Afterpay anyway, because they like it and/or are used to it?
But as we’ve seen with digital cameras, free email and more: when your product becomes someone else’s feature, it can meaningfully impact your business.
Or maybe not.
Just as quickly as banks and non-bank payments companies are starting to provide BNPL services, Afterpay is moving toward offering transaction accounts and has raised the prospect of mortgages.
Because, like the banks, they know the value of customer relationships. And they know their customers — currently using their services for a tiny, tiny fraction of their yearly spending — have other banking needs that Afterpay might be able to service.
Plus, while BNPL is already omnipresent in Australia and getting that way in the US, there is more opportunity to add (many) more customers in both markets, as well as to continue geographical expansion around the world.
Bottom line? BNPL has both headwinds and tailwinds as a payment method. And the current crop of providers have the advantage of being first-movers and well know, but the disadvantage of being in the sights of the big banks and global payment networks.
The future, then, is far from clear.
Maybe Afterpay shareholders have been dealt a beautiful hand, being able to cash out at just the right time. Or maybe Square will end up locking in all of future benefit of BNPL growth for itself.
For what it’s worth, I’d much rather own Square shares than Afterpay, and if I owned Afterpay, I’d happily take the deal — there’s less raw upside but you also end up with a much more diversified long term payments company.
And if I was a bank shareholder, I’d be pushing for them to copy the Suncorp approach, as quickly as possible. Making Afterpay’s ‘product’ a banking ‘feature’ is the best way to diffuse the threat.