Investing in ASX-listed buy now, pay later (BNPL) shares has been quite rewarding for investors over the last few years.
For example, Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) have delivered returns of 677% and 539% respectively. Meanwhile, the S&P/ASX 200 Index (ASX: XJO) has climbed a relatively paltry 23.5% (before dividends) in comparison.
What was once a downtrodden niche payment option has fast become a rapidly growing payment megatrend used by merchants around the world. As the market opportunity has ballooned, many more BNPL competitors have entered the fray, each putting their own spin on the new payment method.
This leaves investors wondering what the future of ASX BNPL shares could look like? Is the market now saturated with options? Is there any growth left in the sector and will the banks be challenged?
In addressing some of these questions, we take a look at the recently released Capgemini World Payments Report for 2021.
Where lies the future?
It has been 18 months of unprecedented events which have vastly changed the payment landscape in various ways. As a side effect, merchants of all sorts were pushed towards digital options in a bid to survive the challenging environment.
This is supported by the substantial merchant uptake in Afterpay’s services during FY21. During the financial year, Afterpay experienced a 77% increase in active merchants, reaching 98,200.
According to the World Payments Report, similar growth could still be ahead for these new payment companies. Additionally, the report notes there is growing consumer demand for convenient payments.
On the merchant side, retailers require instant payment confirmation, seamless cross-border transactions, and smooth reconciliations.
However, how much growth could still be in front of companies operating in the BNPL industry? Well, BNPL adoption is expected to grow at 28% CAGR [compounded annual growth rate] over the next five years.
This possibly explains why the market has become inundated with newcomers. Australian fintech startups must now compete on the world stage with the likes of Affirm Holdings Inc (NASDAQ: AFRM) and whatever BNPL product Apple Inc (NASDAQ: APPL) cooks up with Goldman Sachs.
Furthermore, the World Payments Report highlights that the COVID-19 pandemic has accelerated the adoption of next-gen payment options. Despite this, next-gen retail non-cash transactions still hold a relatively small share of all payments. As such, Capgemini expects a large runway of adoption ahead for BNPL.
Could ASX BNPL shares disrupt the banks?
Following Square‘s (NASDAQ: SQ) proposed acquisition of Afterpay, many investors have been wondering whether the traditional banks could be disrupted by these large fintechs.
Leading Australian banks — Australian and New Zealand Banking Group Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), and Westpac Banking Corp (ASX: WBC) — took in $1.7 billion in revenue from payments and credit cards in FY21. It is estimated that up to 45% of this income is under threat from BNPL disruptors and tech behemoths.
Adding to this, around 75% of consumers aged 30 years or younger use credit cards less than 20 times a year, but are interested in using BNPL offerings. This demonstrates an evolving shift in consumer habits which leans towards the benefit of ASX BNPL shares.
Likewise, merchants are attracted to the BNPL proposition, as data indicates improved sales metrics upon implementation. A focus group showed merchants witnessed a 20% to 30% rise in conversion and a 50% to 80% increase in order value using BNPL.
However, the rise in BNPL may not be a stake to the heart of banking incumbents either. Global head of cash management at Standard Chartered Bank Philip Panaino states:
As the payment ecosystem expands, banks must foster symbiotic relationships with market players. Opportunities around co-creation, co-innovation, and value creation are enormous. But finding the sweet spot matters most. When non-banks develop value-added payment capabilities, incumbents should focus on expediting innovation, shortening development timeframes, and connecting the dots.
Perhaps the future entails a swathe of complementing products and services between BNPL companies and banks.