ASX 200 buy now, pay later (BNPL) services are outgrowing the growth in credit cards for young consumers, a new report has found.
The report, published by the Australia Institute, also claims large tech and payment platforms have a strong influence on the Australian market and that BNPL provides a healthy level of competition.
It's worth noting the report was commissioned by BNPL provider Afterpay. Let's take a closer look.
BNPL shares crucial for competition
According to the discussion paper, "…innovation in the BNPL market is…disrupting the competitive dynamics in the consumer transaction [and customer acquisition] market".
Economist Richard Denniss, who wrote the paper alongside Matt Saunders, argues that competition between BNPL providers means their products are all slightly different.
The paper demonstrates that the BNPL business model differs from that of credit card companies – a comparable industry.
It notes that the BNPL sector sources its revenue from merchant fees – approximately 4% on each sale – versus interest rates and late fees "that underpin the profitability of credit cards".
According to the discussion paper, "[Block Inc (ASX: SQ2)], for example, receives just under 4% of the sales revenues from merchants who source their customers from their platform".
It continues:
Credit card providers offer a cross subsidy between the large number of customers who carry debt on their high interest credit cards and the small proportion of customers who pay off their entire balance each month to avail themselves of the 'interest free' periods offered on some cards.
Contrastingly, BNPL providers typically rely on merchants' willingness to pay for a low cost customer acquisition service that gives them improved access to a growing cohort of consumers who prefer zero or low cost transaction and instalment services to credit cards.
Customer acquisition will benefit too
This underlines the second part of the paper's thesis: customer acquisition.
ASX 200 BNPL companies are similar to companies like Google and Facebook, the paper argues, in that they help merchants to find potential customers.
As a result, BNPL companies such as Block, Zip Co Ltd (ASX: ZIP), and Laybuy Group Holdings Ltd (ASX: LBY) are in direct competition with the large tech platforms like Google and Facebook, as well as large payments providers like Visa and Mastercard.
The discussion paper found:
Google and Facebook receive over 80% of online advertising revenue in Australia and Visa and Mastercard are responsible for 90% of the value of all credit card transactions in Australia.
A highly competitive customer acquisition market offering a diverse range of services and pricing structures will help to enhance competition in retail markets more generally.
This could have benefits to pricing and product selection, the paper also suggested.
Nevertheless, for investors, the ASX 200 BNPL sector has some way to go before reclaiming its losses of 2022. LayBuy Group, for example, is down more than 92% in the last 12 months, while Zip is down almost 94% in that time.
