Why this economist believes ASX 200 BNPL shares are key to keeping the market competitive

BNPL players have their place, this report says.

| More on:
a woman with lots of shopping bags looks upwards towards the sky as if she is pondering something.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX 200 BNPL shares have been pushed lower in 2022 as investors sell off the sector
  • A recent discussion paper argues BNPL companies are important to increase competition within a heavily-concentrated credit card industry
  • It also says the same about customer acquisition with large overseas tech giants

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.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Block, Inc. and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on BNPL shares

A cute young girl stands with her chest thrust out as she zips up the zip of a shiny pink jacket she is wearing.
BNPL shares

Is it too late to buy Zip shares at their 2-year highs?

Thinking long-term remains the key decision factor.

Read more »

A smiling market stall holder selling flowers holds out a payment machine to a customer who hovers her telephone over it to pay via Zip
BNPL shares

Up 327% in a year, the Zip share price just smashed new multi-year highs!

Zip was the second-best performing ASX All Ords stock in FY 2024 and continues to soar into FY 2025.

Read more »

A young woman smiles as she rides a zip line high above the trees.
BNPL shares

Zip shares FY24 recap: Up 256%, what's next for FY25?

Could it be a repeat year for the BNPL player?

Read more »

A happy girl in a yellow playsuit with a zip gives the thumbs up
52-Week Highs

Zip shares surge 10%, bringing gains to 55% in a month

It appears recent developments continue being priced in to the BNPL player's stock.

Read more »

BNPL written on a smartphone.
BNPL shares

Could Apple's latest move boost Zip shares?

Apple is saying goodbye to its Apple Pay Later service less than a year after its launch.

Read more »

A young boy with a sombre face looks down at the zip fastener at the bottom of his jacket as he concentrates on unfastening the clasp.
BNPL shares

Has the Zip share price 'risen too rapidly'?

This expert is telling us to take Zip's profits off the table.

Read more »

A young boy with a sombre face looks down at the zip fastener at the bottom of his jacket as he concentrates on unfastening the clasp.
BNPL shares

Down 10% in April, is the momentous Zip share price rally over or just paused?

Zip shares gave back some of their eye-popping gains in April. What now for the ASX BNPL stock?

Read more »

woman using affirm to pay
BNPL shares

Why is the Zip share price climbing today?

ASX investors are bidding up the Zip share price today.

Read more »