Investing in ASX buy now, pay later (BNPL) shares
While their terms may differ slightly, all buy now, pay later (BNPL) companies essentially give their customers the ability to do the same thing: purchase stuff they otherwise couldn’t afford, and pay the amount back in smaller, more manageable chunks over time.
What are buy now, pay later (BNPL) shares?
BNPL refers to a group of financial services companies that sell customers lines of credit. While BNPL is a relatively new type of personal lending, it is in many ways similar to an old-fashioned laybuy agreement.
Both arrangements allow customers to pay off purchases in manageable instalments over time. However, unlike a laybuy agreement where the customer isn’t permitted to take the purchased product home until they have paid it off in full, BNPL gives the customer immediate access to the purchased product or service.
And although that might sound suspiciously like a regular old personal loan, there is a key difference: BNPL companies typically don’t charge any interest. Instead, they make their money by charging a small fee to the retailer for the use of their service.
The incentive for the retailer is that because BNPL applications are generally approved within seconds, they can give their customers instant access to more products, boosting overall sales volumes.
The rise (and fall?) of BNPL in Australia
The company most synonymous with the BNPL industry in Australia is Afterpay, a tech stock darling and one of the true success stories of the ASX.
Initially listing on the exchange in May 2016 with a valuation of just $100 million, Afterpay shares soared to astronomical heights over the next few years. In 2021, it was acquired by US fintech Block Inc (NYSE: SQ) for an eye-watering $39 billion.
Seeing Afterpay’s success, many other companies offering similar BNPL products soon popped up, and before long there were enough of them to carve out their own section of the financial sector. Companies like Zip and Sezzle gained popularity in their own right.
The share prices of these companies skyrocketed during the pandemic. Despite all the negative impacts that social restrictions and lockdowns had on brick-and-mortar retailers, demand for BNPL products ballooned due to their easy integration with e-commerce platforms.
However, more recently it has been a completely different story. The share price of just about every BNPL company is languishing at multi-year lows in 2022, with supply chain issues, inflation fears, and concerns about rising interest rates scaring investors away from fintech and e-commerce shares.
5 top ASX BNPL share performers in 2022
(based on market capitalisation from high to low)
|Block Inc (ASX: SQ2)||$59.36 billion||Acquired Afterpay in an all-scrip deal worth $39 billion|
|Zip Co Ltd (ASX: ZIP)||$585 million||Australian-based global BNPL company|
|Humm Group Ltd
|$362 million||Recently announced the sale of its BNPL business to
Latitude Group Holdings
|Splitit Ltd (ASX: SPT)||$139 million||BNPL company that allows you to use your existing credit
card to guarantee the purchase
|Sezzle Inc (ASX: SZL)||$107 million||BNPL company that allows you to split your purchases
into four equal repayments
Block – formerly named Square, hence the ASX ticker SQ2 – is a US global technology and financial services company. It is mainly known for developing technology targeted at small to mid-sized businesses that allowed them to use tablet and mobile devices as point-of-sale systems. Then, in 2021, Block expanded into the BNPL space with the purchase of leading Australian BNPL company Afterpay in an all-scrip deal valuing Afterpay at a whopping $39 billion.
Afterpay is the company that kicked off the BNPL megatrend. It offered customers the ability to purchase the products they wanted – but couldn’t currently afford – with only a small deposit, under the condition that they would pay off the remaining balance in three further payments over a six-week period.
What’s more, borrowers didn’t have to pay any interest or fees (so long as they made their regular repayments), making it a much cheaper option than a credit card or a pay-day lender. It gave consumers the ability to break up the full price of their purchase into more manageable chunks.
It became a global success, amassing millions of repeat customers across Australia, the US, and the United Kingdom.
- Market cap: $59.36 billion (as of 28 May 2022)
- Average daily volume: 200,000
- Headquarters: San Francisco, United States
Zip is Afterpay’s next biggest rival – at least in Australia. It claims to serve more than 11 million customers across 14 different countries. It has partnered with many well-known brands, including Amazon.com, Inc and JB Hi-Fi Limited (ASX: JBH).
Zip is similar to Afterpay, although it offers two different products. Zip Pay gives customers access to up to $1,000 to use for online or in-store purchases – you can even use the cash to pay many of your bills on BPAY. Zip Pay also gives customers more flexibility to determine their repayment schedule. Payments as small as $10 can be made weekly, fortnightly, or monthly, as long as they cover a minimum monthly repayment amount.
For larger purchases, Zip offers Zip Money, another BNPL product that allows customers to borrow between $1,000 and $5,000 – and even as much as $50,000 with some merchants. Customers have a guaranteed interest-free period of three months, although it is up to 36 months with some retailers, and there are some additional establishment and account administration fees.
- Market cap: $585 million (as of 28 May 2022)
- Average daily volume: 11.3 million
- Headquarters: Sydney, New South Wales
Humm’s BNPL offering is similar to Zip, with two distinct products depending on the size of the purchase. Humm’s ‘Little things’ allows customers to borrow up to $2,000 for purchases (often without having to pay any fees), while ‘Big things’ gives customers access to up to $30,000 in credit, with some additional establishment and administration fees attached.
In February, Humm announced that it was selling its BNPL, instalment, and credit card operations to financial services company Latitude Group Holdings Ltd (ASX: LFS) for a total consideration of $335 million (comprising $35 million in cash, plus 150 million Latitude shares).
Latitude believes it can realise cost synergies and other benefits from the deal once the business is fully integrated with its existing operations.
- Market cap: $362 million (as of 28 May 2022)
- Average daily volume: 1.6 million
- Headquarters: Sydney, NSW
Splitit allows customers to use the available balance on their existing credit cards to make interest-free purchases. When customers make a purchase, Splitit puts a hold on their credit card for the amount owing. Customers then pay this amount off in a series of interest-free payments with Splitit, before the hold is released.
This has a couple of added benefits. Firstly, it allows customers to continue to earn loyalty points and rewards with their credit card providers. Secondly, there is no need for approvals or credit checks because Splitit uses customers’ existing lines of credit.
- Market cap: $139 million (as of 28 May 2022)
- Average daily volume: 2.1 million
- Headquarters: New York, US
Sezzle is another BNPL company with a similar service to Afterpay, allowing customers to purchase items now and pay them off over a six-week period. Customers make a small deposit upfront at the time of purchase, and then the remaining balance is split into three additional fortnightly payments.
In February, Zip announced it was acquiring Sezzle for an all-scrip deal valued at $491 million (at the time). However, the BNPL landscape has changed a fair bit since then, with share prices much lower than they were back in February. This has led many to wonder if the terms of the acquisition might be updated – or if the deal might be scrapped altogether.
- Market cap: $107 million (as of 28 May 2022)
- Average daily volume: 900,000
- Headquarters: Minneapolis, US
The Australian BNPL sector in a post-pandemic world
Consumers seem to enjoy the freedom that BNPL services provide them – so it does seem like it is here to stay. It is a global financial industry pushed by celebrities, Instagram influencers, and major international clothing brands and retailers.
However, recent massive share price falls have shown that it is still a risky part of the market. The BNPL sector relies heavily on solid consumer confidence. It requires people to spend lots of money shopping to earn its revenue. With interest rates rising and inflation starting to bite, households may start to cut back on discretionary spending – which could spell more trouble for the sector.
It is also now an overcrowded sector. With so many companies offering essentially similar services, not all will gain a big enough share of the market to survive. The recent deals between Humm and Latitude, and then Zip and Sezzle – not to mention Block and Afterpay – may still only be the beginning. There could be a fair bit more M&A activity to come for the sector as competitors continue to jostle for market share.
Are ASX BNPL shares right for you?
Recent share price drops have revealed some weakness in the BNPL sector. Rising interest rates, inflation concerns, and ongoing supply chain issues are all dampening consumer confidence, which makes the short-term outlook for the sector hard to predict.
However, BNPL is clearly popular with customers, who took the service up in record numbers during the pandemic. And despite the near-term uncertainty, there may still be growth opportunities in the BNPL sector over the longer term. But the sector is already getting crowded with many companies offering very similar products, which means not all newcomers will ultimately survive.
This might make investing in BNPL shares a bit risky, and so, before investing, make sure that BNPL shares fit within your personal risk appetite.
Last updated June 2022. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Rhys Brock has positions in Block, Inc., Sezzle Inc, and ZIPCOLTD FPO. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Block, Inc., and ZIPCOLTD FPO. The Motley Fool Australia has positions in and has recommended Block, Inc. The Motley Fool Australia has recommended Amazon and Humm Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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