Guys for those of you in the US finding it difficult to relate to Afterpay from Australia - here’s a US customer case study and story behind their success.
It helps illustrate a few factors:
Credit debt vs Afterpay
Millennial focus
Customer advocacy
https://www.pymnts.com/news/retail/2020/how-contact-us-and-t…
Ant
Does Payday loan or “pay after you buy” really help poor people ? or trap them deeper into debt slavery?
It’s crazy how much they charge on an annualized basis.
Does Payday loan or “pay after you buy” really help poor people ? or trap them deeper into debt slavery?
It’s crazy how much they charge on an annualized basis.
This seems a little OT, but…
In reading the article it sounds like the customer doesn’t pay more than the retail price. The retailer gives up a concession to afterpay, which is not really much different in spirit than the percentage credit card companies get in my view.
There will always be different people who find it advantageous to pay in different ways. Why is my way or your way better than someone else’s? Isn’t going into debt at 18% APR to buy a cup of coffee a trap? 
Make no mistake, I am going into debt to buy the coffee with a credit card, and VISA has a big hammer hanging over my head if I do not pay in 30 days. No one gets upset about that. I wish I got a discount to pay with cash.
How about a $2 ATM charge to withdraw $20, or food at a convenience store, or magazines at newsstand prices, or receiving a 0% auto loan when you pay full price for the car? I’ve been happy to pay all of these at various times because of the convenience they offered, even though there may have been cheaper ways to complete the transaction. Sometimes it is a fair trade in order to do what you want to do with your available time and resources.
Its an interesting company - the growth is clearly impressive.
But typical EBIT margins for a consumer retail company are 7-10%. As I understand it, Afterpay charges the retailer a fee of 3-7% depending on the retailer, around 4% on average. Curious how you guys can get comfortable with the idea that retailers in the US are going to agree to give up almost half of their EBIT (7-10% less 4% = 3-6%)?
The product is obviously attractive if it drives incremental sales i.e. an extra sale at only half EBIT is better than no sale at all. But it does not work at scale.
But thought experiment: imagine if all consumer purchases in the US were made using “buy now pay later”. Every retailer would have their profits cut in half overnight. The American retail industry would collapse. This tells me the product will never see wide adoption, it will remain on the fringes, or they will have to drastically reduce their pricing. Bulls projecting massive growth and or penetration of the market are ignoring simple economics.
Just to clarify a couple of prior posts on this thread:-
Afterpay does NOT charges interest on its instalment payments facility. It DOES provide users with an ability to budget their cash flow. It does NOT allow any further purchasing if there are outstanding repayments to be made. Afterpay DOES practice KYC and KYB practices and is in favour of appropriate industry regulation.
Afterpay profitability is scaling however it is investing in entering new markets whilst the more established markets achieve margin improvements - which shows up in their financials.
Afterpay makes a compelling value proposition that it can bring incremental purchasers to a merchant, that it can increase basket size and increase re-purchasing - that is worth the fees to merchants (who also receive payments in full immediately - unlike credit card companies that delay payment processing by up to 50 days). Merchants are used to having to pay high fees to transaction processors or credit providers without as much benefit. Afterpay is quite mature in NZ and AUS and hasn’t seen take rate declines there, but instead has only experienced continued very high growth rates.
If you want to see how this BNPL adoption trend looks for consumers from Gen X to Millennials to Gen Z, this research has just been published in the UK, (which is usually a similar trend but slightly behind the curve of the US):-
http://www.retailtimes.co.uk/over-60-of-millennials-are-usin…
Ant
Just a few further details on point on 3)
Do you have any evidence that take rate has not declined in AUS and NZ? I have not been able to prove/disprove this (they do not disclose). But their closest competitor Zip has seen significant take rate declines. Zip competes directly for contracts with APT and has also been enjoying exponential growth. I suspect (but don’t know) that these two companies match each others pricing very closely. They offer exactly the same service. Would be interested to hear any evidence-based reasons why that would not be the case.
p13 shows Zip latest revenue yield at 16.8% https://www.asx.com.au/asxpdf/20191129/pdf/44c3gjnj2pwpd3.pd…
The revenue yield was 20.7% in H1 2017. So take rate has declined 19% in just 2 years.
The industry has also been forced to self-regulate earlier this week.
Also AUS/NZ is a structurally different market - transaction processing is substantially more expensive (processing networks out there are much less developed). You can see that in the huge growth companies like Adyen are seeing in AUS, as well as APT). Merchants are keen to have a modern solution which works. So APT is not so expensive on a relative basis.
This is completely different in the US, where transaction processing fees are around 1% (for large retailers. Obviously mom and pop stores pay a lot more to the likes of Square, but APT is not targeting mom and pop stores). So APT in the US is 4x more expensive than the alternative. As I mentioned, if your entire profit margin is 7-10%, the difference between paying 1% and 4% is ENORMOUS. It is the difference between giving away 10% of your profit and 40% of your profit. As I said earlier, obviously this makes sense to drive incremental sales. But it is logically impossible that APT becomes widely adopted, or the option used in “the majority of cases”. Because a merchant cannot afford to give away 40% of his profit in “the majority of cases” - he would go bankrupt.
Hi Exfortisd - just very quickly on this so as not to get into a low quality exchange…
I’ve looked at the financials and the take rate hadn’t budged when I reviewed them - the numbers are all there to calculate. It has been analysed on Hot Copper too with the same conclusion.
Afterpay seem to be penetrating the US market via eCommerce rather than physical retail which allows for use of higher margin solutions (in AUS/NZ Afterpay are penetrating bricks and mortar as well as ecommerce).
Ant
exfortisd,
I don’t think you understand Afterpay’s value proposition to merchants. Merchants generally have gross margins of around 50%, but have very high fixed costs, such as rent, & labour.
Afterpay effectively works as a referral service. Where merchants accept afterpay, their turnover generally increases 30%, through the introduction of Afterpay users to the business, and bringing forward afterpay users expenditure. So paying a 4% fee to achieve an increase in 30% of revenue is great value, as for every extra dollar a merchant receives in sale, 46% will go to the bottom line (excluding discounts / sales). So ti si completely incorrect to say a merchant is giving away 40% of profit. Retail doesn’t work in that way.
To be clear, Afterpay is not competing directly with Visa, Mastercard, Square. It has a completely different value proposition. In relation to competitors, they are all behind Afterpay in terms of merchant numbers and users. There is a significant network effect in play here, as if you have more merchant options, the platform is more attractive to users, who would tend to use just one app. If you have more users, it is more attractive to merchants. A merchant will not care if the fee is 4% or 25 if it can increase his gross income.
seanrapley
This is the fallacy that I am worried bulls get caught up in. As I have said in both my previous posts, I completely understand why merchants like to APT for incremental sales. As you say, it enables them to spread more gross income over fixed costs (I would argue that most online retailers earn closer to a 35% gross margin because delivery, unlike a physical store, is not a fixed cost. The “rent” you mention is not really relevant to an online merchant. But whether it is 50% or 35% is not the core of my argument). So yes, for incremental sales, APT is an attractive option. But do you agree with my thought experiment, that if ALL sales were via APT, and therefore gross margins decreased 4%, then the merchant would indeed give away 40% of net income?
You will say, well of course APT is never going to represent ALL sales. I agree. But it does put a cap on the level of market penetration they can achieve. Even if they became 25% of sales, merchants would take an unsustainable profit hit. So they can only ever be a minority option. Then their service makes a lot more sense for things like clothes or electronics rather than groceries. So they are confined to a few (admittedly large) verticals. Many of these verticals themselves are under immense pressure from Amazon.
Then it becomes a question of valuation. i.e. how much runway do they have left, vs the current price. Obviously the US is a very underpenetrated market so they have decent runway. But there are several competitors - Klarna is dominant in Europe and cheaper than APT. Zip is close behind them in Australia. Everyone offers a very similar service, and we have already seen reductions in pricing. They burn a lot of cash. Many of the (great) companies on this board burn cash, that is not an issue. But most of these companies are selling into very large and expanding markets. Whereas APT has a predefined wall ahead of them.
You can do the maths assuming they reach mature penetration of US and Europe like they have in Australia. At that point in time they will no longer be in hypergrowth and will trade at a much lower revenue multiple. You have to assume that the adult population of these regions is spending a very large amount of money every year through APT to make the numbers stack up (like thousands of dollars per adult). If you compare that to the average disposable income within those geographies, you are betting that people spend a huge amount of their disposable income just with one company. Not even Amazon has achieved that so far.
It sounds like you believe the network effect has real value. I guess that is where we differ. I am of the opinion that retailers will make Klarna and APT compete on price. For example ASOS is a big account of APT. ASOS recently signed up Klarna as well, they now offer both methods. To me that is not symptomatic of a network effect. But of course I may be wrong.
Thanks for post challenging the Afterpay thesis. Here is my response:
"But do you agree with my thought experiment, that if ALL sales were via APT, and therefore gross margins decreased 4%, then the merchant would indeed give away 40% of net income?"
Yes, ALL THINGS BEING EQUAL, they would give away 40% income. But you ignore the following:
• Ultimately around 20% of retail purchasing population will be using afterpay in their markets. After 4 years of operation, ANZ is at 17%, with GMV still growing at 23% in store.
• Afterpay is a referral business, it knows its customers spending habits and can direct their customers to merchants. This can increase merchant sales significantly. In October, Afterpay made 10.3 million such referrals to merchants globally. They have all the data on these referrals, what works, what doesn’t and their referrals are getting better results over time.
• Millennials dislike using credit cards, and being native smartphone users, Afterpay is a more natural way to make payments. Merchants who do not accept this, will lose this cohort of buyers.
The big value proposition Afterpay has for merchants is the data they have on customers buying habits and behaviour. They know what each customer likes, and where they like to spend their money. Make no mistake, this is very valuable, and I don’t think this value has been fully exploited as yet.
"You will say, well of course APT is never going to represent ALL sales. I agree. But it does put a cap on the level of market penetration they can achieve. Even if they became 25% of sales, merchants would take an unsustainable profit hit. So they can only ever be a minority option. Then their service makes a lot more sense for things like clothes or electronics rather than groceries. So they are confined to a few (admittedly large) verticals. Many of these verticals themselves are under immense pressure from Amazon."
Totally agree – it is a niche for small payments of up to $1-2k, it won’t take over all payments. Amazon will not meet and service every niche. It still remains a huge market. Ebay, Visa, and Mastercard have all began partnering with Afterpay – they obviously see where the tide is heading. Amazon Australia signed with Zip Co in December, and I think it is inevitable they will sign with Afterpay in Australia & US.
"Then it becomes a question of valuation. i.e. how much runway do they have left, vs the current price. Obviously the US is a very underpenetrated market so they have decent runway. But there are several competitors –
Klarna is dominant in Europe and cheaper than APT. "
Yes, but Afterpay is only pursuing the UK.
"Zip is close behind them in Australia. "
Ok, Zip is close - Lets see:
Afterpay / Zip customers: 3.0+M /1.8 M
Merchant numbers: +30k / +20k
"Everyone offers a very similar service, and we have already seen reductions in pricing. "
Where? Please point in the direction where you have seen this?
"They burn a lot of cash. Many of the (great) companies on this board burn cash, that is not an issue. But most of these companies are selling into very large and expanding markets. "
In FY2019, they generated operating cashflow of $71.4 M. They no longer need to report quarterly in Australia because they are cashflow positive.
"Whereas APT has a predefined wall ahead of them."
The ANZ business is still growing at over 20 % pa, with improving margins (falling bad debts), with profitability growing faster then revenue. Bed debts fall over time as Afterpay weeds out customers of high credit risk.
"You can do the maths assuming they reach mature penetration of US and Europe like they have in Australia. At that point in time they will no longer be in hypergrowth and will trade at a much lower revenue multiple. "
Yes, that is true of all businesses.
"You have to assume that the adult population of these regions is spending a very large amount of money every year through APT to make the numbers stack up (like thousands of dollars per adult).
Please provide me your math on this, rather than throwing out assertions.
If you compare that to the average disposable income within those geographies, you are betting that people spend a huge amount of their disposable income just with one company. Not even Amazon has achieved that so far."
Assuming Afterpay GPV of $80 billion in 5 years time, this equates to $3.2 billion in revenue. In five years time, revenue growth is likely to be in the 20-25% range. Happy to ride this one for 2-3 years. This is based on the assumption Afterpay reaches the same market penetration that currently prevails in Australia AFTER 4 YEARS, noting growth in the US and UK has been faster so far than what was achieved in Australia. The faster growth is due to the merchant network that was developed in Australia also consisted of international retailers that have championed the brand in the US and UK. THAT IS A NETWORK EFFECT.
"It sounds like you believe the network effect has real value. I guess that is where we differ. I am of the opinion that retailers will make Klarna and APT compete on price. For example ASOS is a big account of APT. ASOS recently signed up Klarna as well, they now offer both methods. To me that is not symptomatic of a network effect. But of course I may be wrong."
Yes, it is normal for retailers to have more than one BNPL option. That is fine. However, it is not normal for customers to have more than one or two apps. That is why I think as the market matures, there will be only 2 or 3 dominant players, and Afterpay is the leader, and most likely one to be in the top 2 or 3.
An example of the network effect is in this article, where customers referred after pay to a major US merchant: [https://www.afr.com/rich-list/how-the-kardashians-helped-nic...](https://www.afr.com/rich-list/how-the-kardashians-helped-nick-molnar-launch-afterpay-in-the-us-20190530-p51sqa)