Misconceptions about Afterpay

I have to start off, by saying I haven’t made a deep study of the field, or of Afterpay, and I’ve only taken a small position in it, but I’m puzzled, even astounded by some of the criticism. For example:

If it’s only 4%, that’s lower than the net interest margin that many banks collect by loaning out in which some of those loans are collateralized by real estate. If this is the case, watch out for this one in a recession. Please correct me if I’m wrong. 4% spread isn’t much when you don’t even do credit checks.

Afterpay is not collecting 4% per YEAR, like a bank loan!!!
They make 4% in six weeks! The customer pays ¼ up front, ¼ in two weeks, and ¼ two weeks later, and a final ¼ two weeks later. And then they put the money back to work.
Compounded, that comes to roughly 41% per year.
And it’s not usury because the customer doesn’t pay the 4%, the merchant pays them for the service they provide.

And wait, that’s not all!
If they get paid $4 on the whole purchase price of $100, but they get paid $25 up front, they are actually getting paid $4 on $75. That comes out to 5.3%!.
If you compound that, they are getting about 56% per year!

But wait, I’m not finished!
A third of the loan is only out for two weeks (and then they get it back to loan it out again), another third is out for four weeks, and a final third is out for six weeks. The average length of time the money is out is only four weeks . And I’m not making this up! Here’s what the company says: “Our entire receivables book has a weighted average duration of less than 30 days.”

Now four weeks goes thirteen times into a 52 week year. If you compound 5.3% thirteen times you get some really large numbers. I get about 76% per year!!! Do you think that’s adequate?

And then misconception two: all the competition makes it impossible for Afterpay to succeed:

I am wondering how AP can compete with companies like Affirm (check your Walmart) or even Synchrony (they have large unit offering financing solutions for merchants). The margins in this business are really small. The typical scenario for 0% loan being merchant has to pay the fee covering the credit loss and profit. With AP not using credit bureaus, it is almost impossible to match the credit loss.

I believe (but haven’t personally verified) that the world’s biggest Buy-Now-Pay-Later (BNPL) operator is Klarna

Well let’s see:

Underlying Sales:
2016 $ 37 million
2017 $ 561 million (+1405%)
2018 $ 2,200 million (+ 289%)
2019 $ 5,200 million (+ 140%)

Total Income (Revenue):
2016 $ 2 million
2017 $ 29 million (+1535%)
2018 $ 117 million (+ 302%)
2019 $ 252 million (+ 115%)

So we have:
Total revenue from $2 million in $252 million in three years
Underlying sales from $37 million to $5,200 million in three years

Clearly the competition is killing them! Or is it? This is nothing like a standard buy now pay later setup where the consumer pays more. This spreads virally. Customers tell their friends and their friends tell their friends.

I just puzzles me how people can say these things.



If you compound 5.3% thirteen times you get some really large numbers. I get about 76% per year!!!

Sorry, arithmetic error. That should be 96% per year!!!



Afterpay is not collecting 4% per YEAR, like a bank loan!!!
They make 4% in six weeks! The customer pays ¼ up front, ¼ in two weeks, and ¼ two weeks later, and a final ¼ two weeks later. And then they put the money back to work.
Compounded, that comes to roughly 41% per year.

Point taken; this is a great return from an annualized return perspective no matter how you slice it. However, not to be picky or split hairs here, so please message board members check my math, but I believe the calculation would look something like this:

In Time Period 0; AfterPay extends $96 on a $100 customer purchase, but immediately receives Payment #1 of 4 ($25)from the customer, so the cash outlay in Time Period 0 = $-96 + $25 = $71.

The $71 is then covered in the following manner; extended 14 days Payment #2 of 4 in the amount of $25; extended days 28 Payment #3 of 4 in the amount of $25, and finally extended 42 days final Payment #4 of 4 of $25.

That’s $75 cash inflow collected over Time Period 1, 2, and 3 for a $71 outflow in Time Period O.

Annualized Return would be 61.01%.


Your math doesn’t factor in the ability of Afterpay to reinvest the 2nd (14-day) and 3rd (28-day) increments.

Your math is equivalent to the $75 coming at the tail end of 42 days.

$4/$71 = 5.633% return
365/42 = 8.69 periods
ARR = 1.05633^8.69 = 1.6101 or 61.01%

This is not correct as it doesn’t take into account reinvestment of interim payments.

What you need to do is take the IRR of periodic cash flows (-71, 25, 25, 25) which gives you a 2.791% return in a two-week period. Annualized, this is about 105%.

However, that last payment isn’t actually $25. Last year it was $24.17, since they lose 83 cents (or 1.1%) of that $75 receivable. Favorably applying the credit losses to final payment, the ARR adjusted for losses is actually 77.4%.



What you need to do is take the IRR of periodic cash flows (-71, 25, 25, 25) which gives you a 2.791% return in a two-week period. Annualized, this is about 105%.


Thanks. You are correct. I was just getting to post that the IRR is 104.98% I realized my mistake the more I thought about it. My annualized return calculator was only taking into consideration a cash outlay in Time Period 0 and then a return of all inflows 42 days out which is obviously incorrect as you point out.

That’s another thing I really like about this board; so many people with so many levels of expertise from so many professional backgrounds.

Thanks for your response and clearing this up.



My point or questions were not about the annualized return on loans vs. that of a bank, it’s what happens when this company has write offs in a recession because they’re essentially a short term lender.

Looking at their income statement for 2019, $46 million of their $264 million in revenue were generated from late fees. That’s 17% of their revenue.

They had $200 million of “Afterpay income” which was essentially money they earned on transactions, and $17 million of “Pay Now” revenue which I don’t fully understand what is and was down from $25 million last year but they say that’s due to an accounting change.

They also wrote off $58.7 million to bad loans. Fully 22% of their total revenue and 29% of their “Afterpay revenue” (what they earned from transactions) was written off as bad loans.

Also they collected 3.9% of underlying sales vs. 4% last year.

So my whole comment was on credit risk. It’s good that it’s only a 6 week loan and not a 3 month loan like I assumed and misremembered.

On top of that their write off metrics are much better year over year but in the end this company is a lender so it has totally different risks compared to your typical SaaS stock discussed here.

I would obviously prefer their revenue be from transactions and not late fees.


Hi Saul, I learn a great deal from your posts. I am trying to understand what the real moat is for Afterpay. Is it going after people who dont have credit cards? The reason i say is because if i buy something on a credit card i dont typically have to pay it atleast until 1 month later so wondering if its a different addressable market Afterpay is targeting?
thank you!

1 Like

fy2018 28.2 million of their 142.3 million in revenue was from late fees, which is 20%. so at least moving in the right direction

from the follow up announcement to the 19 AR

Late fee income as a percentage of total Afterpay statutory income of 18.7%, declining materially
from 24.4% in the pcp. Late fee revenue now represents 0.9% of overall underlying sales, down
40bps on pcp. This was a pleasing result driven by the enhanced consumer protections built into
our product and the benefits of our differentiated business model that is aligned to our

Note: they subtract out “Paynow revenue” from “Total Income” to get those percentages above. Not sure why

Credit card companies charged off 7.9% in 2001, and 11% in 2010. They charged off 3.8% in first quarter of 2018, the highest in 7 years.

So Afterpay is doing much, much better than your typical credit card company. Probably due to the short term nature and structure of the loan that prevents people from overextnding themselves.

In addition, Afterpay has a very attractive balance sheet. They are able to pay their merchants with cash flows from customers rather than resorting to debt.

So while the model has risks worth watching, they seem to be doing fine right now.

1 Like

Hi Student007,

Millennials do not like to use credit-card as they think they will get into the trap of debt. They are the key target market of Afterpay. when you miss a payment on a credit card, you need to pay interest. While afterpay directly deducts money from their account every 2 weeks, so they don’t need to remember to pay bills. They also email you before few days to remind you that payment is due soon. Also, some people will, If given an option, prefer to pay in 4 installments then paying on the spot as they get bit liquidity. So, those who do not use credit cards also use afterpay.

I had previously used afterpay while ago, Just out of curiosity. It was easy to set up an account with them and they have a very user-friendly app.

Furthermore, the Interest rates on credit cards in New Zealand range from 12.99% to 25.99%. So, if customers miss or unable to pay, they are charged huge amount.

In regards to the real moat, I think a huge range of customers and merchants are their moat as all major businesses accept afterpay.



If there is any moat based on customers, then Klarma would have that moat. I really don’t see this as any type of moat business, just an evergreen space of signing up retailers and customers with buy now/pay later zero interest to the customer loans.

Klarna was founded in 2005 and said Tuesday it is “in sight” of $1 billion in annual revenue. The company, which launched in the U.S. in 2015, said it is growing at a rate of 6 million new American customers per year.

Afterpay seems to be growing somewhere around 1 million users in USA. I have seen comments that USA and China are some of the more competitive markets.


Klarma was valued at $5.5 billion in August 2019, almost half what afterpay is currently valued at, despite being roughly 5x the size of afterpay.

Klarma is considering an IPO in 2020, or, they may do more private funding. Based on the fact VC seem to undervalue this sector compared to the market, maybe we will get a chance at an IPO this year.

The good news is Klarma default rates are actually even lower, less than 1% of loans.


Here’s a graphically illustrated comparison of Afterpay and Klarna…helpful snapshot of key differences across markets for those who learn visually. Another thing I learned while looking into this is that while Afterpay always uses 4 installments, Klarna customizes payments with each retailer.




Yes, Klarna is the main competitor.

Klarna is quite different to Afterpay, in that Klarna is a bank, with business interests that extend beyond BNPL. Klarna is privately owned, and was most recently valued at $5.5 BN USD, compared to publicly listed APT’s valuation of $6.8 BN USD. Presumably, Klarna would earn a significantly higher valuation if it were to be public.

Revenue comparisons:

Klarna: $915 M AUD @ 33% yoy growth.
Started US BNPL business: Nov '16. Klarna had about an 18 month head start, and is the US market leader.
8 million monthly app users as at the end of September 2019.
Doesn’t break out US users, but says its the most popular BNPL app on Google Play Store, my review conforms this.
Merchants: 190 k globally (predominantly from German / Swiss / Swedish markets).

Afterpay:$252 M AUD @ 115% yoy growth
Started US BNPL business: Aug '18.
6.6 million active app users as at the end of November 2019.
22 000 users per day joining platform in November. 3M users now in the USA.
Merchants: 45 k globally (predominantly from ANZ markets).

Klarna has a head start in the US and UK. I am OK with this. There is enough room for 2-3 players. It will be interesting to see if Afterpay’s accelerating growth will get them closer to Klarna. I will try to dig a little deeper into each businesses’ strategies and offerings. I know Klarna have a wider variety of payment products, such a debit cards, consumer finance, and deposit taking. This may be appealing to certain merchants.

On bad debts, Afterpay’s net tangible losses (which is gross loss, charge back costs, debt recovery costs, less late fee income) is 0.4% of revenue. Gross loss fell to 1.1% of revenue from 1.5% in FY18. This will probably worsen as the immature US market grows, before falling again as the credit risk is weeded out.

No one knows what will happen with BNPL bad debts in a recession. It is one uncertainty to be aware of, and I don’t think anyone can honestly say they can anticipate how bad debts / net losses will change, and by how much in such an event. Keep this in mind when weighting BNPL businesses in your portfolios.

1 Like

you can see Klarna’s financial statements


and as just pointed out their most recent release (1st 3 quarters of 2019)


shows approx 34% revenue growth

Millennials do not like to use credit-card as they think they will get into the trap of debt. They are the key target market of Afterpay. when you miss a payment on a credit card, you need to pay interest.

My bank bill pay allows me to setup automatic payments on all sorts of schedules.
Couldn’t a Millennial figure out how to do this?


Younger generations are widely thought to be averse to credit—but that’s not necessarily true when it comes to credit cards.

Members of the millennial generation—people between ages 23 and 38—increased their average credit card debt by 7% in the past year, according to recent data from Experian. That’s the second-largest increase in credit card debt among all generations in the past year, and the spike could show that younger consumers are becoming more comfortable using plastic as a payment method.



Millennial credit card debt might be influenced by heavy college tuition loans and the fact that many have yet to hit peak earnings years. They are not necessarily more averse to credit than other people.

Being adverse to having credit card debt is not the same as being adverse to using credit cards. I suspect millennials are perfectly happy using credit cards, they are just educated enough to use a service that doesn’t charge interest if they need to spread out the payments for whatever reason.

American Express has a similar option to create a payment plan. They charge a fee but I have received many offers to create plans without the fee for a certain number of purchases. You pay over 3 or 6 or 9 months depending on the amount. I would think they could easily extend this option just to those with good credit as a way to incentivize spending on their cards, while taking their standard payment fee. It’s certainly not a very user friendly system yet because you have to go online to select the purchase and set the plan and it adds multiple payment options each month (due to having both regular purchase and the payment plan purchased on the same card). But I suspect they could easily leverage their existing data to make the lower fee (3% or so) still worth getting into this space, and they would have a lot more history on the consumer to make decisions on how much to extend to any one customer.

I had a question about these services. I recently have purchased Hoka shoes over the last six months and the last 2 times they have offered a 4 payment plan . I looked up the company they use (QuadPay, a private company with about 100 retailers . My question is what is the selling advatange and or differentiator for each of these companies .

I own a couple small businesses and we use a credit card provider . One of the reason I don’t use Square for restaurants is that they charge a flat 3% fee . I use a company that charges 1.89% which includes all fees . I save over $30K by shopping for the best rate for this service . What is to stop other BNPL company’s from lowering the standard take rate from 4% to 3% or 2%? I ask because just like credit card transaction fees, I can not see any other value besides the service itself. Am I missing something other than the first mover advantage? Is it possible for a company to differentiate itself based on sales execution. Does Afterpay have a superior sales force or value proposition compared to the other players?

I appreciate any thoughts.



They make 4% in six weeks!

I looked at Afterpay website and they are accepting credit cards for payments. I’m curious to know how much fee Afterpay would have to pay to the credit card companies for four transactions. Do they have to pay transaction fee on their share (4%) of merchandise cost or the total cost. If they end up paying transaction fee on the whole merchandise cost, how much they really left with the 4% share they are keeping?



For what it’s worth, I just received an email from J Crew… about Afterpay… explaining how it works, etc. J Crew loves it! Can the rest of American retail be far behind?