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:
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.