Afterpay is the leading buy now, pay later platform in Australia.
Afterpay allows customers to shop now and pay later in four fortnightly payments. If customers pay on time, there are no interest charges or fees.
Like most of our favorite investments, “Afterpay it” has become a verb.
“Afterpay it”
Afterpay’s branding is a competitive advantage.
It has become part of the shopping experience with retailers prominently displaying Afterpay’s services which helps the company’s growth. It’s become so ubiquitous that retailers are finding they need to offer Afterpay as a payment option alongside Visa and Mastercard.
Afterpay have said that once they go live, 24 hours later they process a quarter of that retailer’s sales online.
Data scaling it
Afterpay also has scale, facilitating 10% of all e-commerce transactions in Australia.
The network effect is tremendous, as more customers lead to more retailers, leading to more customers. The business itself benefits from more data, which allows them to improve their risk assessment (30% of transactions are rejected real time) and in the future the company could potentially use data to expand its personalisation capabilities and even recommend retailers to customers.
Afterpay has become one of the largest lead generators for Australian retailers with 2.7 million downloads of its app. We believe they could potentially charge for advertising and data on shopper insights. These services could generate high margins.
What's your budget? Disrupting credit cards
Addressable markets are a key topic for investors. Investment opportunities arise when investors misprice the potential.
A recent example is ride sharing, some investors initially believed the addressable market was just taxi revenue. But because ride sharing requires no registration or licensing (anyone can be a driver) ride sharing businesses actually increased the size of the addressable market. When the size of the addressable market increases, investors may sometimes underestimate the potential.
In Afterpay’s case the investment story has moved from
- an addressable market of online fashion, where Afterpay has 25% market share,
- to 10% share of all e-commerce in Australia,
- to general retail (15% of transactions are now point of sale in store),
- to now include the US and UK retail markets.
We believe Afterpay is not just disrupting e-commerce but that it could also be disrupting credit card spend.
The addressable market size is now trillions. Afterpay is targeting gross sales of AUS$20 billion by 2022.
Like most payment methods Afterpay can be used inappropriately (where people spend more than they can afford) but we believe their service is much more compelling than traditional credit cards.
63% of millennials in the US don’t own a single credit card.
85% of Afterpay transactions are via debit cards with Afterpay’s fortnightly repayments used as a budgeting tool.
Afterpay only approves one order at a time and if a payment is not made customers cannot make any further purchases, whereas access to credit cards may not be extended when credit card debts are not repaid. Instead, the credit card is often still accessible and may trap customers in a debt cycle often with high interest rate charges if payments are not made.
For these reasons, we believe Afterpay’s revenue model is more aligned with customers, and provides its 3.5 million active customers with better outcomes than credit cards.
We think it’s interesting to compare the market value of Afterpay to PayPal, Visa and Mastercard. Although Afterpay is not globally accepted and recognised like the other payment companies but it's an interesting comparison of what could be if this trend of millennials ditching credit cards for buy now pay later services continues.
OMG Kylie Jenner
Social media has been a big driver of growth, with around 24% of Australian millennials becoming customers. Retailers and social media influencers are promoting Afterpay here and overseas. Now that Afterpay is a verb, it’s benefiting from word of mouth, which we think is one of the best forms of advertising. It’s free! Most customers don’t like payment companies but customers like and recommend Afterpay.
Best Aussie retail export since Vegemite
It’s very unusual for an Australian company to see international traction so quickly. The US launch is scaling faster than its launch in Australia.
Why do retailers pay 3.9% to Afterpay?
Customers are not charged if they pay on time, instead Afterpay charges the merchant an average 3.9%.
This cost is higher than Visa and Mastercard but retailers wear this cost as Afterpay increases the chance of a sale, increases average customer spend, generates repeat buyers and reduces retailer fraud and credit risk as Afterpay guarantees payments to the retailer.
It’s compelling that on average, Afterpay partners see a 22% increase in conversion and a 20-30% increase in average orders. The reduction in fraud and credit risks is compelling for retailers online, so it's interesting they have been so successful in store as well at 15% of sales.
Customers are not charged if they pay on time, however there are late fees. Late fees will not exceed 25% of the order amount or $68 (whichever is higher). 17.6% of sales are from late fees but this runs at a loss. Late fees as a % of underlying retailer sales is 0.8%.
Here’s how a customer’s purchase breaks down when they Afterpay it:
Surcharge risk
There is a risk that merchants may charge customers extra to use Afterpay.
Afterpay is very consumer friendly however if merchants add surcharges it makes Afterpay less attractive for customers. We believe there may be a future pressure on the average 3.9% merchant fee as Afterpay becomes a larger percentage of retailer payments.
The regulator
Regulation is also a risk but the Australian government at the time of writing has stated that Afterpay will not have to adopt bank like credit checks on customers.
Afterpay doesn’t charge interest, meaning it’s not subject to the National Credit Act.
A recent Senate committee inquiry into credit and financial products targeted at consumers at risk of financial hardship highlighted the differences between buy now, pay later products like Afterpay and traditional credit products with separate regulatory frameworks.
Afterpay should also benefit from open banking. Open banking makes data more available, leveling the playing field for newer players like Afterpay.
Could you imagine not accepting Visa or Afterpay?
We believe Afterpay is one of the most compelling companies to come out of Australia.
The company's execution has been flawless and initial signs of growth in the US are strong.
Could you imagine running a retail store without being able to accept Visa or Mastercard?
Afterpay is heading into similar territory with customers expecting stores to offer Afterpay as a payment option.
Important! We’re sharing with you our thoughts on the companies in which Spaceship Voyager invests for your informational purposes only. We think it’s important (and interesting!) to let you know what’s happening with Spaceship Voyager’s investments. However, we are not making recommendations to buy or sell holdings in a specific company. Past performance isn’t a reliable indicator or guarantee of future performance.
The Spaceship Universe Portfolio currently invests in Afterpay, Mastercard and Visa.
The Spaceship Index Portfolio currently invests in Mastercard and Visa.
