Square’s $ 29 billion Afterpay bet heralds the future of the ‘buy now, pay later’ trend

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Jack Dorsey’s biggest bet to date has made waves in the fintech and banking world, with investors betting that Square’s $ 29 billion deal to acquire Afterpay indicates the “buy now,” trend. pay later ”is sustainable.

BNPL is based on an emerging thesis that millennials and Gen Z consumers are wary of traditional credit, but still want to borrow money to buy goods. Afterpay allows buyers to divide the cost of goods into four installments without interest, but with late fees if payments are missed.

“We believe we are in the early days of the opportunity before us,” Amrita Ahuja, chief financial officer of Square, said speaking to the Financial Times. “From a buy now, pay later perspective, with online payments alone we see a significant and growing opportunity representing $ 10 billion in payments volume by 2024.”

The deal sees Square join an increasingly crowded space, alongside big players such as Sweden’s Klarna, Affirm, and Silicon Valley’s PayPal, with Apple also exploring the market. The industry also faces an ongoing regulatory battle, as lawmakers question an industry that lends money in an instant, often without a traditional credit check to ensure a consumer will be able to repay his debt.

“This decade is going to be the shake-up of the banking industry,” Klarna chief executive Sebastian Siemiatkowski told CNBC on Monday. “I’m a little surprised to see consolidation happening so early, at this level, but at the same time, I think that’s what we’re going to see in a directional way.”

BNPL has exploded in popularity over the past year thanks to the online shopping boom sparked by the coronavirus pandemic, but industry executives said it had shown strong growth long before the pandemic, alongside a wider trend towards more flexible financing among traditional lenders.

Prior to 2020, banks such as JPMorgan Chase, American Express, and Citigroup each launched flexible payment options tied to existing credit cards as a response to point-of-sale financing.

The past 18 months have seen a significant increase in the number of retailers ready to adopt the supplemental financing option. “There’s a bit of FOMO taking hold,” said Brendan Coughlin of Citizens Financial Group.

Afterpay was among the pioneers of BNPL. It was founded by Sydney neighbors Nick Molnar and Anthony Eisen in 2014, and today has worldwide annual sales of $ 15.6 billion.

The company went public on the Australian Securities Exchange in 2016 at a valuation of AU $ 165 million (US $ 122 million). In May 2020, Chinese tech giant Tencent paid around A $ 300 million for a 5% stake in the Australian group, which was then worth around A $ 8 billion.

The merger with Afterpay will allow Square to offer BNPL services to its millions of merchants, who processed payments worth $ 38.8 billion in its most recent quarter, while also tapping into customers of Afterpay, including Amazon and Target.

The company will also integrate Afterpay into its Cash app, which has around 70 million users and is slowly growing as a one-stop-shop for financial services for payments, cryptocurrency, savings, and investing.

“All of a sudden you have probably the most compelling super app outside of China,” said Chris Brendler of DA Davidson, who is an investor in both companies.

Square gross payment volume

Investors seem convinced. Despite the deal with a 30% premium over Afterpay’s most recent share price, the news pushed Square’s share price up 10% at Monday’s close.

“This is definitely a bull market deal,” said Andrew Atherton, managing director of Union Square Advisors. “People are rewarding Jack Dorsey for his daring and for making a big bet.”

Square’s entry into BNPL comes as the industry becomes increasingly competitive.

Klarna increased its valuation from $ 11 billion in September 2020 to $ 46 billion in June of this year, making it the most valuable standalone company in the industry.

Shares of Affirm, the U.S. online lender led by PayPal co-founder Max Levchin, rose 15% on Monday following the announcement of the Afterpay deal. Affirm, which went public in January and is now valued at $ 17 billion, recently extended its partnership with Shopify to offer BNPL services to U.S. e-commerce platform merchants.

PayPal first entered BNPL in 2008 when its parent company eBay bought Bill Me Later. A year ago, PayPal launched Pay in 4, a free six-week installment offering for consumers and merchants, alongside its longer-term PayPal credit service.

Earlier this year, Apple was hiring staff for its payments division with experience at BNPL, as it looks to expand Apple Pay and its Wallet app. Bloomberg reported last month that the iPhone maker is working with Goldman Sachs to develop an Apple Pay Later service.

Industry executives warn, however, that the more crowded market could erode business margins, while angry consumers may also be put off by the growing number of payment options.

“The current situation, where you have seven buttons when you checkout, I don’t think that’s a lasting situation,” said a consumer finance manager at a major US bank. “I think we are in an interim period.

The industry’s immature and inconsistent regulatory environment poses an even greater threat.

“It’s what everyone calls the Wild West,” said Alyson Clarke, analyst at Forrester. “It is not their responsibility to make sure that you are in good financial health to be able to repay this loan.”

Some companies do a “soft” credit check that briefly examines a person’s position, but “not as much as they should if they lend you money,” Clarke said. “Afterpay does none of these things. “

A survey of Australian consumers, compiled by the country’s financial regulator in 2020, suggested that 21% of BNPL users have missed a payment in the previous 12 months. Almost half of them were between 18 and 29 years old. Morgan Stanley analysts have estimated that Afterpay brings in around $ 70 million a year in late fees.

The UK financial regulator has said BNPL players should be forced to comply with its credit rules as a “matter of urgency.” In the United States, a government consumer protection agency has issued guidelines calling for caution in the face of “tempting” BNPL transactions.

Hinting at other possible tensions, Capital One in December became the first major credit card company to prevent its customers from using its cards to pay for BNPL purchases, calling the practice “risky for customers and customers alike. banks that serve them, “according to Reuters.

Afterpay board member Dana Stalder said the company welcomes the regulation. “Buying now, paying later is just a more consumer-friendly product,” he said. “Consumers understand this, they are not stupid. That’s why they vote with their feet.

Additional reporting by Richard Milne and Tim Bradshaw


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