Should your business use Afterpay? All the pros and cons explained

australian retail

It is well known within my circle of friends and peers that I am not a fan of Afterpay.

My personal reasons are best saved for a separate blog, but the TL;DR version is because it goes against everything I believe in when it comes to consumerism and developing strong financial habits. I am an accountant, after all.

Accordingly, you will think this blog will be biased. But stop! Before you hit close on your browser, hear me out — I promise to be objective on this one.

Why? Because a lot of our e-commerce clients offer Afterpay and claim it has done wonders for their business. As their accountant and financial advisor, I can attest to that claim. There is no doubt that Afterpay stimulates top-line sales growth.

But at what cost?

In this blog, I’m going to give you an overview of Afterpay, what the costs are and whether your small business should adopt it.

What is Afterpay?

Afterpay is Australia’s fintech darling — a ‘buy-now-pay-later’ platform that allows customers to pay for their purchases over four, fortnightly instalments. Retailers that offer Afterpay get paid immediately, but are charged a merchant fee. It’s like a modern-day credit card with an interest-free period.

Much like other sexy fintech platforms that market to smashed-avocado-eating millennials (cue Spaceship), I want to point out Afterpay is not a new business model. In old-school terms, it’s known as ‘factoring’, where a business sells its accounts receivable to a lender for a fee. The key difference is factoring is typically used for large debtors in B2B companies. Afterpay has brought factoring to consumers (B2C).

How does Afterpay make money from your small business?

Afterpay charges a 4.17% merchant fee on all sales made via the platform. The company also makes money from the customer via late fees.

The benefits of Afterpay

Afterpay claims the main benefit for retailers is it generates more sales. According to its website, it does this by:

  • Incremental sales and new customers — Afterpay converts customers that would have otherwise been abandoned, generating more sales from the existing customer base and creating new customers; and
  • Increased basket size and repeat purchase rates — Afterpay customers spend more per transaction and over their lifetime, and they come back more often.

I’ve been unable to dig up any independent statistics on these claims, but it is backed by some case studies listed on Afterpay’s website.

Furthermore, according to a consumer survey by independent finance product website, Mozo, 50% of Afterpay users said they spent more using Afterpay than using a debit or credit card.

The instant gratification monkey is real.

So, should my small business adopt Afterpay?

As a rational, profit-driven business owner, the question you need to ask yourself is this: does the 4% merchant cost outweigh the additional sales generated from Afterpay users?

My answer? Well, it depends on three factors:

  • Your gross profit margins;
  • The percentage of new sales derived from Afterpay; and
  • The overall percentage mix of sales paid via Afterpay.

Let’s tinker with these assumptions.

Below is a simple financial model of a retail business. As you can see, there is a base case and an adjusted case, which is driven by the above assumptions.

In this example, we have assumed at a base-case level, the business currently does $150,000 of net profit, assuming a gross profit margin of 50%.

Now, what if the business decided to adopt Afterpay?

Under the adjusted model, we have assumed instant gratification customers spend on average 5% more on every transaction, which results in higher sales. We also assume 5% of total sales are paid via the Afterpay platform. These have an impact on the direct costs of the business, because 5% of total sales attracted the merchant fee of 4%

Factoring the 5% of new sales growth and merchant fee, the business generates an additional $41k of new annual profit. Pretty good right?

Under this example, it’s a no-brainer — you should adopt Afterpay.

But, what happens when the hype of Afterpay fades away? What if the buzz of Afterpay retail therapy wears off, and your customers go back to their ordinary spending habits. It’s not unreasonable to assume sales volumes will eventually revert to the mean.

The problem here is because your customers are ‘hooked’ on the Afterpay platform, the overall mix of sales paid via Afterpay is higher — which can actually cost you more money if you’re not generating any new sales as a result of the platform.

To model this, let’s play with the assumption no new sales are generated from the base case, but the overall mix of sales paid via Afterpay shifts from 5% to 15%.

As you can see, it’s a very different result. The business is actually worse off.

Why? Because there are no new sales being generated from Afterpay. Furthermore, the sales the customer would ordinarily buy via alternative payments (cash or credit card) is now paid via Afterpay, which attracts a higher merchant fee. The result is that the overall costs of the business increase, with no actual benefit.

Economically speaking, one could argue Afterpay has short-term benefits to your business due to the increased sales volume — but over the long term it may end up eroding your profitability.

Furthermore, savvy consumers who do not choose to pay you via Afterpay might try to request a discount if they pay via the ‘old-school’ system of cash or credit card. I mean, after all, it saves your business the 4% merchant fee. The net result is the same, so why not pass the 4% fee as a discount to the customer instead of paying it to Afterpay?

A real-life example

Of course, I tried this. My purchase was a To To coffee table from Fantastic Furniture.

Full disclosure, I don’t normally buy furniture — this was for my wife’s Christmas present. If you’re reading this Liz … surprise!

Here’s the chat transcript of my attempted discount negotiation.

Unfortunately, Ryan couldn’t deliver on the discount due to their store policy (probably above his pay grade). Anyway, it was worth a shot.

In conclusion

It’s highly likely adopting Afterpay is good for your business in the short term. If it indeed does generate more sales, then it’s definitely a win for you. Just keep track of the percentage of sales made via Afterpay so you can understand the long-term impact of it on your business’s profitability.

The risk is your loyal customers simply use Afterpay for everything, which results in cannibalizing existing sales at higher merchant fees for no benefit.

Remember, revenue is vanity, but profit is sanity.

NOW READ: Businesses welcome Afterpay inquiry: Should ‘buy-now-pay-later’ be regulated?

NOW READ: How lending startups like Afterpay make their money


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3 years ago

Hmmh, 5% is a little light on don’t you think?

The Steve Madden Group, a leading footwear and fashion accessories retailer, said:

“We were very excited to launch Afterpay in the US market after seeing its success in Australia. In the first week of going live, Afterpay was the second most popular payment method after credit cards and we saw a 25% uplift in average order value”.

I understand your point re if they go back to spending less but there are no signs of that yet.

Jason Andrew
Jason Andrew
3 years ago
Reply to  Roger

The 5% was an arbitrary value used to make a point. Happy to send you my financial model so you can play with the variables if you like.

Agreed we haven’t seen hard evidence of consumers going back to spending less – time will tell!

Storewall Australia
3 years ago

The rates will also vary. I have seen them like this: The rate to use Afterpay is 6% + 30c (plus GST) on each transaction made through Afterpay. This is the only fee you will incur with Afterpay (no setup/installation/plugin fees).

Flawed Logic
Flawed Logic
3 years ago

Your logic is somewhat flawed when asking Fantastic Furniture for a discount – they’ll still have to pay a gateway fee whether using Afterpay or not so they’d actually end up losing more than 4% if they accepted your offer.

The other benefit to Afterpay is the increased level of trustworthiness of the brand. As retailers are checked prior to going live, you are more likely to get your goods from a retailer that offers Afterpay than one that doesn’t (whether you use Afterpay or not).

The last 2 retailers I purchased from that didn’t offer Afterpay at all turned out to be fake websites scamming money.

1 year ago

If you’re using a credit card or debit card the companies pay like a 2% fee right? So really afterpay would
Only be charging 2% more?

1 year ago
Reply to  Sandra

Not really. If you use Shopify, Shopify will take an additional 1% if the charge is not through their payment portal, Shop. It all adds up so quick . On top of al that Afterpay keeps the fees when your order is returned, refunded or canceled.

11 months ago
Reply to  Brook

Another thing everyone forgets is that every gateway your payments flow through charge further fees. For example, Shopify charges it’s settlement fees, but if your customer chose Paypal as their payment option, you end up being charged further PayPal fees when you cash out to your checking account. I lose 4.3% to every sale paid in this fashion. Tack on Afterpay’s 6 odd % and I’m down over 10%. Luckily, through Shopify, my monthly volume mostly offsets their monthly fee. Imagine the nightmare of an eBay sale – they rake around 12% on a transaction. Lets say you’re also paying the pirates a promotion fee to “get your product noticed”, I set mine at 6% compared to the 9% they suggested, so now I’m at around 18% already … addon Afterpay’s 6%, and I’m going to be hemorrhaging around 24%! It all adds up really quickly. Not to mention that with intense competition it’s a temptation to have the “best prices” to be a good deal!

1 year ago

Its almost too obvious but not mentioned. Customers that like afterpay may choose to shop at a competitor that offers afterpay as a payment option. (If you don’t offer it)

Last edited 1 year ago by Dank
1 year ago

One HUGE thing no one is discussing when it comes to these installment ads is they KEEP THE FEES when order are returned refunded or even canceled before you get to ship. Imagine getting $10,000 of returns from December holiday shopping and you have let them keep $500.

1 year ago

Love the article

Last edited 1 year ago by Jimmy
11 months ago

It all depends on your perspective. It’s great for customers. And I personally believe it’s great for business too. Sure, they may pay 2-3% more per transaction in fees, but that’s a transaction that likely would not have taken place without an installment service. And remember, customers generally spend more when using the platforms like Afterpay or Klarna. That’s the whole point! I don’t see any negatives here. The only potential negative may be that these services don’t report to credit agencies like Equifax or Experian. These platforms work just like a credit card, without the benefit of actually helping your credit. But, again, it’s bringing low-income customers to the table. Customers who otherwise would not have been able to make such a purchase due to poor credit or the inability to secure a traditional credit card. I see it as a win-win. I use Afterpay quite a bit. And my purchases have increased slowly, but steadily over time. For instance: I started out with Afterpay buying a $50 sweater around Christmas time. That was almost a year ago. Just 3 weeks ago, I purchased a $400 LG television from Best Buy, and I only have one more payment left on it. I would not have been able to afford the TV had I not used Afterpay, because I do not have any credit cards. I am working to build up my credit, but in the meantime, Afterpay has been an alternative & positive experience for myself and many others. Merchants pay fees to allow customers to pay by credit & debit. What’s the difference?

1 month ago

Afterpay is trash

1 month ago

Afterpay is good and bad

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