Of all the obscure and unexpected trends to come out of the COVID-19 pandemic, there’s one fintech stock story that has dominated headlines: Afterpay, and the buy-now-pay-later competitors following in its footsteps.
Afterpay’s sales were more than 100% up in the 2019-20 financial year, compared to 2019-20, with the final quarter of the financial year performing particularly strongly, even as Australians endured the COVID-19 crisis.
After hitting a low of $8.90 towards the end of March, Afterpay’s share price has since skyrocketed, peaking at just over $75 on July 21, giving the business a market cap of more than $20 billion.
In early-July, Afterpay founders Anthony Eisen and Nick Molnar announced they were selling $250 million in sales, as part of a bid to raise $1 billion in fresh capital for the business.
Rival Zip is also putting in a strong performance, reporting record transaction volumes in the last quarter of the financial year, and recording record highs in its share price.
But there’s also activity among the new kids on the block.
Payright — a startup offering buy-now-pay-later solutions for big-ticket items — raised $12 million in an oversubscribed round earlier this month, with co-founder Piers Redward saying COVID-19 saw an uptick in business.
Speaking to SmartCompany, SBO Financial director and head of growth Jason Andrew notes that we’re seeing a swathe of new entrants in the buy-now-pay-later (BNPL) space.
“It’s almost what Uber was before,” he says.
Where once it seemed every new startup was the ‘Uber for X’, now everyone is launching the ‘Afterpay for’ their specific industry, demographic or business model, he explains.
“It’s seen as a low barrier-to-entry tech play,” he adds.
Research suggests the rise in BNPL has also correlated with a decline in the use of credit cards.
According to data from IBISWorld and the Reserve Bank of Australia, the number of people using credit cards peaked in 2016-17, but has been steadily falling since.
It was about the same time that the use of BNPL started to pick up. In 2015-16, about $100 million was spent through BNPL products. By 2019-20, that had risen to about $700 million.
This trend has only been exacerbated by the COVID-19 crisis, the research suggests. Social distancing measures and ongoing lockdown regulations have normalised online shopping and made consumers more confident when doing so.
At the same time, BNPL options are more often integrated into the final online checkout process.
There are concerning overtones here, however. Consumers facing difficult times during the economic crisis may be treating BNPL as a last resort, purchasing essentials through instalments.
“COVID-19 is expected to increase the unemployment rate, and contribute to weaker consumer sentiment and lower real household incomes in 2020-21, spelling disaster for the retail sector,” IBISWorld senior industry analyst Yin Yeoh said in a statement.
“However, BNPL service providers are likely to benefit from consumers using industry services for essential items.”
Speaking to SmartCompany, Dr Billy Sung, a senior lecturer at the School of Marketing at Curtin Business School, says when we’re considering why BNPL has been growing in popularity, much of it comes down to psychology.
Research has shown that the area of the brain that’s activated when you feel physical pain is the same that’s activated when you part with your hard-earned cash.
Sung explains what he calls the “bottom-dollar effect”.
If you buy a product that’s out of your budget — or out of your perceived budget — when you consume that product or service, “you derive much less satisfaction”, he says.
“A purchase that’s outside of someone’s usual budget actually makes that product or that service, when you’re consuming it, less satisfying,” he adds.
“The consumer learns from this, psychologically.”
So, if you pay from something incrementally, it’s more likely to feel more reasonable within your weekly budget. When you consume it, that makes it all the more satisfying.
“That’s one of the drivers of why [BNPL] is so popular,” Sung says.
“Psychologically speaking, the pain of paying is much less.”
Of course, the same logic could be applied to credit card payments. Again, the consumer doesn’t pay off the full amount straight away.
But, there’s a big difference, Sung says. Namely, compound interest.
“There’s a risk that’s associated,” he explains.
“If I can’t pay off this debt then I will have certain compound interest.”
Therein lies the unique value proposition for BNPL. You’re not paying cash — the most psychologically painful way to purchase — but there’s not as much risk attached as there is with credit card payments.
But there’s yet more psychological tricks at work here. The amount of time between purchasing the product and paying for it also affects the way you feel towards that product, Sung says.
The longer the gap between consuming the product and paying for it, the less satisfied you become.
BNPL strikes a balance between the pain of paying upfront, and the dissatisfaction of paying much later.
“It’s not even positioned as a debt. You’re paying off that product incrementally,” he says.
Of course, during COVID-19, we’re also seeing people purchase more online. Again, that takes the consumer one more step away from the perceived pain of payment. But, it also reduces friction in the very process of signing up to a BNPL provider in the first place.
There’s no standing around awkwardly in a store while you fill in forms and wait for approval, he notes.
“Because of digital consumption, that process becomes much easier,” he says.
“The retailers and the marketers have done a very good job in removing some of the pain-points, and COVID-19 definitely has sped that up simply because it makes us more reliant on these digital platforms.”
The Tesla of Australia?
That said, while BNPL products are undoubtedly picking up more users, Andrews suggests that isn’t necessarily the driving force behind the recent spike in its market cap. He does, however, admit this depends on who you ask.
“There’s a lot of capital around at the moment,” he suggests.
In Australia and elsewhere, governments are trying to inject money into the economy, by dishing out lump-sum cash payments. At the same time, fintechs in the form of stock trading apps mean the stock market is more accessible than ever.
“Retail investors are jumping on their phones and being able to trade on the stock market,” Andrew says.
The brands that are blowing up at the moment are those retail investors are familiar with.
“Tesla is the obvious one. Everyone loves Elon Musk,” Andrew notes.
“Every time he drops a tweet the share price seems to jump 20% — which is completely irrational, but it is what it is,” he adds.
“Afterpay is basically the Tesla of Australia, in terms of that marketing power.”
In the long term, Andrew says it’s very possible these BNPL providers would outside credit cards. In fact, it’s possible they could evolve to take on the big four as well.
“Everyone is waiting for when Afterpay applies for a banking licence,” he says.
The business already has a loyal fanbase, he notes. And the big four don’t exactly have the best reputation — particularly among younger consumers.
“That would be a super interesting move for them, and honestly it’s probably just a matter of time,” Andrew says.
“There’s a gap there for a product to be more aligned with the values of millennials and that segment of the market,” he adds.
Of course, we are seeing the emergence of Australian neobanks, which are also setting out to appeal to a new generation of spenders and doing away with the stuffy old tradition of physical branches.
But, Andrew notes that, at least as of yet, these businesses aren’t generating much in the way of revenue. Afterpay may not quite be profitable, but it has a model that works and a brand that resonates. There’s room for expansion, Andrew says.
“That’s probably another reason why the share price is so bubbly. They see a long-term opportunity with the brand.”
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