In seven years, Afterpay went from an idea to help an internet jewellery business to a company worth $39 billion. By James Hennessy.
What makes Afterpay worth $39 billion
On Monday, United States payments giant Square announced that it intended to acquire Australian buy now, pay later company Afterpay, in a deal worth an expected $39 billion. Afterpay’s product will be rolled into Square’s own app and offered to its millions of merchants.
Even by the lofty standard of recent tech industry valuations, the deal is enormous. It is all the more remarkable when you consider that Afterpay’s stock price was languishing as low as $12 in March last year, slammed by a collapsing sharemarket and predictions of widespread credit defaults. At its peak less than a year later, it traded at more than $150 a share.
At the heart of Afterpay’s success are its two founders, Nick Molnar and Anthony Eisen, who first met as neighbours in 2010, living in the waterfront Sydney suburb of Rose Bay. Molnar was the scion of an eastern suburbs jewellery family who started a teenage side hustle selling their products on eBay. Eisen, 16 years Molnar’s senior, was a money man at the tail-end of a stint with the corporate raiders at Guinness Peat Group.
The pair met when Eisen, curious about the constant flow of packages to and from the Molnar home and Nick’s nocturnal time schedule, asked the boy’s father what he was up to.
Molnar, now Australia’s youngest billionaire, developed the initial concept for Afterpay in 2014 while working with his brother Simon on the family’s internet jewellery business, Ice Online.
Molnar’s mother, Michelle, told The Sydney Morning Herald that the need for a new payment method emerged thanks to the large number of customers who would arrive at the checkout but not actually finish the transaction. Afterpay, whose name was taken from a similar Dutch product and first road-tested with Ice Online, sought to resolve a dual problem: customers who lacked the financial flexibility to close a purchase, and the businesses that were losing those potential customers.
This is a problem as ancient as commerce itself, with a similarly ancient solution: credit. But Molnar, himself a millennial, understood that a fresh cohort of shoppers were wary of debt, having entered adulthood in the wake of the global financial crisis and who were now eking out an economic existence far more precarious than that of their parents.
Thus began Molnar and Eisen’s quest to rebrand credit for a new generation. The nascent company partnered with Australian payments firm Touchcorp to supply the underlying tech, later merging in 2017 under the name Afterpay Touch, and went scouting for retail partners. Its first success was Princess Polly, an online fashion store that set the early model for the ideal buy now, pay later customer: young, female and sans credit card.
The promise of Afterpay and its growing legion of imitators is simple: you get your desired product now, and you pay for it in four interest-free fortnightly instalments. It’s a loan at checkout that scratches the modern itch for instant gratification, with Afterpay fronting the payment to the merchant minus a transaction fee and a cut of between 4 and 6 per cent.
For the customer, the appeal is obvious. Unlike credit cards, which are burdened with complex terms, unforgiving payment schedules and punishing interest rates, Afterpay keeps things streamlined for shoppers accustomed to the slick, frictionless digital interfaces of the smartphone era. It is no accident that payments on Afterpay’s reliable schedules feel more like a Netflix subscription than servicing the debt on a Mastercard.
In exchange for much higher merchant fees than they would pay with a credit card provider, the retailer gains access to Afterpay’s user base, which is predominantly under 34 years of age. The company boasts that its users are reliable return shoppers who fill their online shopping carts to the brim, and the pay-in-four promise means these customers are willing to spend more than they might have otherwise.
Less prominent in Afterpay’s brand mythology are late fees. The company does not charge interest, but it does charge penalties for late payments – “which we hate to do”, it insists on its website – that scale with the size of a purchase and cap out at $68. Late fees currently comprise about 10 per cent of the company’s revenue and remain a focus for consumer groups such as CHOICE, which see them as a potential debt trap, especially for customers who maintain multiple buy now, pay later accounts.
Afterpay listed on the ASX in May 2016 at a valuation of $140 million. By August, it had doubled its share price. In early 2017, it was processing 15 per cent of all online fashion purchases in Australia. The company’s growth was driven in large part by a homespun brand evangelism, with the company encouraging its users to contact their favourite online stores and request they offer Afterpay at checkout.
Regulators began to take notice of this strange new model. This is the other aspect of Afterpay’s success, one the company is less keen to flaunt: like so many other tech successes of the past decade, including Uber and Airbnb, it has thrived in the gaps of a slow-moving regulatory state.
In the company’s telling, it is not a payments platform or lender but a customer acquisition channel for business. This may not persuade a person of average intelligence, but it has provided the company with substantial advantages along its journey to growth. First, and much to the chagrin of traditional credit suppliers such as Australia’s Big Four banks, Afterpay is not obliged to perform credit checks, which it argues provide an incomplete picture of the modern customer and their capacity to pay. Second, Afterpay forbids its partner retailers from passing merchant fees on to the customer, which credit card providers are compelled to allow.
In early 2018, Afterpay spread its wings into the US. It took only two years for its American customer base to grow larger than its Australian one. In 2019, just five years after the company was founded, Molnar and Eisen debuted on The Australian Financial Review’s Rich List, with an estimated wealth of $487 million each. A year later, as the company’s share price surfed upwards on a hot pandemic sharemarket buoyed by stimulus money and locked-down retail traders, they were both billionaires on paper.
By 2021, Afterpay was publicly considering relisting on a US stock exchange. The company, formed in Sydney, was casting off its Australian shackles and becoming American.
The proposed Square deal comes as something of a surprise. Indeed, in a new book on Afterpay released on Tuesday, written by The Australian Financial Review journalists Jonathan Shapiro and James Eyers, the San Francisco-based Square is mentioned only once and in passing.
But the material forces of economic history press on, and it is clear that Afterpay – whether one considers its product radically new or a shrewd rebadging of the same old debt for a new generation – has helped chart a course on what consumer finance will look like in the coming years, for better or worse.
In the months before the Square announcement, a legion of major players signalled their intention to enter the same space, spurred in no small part by Afterpay’s meteoric success. Payments behemoth PayPal recently rolled out its own, functionally identical “Pay in 4” feature to the Australian market, and Apple announced its implementation in July in partnership with Goldman Sachs. The Commonwealth Bank, already invested in Swedish fintech Klarna, which offers a similar product, is also cooking up a local, in-house solution.
For Molnar and Eisen, who will walk away from the deal as phenomenally wealthy Square executives, this saga might be remembered as a historic example of selling at the right moment, just as a buzzy new sector is swallowed up by the global tech titans that so dominate the rest of modern life.
According to the latest figures, a quarter of Australians aged between 18 and 50 had buy now, pay later debt in the first quarter of this year, making it the fourth most common type of debt held. That will be their legacy.
This article was first published in the print edition of The Saturday Paper on Aug 7, 2021 as "Credit when it’s due".
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