It seems apt for a company such as Afterpay, which has sated many millennials’ desire to own what they want when they want, to be impatient for global domination.
Unlikely, too, given the buy now, pay later service was founded in Australia just six years ago. The company is now valued at almost $40 billion, with a share price that has grown by more than 13,000 per cent since 2016.
In the six months to December 2020 alone, it was responsible for almost $10 billion in sales around the world. Still, the company has never reported a profit and its half-year results, released this week, reported losses had increased to $79.2 million after tax.
Afterpay is the platypus of the fintech market. The brainchild of Nick Molnar – who was selling items from his parents’ jewellery store on eBay while studying at the University of Sydney – it was brought to life by investor and businessman Anthony Eisen.
It is a credit company that handed back its credit licence in 2019 because it didn’t need it; a payday lender, of sorts, with no nosebleed-inducing interest rates; and a loan company that makes most of its money not from the consumers who use it but from retailers. There is also, notably, its devoted online following.
Regulators have been playing catch-up, unsure how to treat the chimeric company. The major banks are fretting about their credit card businesses and whether an individual’s use of a service such as Afterpay should constitute a red flag for the purposes of assessing home loan applications. For industry insiders who have been watching Afterpay’s breathtaking rise, it is one of those ideas that makes others say, “Why didn’t I think of that?”
On the surface, the business model is simple. The company signs up retailers, for example David Jones, which might sell a pair of shoes for $200. Rather than pay the full price on checkout, consumers can purchase via Afterpay in four instalments. Afterpay takes the first quarter, in this case $50, from the buyer as a down payment, and transfers the full purchase price to the retailer.
What’s different about this company, even compared with its direct competitors such as Zip, is that Afterpay’s customers pay no interest. It is the store that pays for the “privilege” of being included on the roster. The fintech company charges stores between 4 and 6 per cent of the sale price of the goods.
At Thursday’s half-yearly results, Afterpay’s executives revealed these merchant fees account for 90 per cent of the company’s half-year revenue of $417 million.
Less than 10 per cent of the group’s income is now recouped from controversial late fees – $10 for a missed repayment and another $7 if that same payment is missed within another week – but these are capped at $68 or one-quarter of the purchase price, whichever is lower.
“In the scheme of these kinds of products, it is definitely up the consumer-friendly end of the market,” the chief executive of another Australian fintech company tells The Saturday Paper.
But this compliment comes with a qualification.
“Afterpay is not a payday lender, it’s free for the consumer to use, but the dangerous part of it is that it encourages people to overspend. I don’t think Afterpay are a bad company, but if there is a bad part, it is this,” the CEO says.
“If you just used Afterpay once, that’s fine in itself, but if you do it many times, that is when it becomes problematic. Because, in a sense, everything you buy seems like it is a quarter of the price and humans are not naturally inclined to think ahead.”
Afterpay’s senior ranks refer to the platform as a “lifestyle enabler” for Generation Z and millennials in particular, who have demonstrated a clear aversion to traditional credit in the United States, Australia and other similar markets.
The average transaction price isn’t particularly high – $150 per customer, which hasn’t changed since the company launched – but, as one senior executive sees it, young consumers “are using Afterpay to smooth their income”.
This isn’t a quirk. It’s the fundamental insight by Molnar that inspired the substance of the company he would go on to create.
“It was founded on a belief that if you could break down the price and give people more flexibility, it would be perceived as a discount,” he told The Australian Financial Review in 2018.
“Maybe it was as simple as being a millennial; I just knew it felt right.”
In this, Molnar, who turned 30 last year and is Australia’s youngest self-made billionaire, has clearly been proved right.
The average age of an Afterpay user is 35, and the company has an almost cult-like following among some. A Facebook group named Afterpay Obsession has nearly 133,000 members who spend their time lobbying retailers to join the company’s roster.
Molnar told investors on Thursday that the company has watched “particularly the millennial cohort start to shift away from credit to debit”.
“Most recently, in the pandemic, there has been a further acceleration towards debit and away from credit,” he said. “In fact, Gen X and older has seen the largest reductions in outstanding credit balances in recent times.”
This has been “amazing” to watch unfold, Molnar said, but even more so as younger generations increase their own income base.
“Afterpay was built for this generation,” he said, referring to millennials. And the entire business model is reliant on “high frequency, high velocity” transactions.
The company revealed on Thursday that its earliest users from Australia and New Zealand are now using the platform 29 times on average each year; that is, 29 transactions. The top 10 per cent of users in the same market are transacting 60 times a year.
New data shows 17 per cent of all Afterpay customers around the world are making purchases directly from the company’s app, which may be a sign they need or wish to only pay in instalments.
It’s clear Molnar and Eisen’s ambitions are global, and fashion retail remains their key focus.
Afterpay will be the principal sponsor of London Fashion Week in a multiyear deal and has been a named sponsor of Australian Fashion Week. It also now has more than five million users in the US, thanks in no small part to the interest of reality TV star turned businesswoman Kim Kardashian West.
Recognising the Kardashian empire could be marketing gold for their company, Molnar and Eisen had desperately been trying to get in touch with the family to no avail.
As the Black Friday sales loomed in 2018, a representative of the Kardashian family – apparently without realising there was a litany of unanswered calls and emails – emailed the Afterpay team through the template contact form on the company’s website.
Molnar told the AFR he received a phone call on Thanksgiving, when there was no one working in Afterpay’s San Francisco office, with Kardashian’s team demanding Afterpay link with their products the same day. “Within two hours, we got them live,” Molnar recalled.
It would prove a fortuitous collaboration for both Afterpay and KKW Beauty, which itself has since ballooned into a billion-dollar company.
Critics of Afterpay maintain the company should be regulated like a traditional credit provider. But because it doesn’t charge consumers for actually providing credit, Afterpay is not covered at all by the National Credit Act. In fact, none of the players in the Australian market are, according to a 2018 report of the Australian Securities and Investments Commission.
On Monday, 95 per cent of the sector, including Afterpay, will become subject to a voluntary code, co-written by the companies themselves alongside the Australian Finance Industry Association, a business lobby. The code’s terms are generally vague but can be enforced by the government body, the Australian Financial Complaints Authority.
The senate select committee on financial technology and regulatory technology, chaired by Liberal Andrew Bragg, is also looking into buy now, pay later, but isn’t due to release its final report on reform options until April. Public commentary from Bragg indicates it’s unlikely the report will trouble Afterpay.
Instead, the company is more worried about potential regulation from the Reserve Bank of Australia, which has questioned whether buy now, pay later schemes ought to be subject to a surcharge framework, as credit cards are. This would allow retailers and stores to pass on the cost of the transactions to consumers.
Behind the scenes, the lobbying by the major firms to avoid such regulation has been intense.
Afterpay has retained Cato & Clive for several years, while its biggest competitor in Australia, Zip Co, has been represented by Liberal Party moderate powerbroker Michael Photios and his firm, Premier National.
To further skirt existing regulations, Afterpay announced a branding deal with Westpac to offer a traditional debit banking account. This will bear the Afterpay logo and join automatically to the platform when customers use the service to buy online or instore.
“We will be able to see your salary going in and learn all these new things,” one senior figure in Afterpay tells The Saturday Paper. That is a powerful step forward for a company that wants you to spend but that doesn’t actually perform credit checks on its customers. Nor does it ever report defaulted payments to credit bureaus.
In the US in particular, this has been lauded as a win for financially excluded communities, those locked into a cycle of curtailed financial freedom by bad credit histories.
In Australia, though, the major banks are unsure what a pattern of usage on a platform such as Afterpay should actually signal. Is it the sign of someone bad with money or is it a budgeting tool? The company really wants you to know it prefers the latter interpretation and is working on a new app and benefits program that rewards on-time payments rather than spend value.
As it expands into novel markets at home, Afterpay grows hungry for the world.
The brand is due for “imminent” launch in the European market and announced a major deal to increase its ownership of Afterpay US to 90 per cent on Thursday. Its growth in Britain is startling. It has also established a presence in Singapore and although publicly the firm is not talking about China, industry insiders say it has the world’s largest market in its sights.
“What we’re doing in Asia and particularly in Singapore does represent early irons in the fire,” Eisen said on Thursday.
He declined to go into specifics but said it’s a matter for the “relatively near future”.
This article was first published in the print edition of The Saturday Paper on February 27, 2021 as "Gen enabler".
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