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Beyond Afterpay: the evolution of the buy now, pay later market

Afterpay is one of Australia’s most discussed stocks. But with key 'buy now, pay later' players only scratching the surface of the Australian retail market, Duskho Bajic, Head of Australian Equities Growth, sees room for new competition. Dushko explores the evolving 'buy now, pay later' landscape and shares how he identifies companies poised for success in an interview with Livewire.

Is there still opportunity in the BNPL space or is the space too crowded?

The addressable market for ‘buy now, pay later’, whichever way you cut it, is enormous and the key players in this space have only scratched the surface of it. 


Source: Statistica 2019, NAB Online: Retail Index Dec-18, Company data (Afterpay, Zip Co, Flexigroup, Openpay FY20 ASX investor presentations) as at August 2020.

In Australia, the BNPL sector now represents over 25% of online retail sales, an impressive feat achieved within just 5 years. We agree with the mainstream view that the shift towards online retail is permanent, which means the online addressable market for BNPL will only expand over time. More interestingly, the BNPL sector only represents 3% of the total Australian retail market (based on A$320bn market size) today. Even with shrinking share, in-store sales are likely to remain the majority of retail sales over the near-term – representing an even larger untapped market for BNPL, for both old and new players. Although changing in-store consumer behaviour can be challenging, the dramatic shift to contactless payments in the Australian market over the past 3 years provides precedent of consumers adapting to new technologies.


Source: Statistica 2019, NAB Online: Retail Index Dec-18, FTI consulting group 2017, National Retail Federation 2019, Retail Economics UK 2019. Data as at respective report dates.

Looking at the US, the retail market here is 15x larger than the Australian market – 20-fold when comparing eCommerce only. We estimate that the top 5 BNPL players have only penetrated c.5% of the US online retail market to-date, leaving plenty of room for growth in both existing and new players. Similarly to Australia, US in-store sales remain a large proportion of the total retail market, presenting ample opportunity for BNPL to penetrate the market.

When we extrapolate these trends and statistics to other geographies across Europe and Asia, it shows they are even less penetrated by BNPL. The size of the global opportunity for BNPL suggests it is a space yet to become saturated over the coming years.

What do you look for in a BNPL company, and what do you think is critical for a company to succeed in this space?

When evaluating a BNPL company, we focus on the product offering to the customer – is it easy to use and easy to understand? We believe the customer experience with a payments solution is highly important for adoption. This is especially important for the younger generations who have become accustomed to seamless, ‘on-demand’ services such as Netflix, Uber and Amazon etc. Most BNPL products have simple sign-up and approval processes that take only 1-2 minutes to complete, hence the popularity. However, we believe that the more successful BNPL services stick to a core product, focusing on enhancing the solution through innovation, whilst keeping the fee structure simple. Doing this successfully will keep customer engagement high and boost purchasing frequency. 

In-line with our investment philosophy, we also prefer BNPL companies that operate capital-efficient models. Having a receivables book that turns over at high velocity not only maximises returns, but also de-risks credit losses as the company is able to quickly respond to any changes in its customer base.

Another critical component for a BNPL company to succeed is running a highly scalable business model, in order to expand into new markets and segments. At a micro level, retailers are highly sensitive to changes in their eCommerce platform, especially anything to do with the ‘check-out’. It’s critical for BNPL players to not only implement into a merchant seamlessly, but to have the capacity to take on volume without disruptions to the consumer experience. Afterpay fits the bill on all of our criteria[1].

How is the dynamic of the BNPL space going to change with the entrance of PayPal?

For a payments juggernaut like PayPal to enter the space, we think it brings great validation to the BNPL industry. This is not PayPal’s first attempt into the instalments space. However this time around, the proposed product (‘Pay in 4’) is more akin to the key BNPL players, which really validates this particular model that has been doubted by many. 

PayPal boasts over 320 million active customers and 26 million merchant relationships[2] and should not be dismissed as a competitor.

PayPal charges anywhere between 2.6-2.9% for the service, and the ‘Pay in 4’ product will be offered to merchants with no additional costs. Given BNPL fees average around 4%, PayPal’s entry may stimulate more discussions around price. However, intensive pricing discussions are not new to the BNPL industry given the number of players entering the space. We believe retailers are more focused on partnering with a BNPL that can offer a valuable customer network rather than squeezing out a couple basis points of fees.

On that note, we think PayPal faces several hurdles in its BNPL product launch. Firstly, customer engagement will be crucial. PayPal has generally been an ‘after-thought’ in a consumer’s purchase cycle – a means to an end – which will need to be improved in order to invigorate better spending metrics in its customer base. Secondly, a great proportion of retailers will demand an multi-channel solution to enhance customer engagement from online to in-store. PayPal has historically been an online offering and is yet to bring a greater presence offline. Lastly, it will be interesting to see the route PayPal takes in financing the product and managing credit risk as it will dictate the adoption of the product and impact the customer experience. 

Can you nominate one start-up, new BNPL company that looks promising and has growth prospects. Please also nominate one established BNPL company that this start-up is going to have to chase to be successful[3].

We think Sezzle is one BNPL company to watch. The company has delivered tremendous GMV[4] and customer growth since launching in 2017 (1.7 million customers to-date[5]). What’s fascinating about the Sezzle strategy is the focus on building positive credit history for its customers and becoming a ‘social good’ product. In order to facilitate this strategy, Sezzle has rolled out some impressive product developments such as ‘Sezzle Up’ and ‘Sezzle Anywhere’. These features give customers access to building their credit score and they are rewarded for focusing on building their score.

While the Sezzle product is high-quality, we believe the company will need to partner with an enterprise-sized retailer to gain more traction and compete with the likes of more established BNPL players such as Afterpay. This is important because large retailers want to see a track record of successful facilitation of larger sales volumes. In addition, Afterpay’s success so far has been boosted by these partnerships with major retailers given the broad reach that they have with consumers.

[1] This stock information does not constitute any offer or inducement to enter into any investment activity.
[2] Source: PayPal 2Q20 investor presentation (July 2020)
[3] Any stock mentioned does not constitute any offer or inducement to enter into any investment activity
[4] GMV refers to gross merchandise value
[5] Source: Sezzle 3Q20 investor presentation (Oct 2020)


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