Jack Dorsey’s biggest gamble to date has caused ripples in the financial technology and banking industry. Investors are betting on Square’s $29 billion all-stock transaction Acquired Afterpay Shows that the “buy now, pay later” trend has staying power.
BNPL relies on an emerging argument that millennials and Gen Z consumers do not trust traditional credit, but still hope Borrow money to buy things. Afterpay allows shoppers to divide the cost of goods into four installments without paying interest-but if they miss the payment, they will have to pay a late fee.
Square’s Chief Financial Officer Amrita Ahuja said in an interview with the Financial Times: “We think we are in the early stages of facing opportunities.” In 2024, the payment volume will reach 10 trillion U.S. dollars. This is a huge and growing opportunity.”
This deal allows Square to join an increasingly crowded space, and Big player For example, Sweden’s Klarna, Silicon Valley’s Affirm and PayPal, Apple is also exploring this market. The industry is also facing a brewing regulatory struggle, as lawmakers question an industry that lends instant loans, usually without traditional credit checks to ensure that consumers can repay their debts.
“This decade will be a drastic change in the banking industry,” Klarna CEO Sebastian Siemiatkowski said on CNBC on Monday. “I am a little surprised to see such an early integration happening at this level, but at the same point in time, I think this is the direction we will see.”
Due to the online shopping boom driven by the coronavirus pandemic, BNPL has been very popular in the past year, but industry executives say that it has shown strong growth before the pandemic, and traditional lenders have also seen more flexible financing. Broader trends.
Entering 2020, banks such as JPMorgan Chase, American Express, and Citigroup have all introduced flexible payment options tied to existing credit cards to deal with point-of-sale financing.
In the past 18 months, the number of retailers willing to adopt additional financing options has increased significantly. Brendan Coughlin of Citizens Financial Group said: “There is a little FOMO setup.”
Afterpay is one of the pioneers of BNPL. It was founded in 2014 by Sydney neighbors Nick Molnar and Anthony Eisen, and now has global annual sales of $15.6 billion.
The company was listed on the Australian Stock Exchange in 2016 and is valued at AUD 165 million (USD 122 million). In May 2020, Chinese technology giant Tencent bought a 5% stake in the Australian group for about A$300 million, which was valued at about A$8 billion at the time.
The cooperation with Afterpay will enable Square to provide BNPL services to its millions of merchants, who have processed payments worth $38.8 billion in the most recent quarter, while also being able to take advantage of Afterpay’s customers, including Amazon and Target.
The company will also integrate Afterpay into its Cash App, which has approximately 70 million users and is slowly building into a one-stop financial services store for payments, cryptocurrency, savings and investment.
“Suddenly, you may have the most compelling super app outside of China,” said Chris Brendler of DA Davidson, who is an investor in these two companies.
Investors seem to be convinced. Although the deal was a 30% premium to Afterpay’s latest stock price, the news made Square’s stock price up 10% at the close of trading on Monday.
“This is undoubtedly a bull market transaction,” said Andrew Atherton, managing director of Union Square Consultants. “People reward Jack Dorsey for his boldness and big bets.”
When Square entered BNPL, the industry became increasingly competitive.
Klarna’s valuation increased from US$11 billion in September 2020 to US$46 billion in June this year, making it the most valuable independent company in the industry.
After the news of the Afterpay transaction came out, the share price of Affirm, the AOL lender led by PayPal co-founder Max Levchin, rose 15% on Monday.Confirm, which Listed In January, now worth $17 billion, it recently expanded its partnership with Shopify to provide BNPL services to US merchants on e-commerce platforms.
PayPal first entered BNPL in 2008, when its parent company eBay acquired Bill Me Later. A year ago, PayPal launched Pay in 4, which is a six-week installment payment service that is free for consumers and merchants and provides long-term PayPal Credit services.
Earlier this year, Apple hiring employee Because of its payment department with experience in BNPL, because it wants to expand Apple Pay and its wallet application. Bloomberg reported last month that the iPhone maker is working with Goldman Sachs to develop the Apple Pay Later service.
However, industry executives warn that a more crowded market may erode corporate profit margins, and flustered consumers may also be discouraged by the fast-growing checkout options.
A consumer finance executive at a top US bank said: “The current situation, there are seven buttons at the checkout. I don’t think this is a sustainable situation.” “I think we are in a transitional period.”
The bigger threat remains the immature and inconsistent regulatory environment in the industry.
“This is what everyone calls the Wild West,” said Forrester analyst Alyson Clarke. “They are not responsible for ensuring that you are financially sound and able to repay the loan.”
Clark said that some companies will conduct “soft” credit checks to briefly check a person’s condition, but “if they lend you money, they won’t do as much as they should.” “Afterpay doesn’t do any of these.”
A survey of Australian consumers conducted by the country’s financial regulator in 2020 revealed that 21% of BNPL users have missed payments in the past 12 months. Almost half of them are between 18 and 29 years old. Morgan Stanley analysts estimate that Afterpay’s annual late fee is about $70.
The British financial regulator said that BNPL participants should be forced Comply with its credit rules As an “emergency”. In the United States, a government consumer protection agency issued guidance urging caution about “tempting” BNPL transactions.
To hint at possible further tensions, Capital One became the first major credit card company in December to prevent customers from using their cards to pay for BNPL purchases, saying that this practice “is risky for customers and the banks that provide services to them. of”. Reuters.
Dana Stalder, a member of Afterpay’s board of directors, said the company welcomes supervision. “Buying now and paying later is just a more user-friendly consumer product,” he said. “Consumers understand this and they are not stupid. That’s why they vote with their feet.”
Additional reporting by Richard Milne and Tim Bradshaw