The market value of the ‘buy now, pay later’ (BNPL) sector as represented by 13 ASX companies has mushroomed to $53.6bn as share price valuations have soared over the past year.

Sector leader Afterpay (ASX:APT) now has a market value of $42.50bn, up from $19.8bn in August 2020, and its growth was acknowledged in December when it joined the ASX 200.

The ASX 200 index represents the 200 largest public companies listed on Australian Securities Exchange.

The BNPL sector’s second largest ASX company Zip (ASX:Z1P) has grown to $6.8bn from $2.4bn over the same period, and has nearly 6 million customers worldwide.

The stock market values of the next three largest BNPL companies in Australia — Humm Group (ASX:HUM), Splitit (ASX:SPT) and Sezzle (ASX:SZL) range between $575m to $1.1bn.

This is up from a market value of $385m and $715m for the third, fourth and fifth largest BNPL companies in Australia last August, when this guide was first written.

The massive popularity of BNPL among consumers of all ages is a testament to the inventiveness of Australia’s retail and finance sectors in developing a flexible payments product.

The innovation has even spread abroad to countries including the US and UK, where some Australian BNPL companies now have operations.


ASX Buy Now Pay Later companies

Code Name Price % Year Change Market Cap
APT Afterpay Limited 150.92 273 $43.3B
CI1 Credit Intelligence 0.071 115 $86.8M
DOU Douugh Limited 0.225 628 $84.5M
FFG Fatfish Group 0.14 1300 $134.7M
HUM Humm Group Limited 1.31 -27 $629.0M
IOU Ioupay Limited 0.54 5300 $277.5M
LBY Laybuy Group Holding 1.38 3 $249.5M
OPY Openpay Group 3.14 148 $256.1M
PYR Payright Limited 1.01 -16 $60.3M
SPT Splitit 1.27 157 $575.2M
SZL Sezzle Inc. 11.41 536 $1.1B
Z1P Zip Co Ltd. 12.43 220 $6.8B
ZBT Zebit Inc. 1.05 -33 $100.1M


Sector has seen rapid growth

BNPL companies first appeared in Australia around five years ago and customer numbers started to increase from 2018 as more retailers and merchants participated in the business concept.

There were 3.7 million active account users for BNPL in Australia in the 2019 financial year, up 38 per cent form the preceding 2018 financial year.

The value of BNPL transactions in the 2019 financial year was $5.6bn, a rise of 79 per cent on $3.1bn in the 2018 financial year.

So far, so good, but the sector really took off in 2020, when share price valuations escalated and investors piled into the BNPL sector as it attracted increasing numbers of customers.

This is the so-called network effect in action, when the value of a company increases rapidly as more and more customers use its services, thereby attracting more users to its ranks.

The sector’s explosive growth also happened during an exceptional time and set of social circumstances with the COVID-19 pandemic as a backdrop.

The pandemic effectively prevented people from visiting shops and retail centres, as they stayed at home for work, rest and play and shopped and worked over the internet.

At the same time, large numbers of Australian consumers were laid off from regular employment or were forced to work from home, leading to reduced income for many.


Practical solution to a changing economy

Practical-minded consumers hooked into BNPL as a way of buying goods online while deferring payment and its popularity began to climb steadily.

BNPL means consumers can purchase an item from a participating retailer with a small upfront payment and then settle the outstanding amount in three or four installments.

Millions of consumers have used BNPL providers to shop for goods on- and off-line in a secure, convenient and cost-effective way during the coronavirus pandemic.

The BNPL sector in Australia has now reached a point where Afterpay’s number of customers is almost the same as the whole sector’s in the 2019 financial year.

Afterpay had a customer base of 3.4 million people in Australia and New Zealand for sales of $2.2bn in the 2020 financial year.

The BNPL market leader accounts for 73 per cent of spending in the sector in Australia and New Zealand.

Younger Australians and New Zealanders in the Generation Z cohort represent 13 per cent of its customer spend, and for the older Millennial age group it is 52 per cent.

The company is focusing on these two customer segments to provide growth for its business.

“Household purchases is the fastest growing category, especially among young generations, growing 197 per cent year on year for Generation Z, and 68 per cent for Millennials,” it said.


Code of Practice is on its way for BNPL

The Australian government and regulators have to date taken a light-touch approach to overseeing BNPL, but there are moves afoot to formalise the way the sector operates.

A new BNPL industry Code of Practice is to begin operating from March 1, and is currently being finalised by BNPL companies and the Australian Finance Industry Association.

The AFIA has among its members a number of BNPL companies including, Afterpay, Brighte, flexigroup, Klarna, OpenPay and Zip.

“This is a world-first BNPL Code of Practice and it is crucial to customers and to the future of the industry that we get it right,” AFIA chief executive, Diane Tate, said.

The Code goes above and beyond the law Tate said, “because we all understand the need to protect vulnerable consumers while supporting innovation that allows people to make purchases and payments in ways that suit them”.

The code is in response to recommendations from the Australian Securities and Investment Commission’s (ASIC) report into the sector of November 2020.

ASIC noted the development of the BNPL Code of Practice and said in its report that it retains the power to intervene in the sector to address “any significant consumer detriment”.

The regulator can order a person or company to not engage in specified conduct related to BNPL products, to enable it to respond to potential consumer harm in a timely way.

From October this year, new design and distribution product obligations will apply to the BNPL sector in Australia.

“These obligations will require the industry to design fit-for-purpose products that meet consumer needs,” said ASIC.


‘Turbocharged’ pursuit of market opportunities

Some in the market wonder whether BNPL companies can sustain their rapid share price growth, while others are confident the sector can continue to roll up customers and expand.

Two investment firms believe there is further upside to come in the sector’s lead, Afterpay.

Analysts at Swiss investment bank UBS said in a client note that Afterpay was “well positioned” to exceed its underlying sales target of $20bn for the 2022 financial year as it maintained “strong momentum in the business”.

Meanwhile, Bell Potter analysts point to APT’s positioning for expansion.

“Afterpay has taken the opportunity to increase its firepower to turbocharge its pursuit of the market opportunity before it and to de-risk the business,” Bell Potter analyst Lafitani Sotiriou said, adding the company had flagged expansion in Europe and Asia.

“We see the European Union as the next obvious expansion point, otherwise somewhere closer to home in the South-East Asian region,” Sotirioue said.


Straightforward business model transfers risk

The BNPL business model is straightforward. BNPL companies act as middle-men between customers and retailers, providing credit to consumers to facilitate purchases from retailers.

Retailers benefit by receiving cashflow from sales that may not have occurred because the consumer was cash-strapped, or unable to afford an item in a single payment.

Shoppers can purchase goods at their convenience and repay the credit in instalments, sometimes interest free.

When a sale happens using BNPL, the credit risk transfers from the retailer to the BNPL provider, and it is up to the BNPL provider to ensure they are paid by the consumer.

BNPL providers carry out credit and identity checks on customers in real-time to curtail potential attempts at fraud and to ensure customers have the capacity to repay any credit.

Retailers pay the BNPL provider a commission or a flat fee for managing the system.

Afterpay charges retailers a fee of 30c per transaction and a commission of 4 to 6 per cent depending on transaction volumes.

Debit card companies typically charge retailers 0.5 to 1 per cent of a transaction’s value, and credit card providers charge a little more at 1 to 2 per cent per sale.

Consumer protections are built into the system in the case shoppers default on bills.

Customers that decline to settle bills are no longer allowed to use a BNPL provider’s system.

The BNPL operator will still pay the retailer for any goods purchased but not paid for.

The customer in default is not referred to credit status agencies, unlike say credit cards.

“Clearly, the entire business model is built around getting customers paying on time and making sure the right customers are using our product,” Afterpay’s head of global transformation, Christine Blyth, said in an interview with website In The Black.


Market leaders dominate the BNPL landscape

Afterpay, the market leader and the sector’s early mover, is one of five BNPL companies that dominate the sector in Australia.

The company was founded by Anthony Eisen and Nicholas Molnar who are Afterpay’s largest shareholders with approximately 18.4 million shares each.

Afterpay has 11 million customers worldwide and its BNPL system is available in 64,000 retailers in Australia, New Zealand, the United Kingdom and the United States.

The company has experienced rapid growth over the 2020 financial year, including a 72 per cent rise in its merchant base, and 116 per cent increase in customer numbers.

Customers can now pay for retail items using Afterpay’s app on their mobile phone including Apple iphones and on android phones using Google Pay.

The company’s service was first adopted by retailers in 2016, starting in Australia and New Zealand, which remains its core market.

Afterpay’s sales reached $11.2bn in the 2020 financial year, and the company’s sales target is $20bn by the June 2022-ended financial year.

The business is planning to roll out Afterpay services in Canada later this year, and is considering acquisitions to accelerate its penetration of new markets.

Hong Kong-listed Tencent, a provider of internet and cloud-based services in China, became a significant shareholder in Afterpay in May, taking a 5 per cent stake in the BNPL company.

Tencent operates a mobile phone payments platform in China, Weixin Pay, that facilitates an average of 1 billion transactions each day.

“Afterpay’s approach stands out to us not just for its attractive business model characteristics, but also because its service aligns so well with consumer trends we see developing globally in terms of Afterpay’s customer centric, interest free approach as well as its integrated retail presence and ability to add significant value for its merchant base,” Tencent’s chief strategy officer James Mitchell said.


Zip algorithms minimise arrears

Next in market size in the BNPL sector on the ASX is Zip with a market cap of around $6.8bn.

Zip’s sales revenue soared 91 per cent to $161.2m in the 2020 financial year on $2.3bn of transaction volume.

Customer numbers using Zip grew to 2.1 million in the 2020 financial year, up 63 per cent year on year.

The number of merchants signed up to Zip increased 51 per cent year on year to 24,500.

“The business model was tested during COVID-19 and proved extremely resilient – in terms of transaction volume, strong revenue mix and outstanding customer repayment performance,” managing director and chief executive Larry Diamond said.

Monthly customer arrears, a forward indicator of future losses, fell to 1.33 per cent in June.

Net receivables, that is money owed by customers, grew 68 per cent year on year to $1.1bn.

Credit for new and existing customers was tightened in March because of COVID-19.

“Specifically, Zip adjusted its application underwriting algorithms and leverages its real-time portfolio management tools to actively monitor account behaviour and adjust limits accordingly,” Zip said in its June quarter update.

Zip has agreed to acquire US BNPL company QuadPay for $403m to accelerate its growth strategy in America.

QuadPay has 1.8 million US customers and annualised revenue of $66m.


Shift to online sales boosting BNPL sector

Third in line in the BNPL sector by customer base is Sezzle, which had 1.4 million active customers and 16,000 merchant members at the June quarter.

The company is on track to reach its target of $1bn for underlying merchant sales by December 2020, with the COVID-19 pandemic accelerating the trend to online retail.

“The shift to online retail has positioned Sezzle as a key partner for merchants, as 2Q 2020 represented the top three periods of monthly UMS,” executive chairman and chief executive Charlie Youakim said.

Around half of Sezzle’s customer base are Millennials — born in the 1980s to early 1990s, and 20 per cent are Generation Z (late 1990s to 2010s).

The company said it was well positioned to benefit from future growth in spending power for the Millennial and Generation Z age groups.

This is because 25 per cent of society’s disposable income will belong to the Generation Z age group of which there are 84 million in the US.

BNPL by age
Buy now, pay later usage by age. Source: Roy Morgan


Solving abandoned online sales

Splitit said its delayed payment system solves the problem for retailers of online consumers abandoning purchases at the checkout stage.

“The single biggest challenge for e-commerce retailers is overcoming around 70 per cent cart abandonment by shoppers. This translates into $4.6 trillion in lost e-commerce sales each year,” the company said.

Price is the main reason consumers abandon online purchases, said the company, which has formed partnerships with credit card companies Mastercard and Visa.

As a payment option Splitit allows customers to pay for goods in three to 24 monthly instalments using their existing credit card, thereby splitting the cost into manageable payments.

At the June quarter, Splitit had 1,000 merchants including home, sports and luxury brands, and 309,000 customers.

“Accelerating merchant demand, strong foundations and a great shopper experience have set Splitit on a rapid growth trajectory, with record merchant sales volume and revenue during the quarter,” chief executive Brian Paterson said.


The best of the rest BNPL firms

Zebit (ASX:ZBT), a US-based company that has listed on the Australian bourse, is targeting a different market — one that although slightly risky, may pay off in spades.

The company is aiming to tap into a pool of over 100 million people in the US that have lower credit scores and are unlikely to pass a credit check.

There are also non-ASX listed BNPL companies operating in Australia including LatitudePay, which launched in 2019.

Other ASX companies have delayed payment systems as a feature of their business.

They include digital banking company Novatti (ASX:NOV), mobile banking and digital payments company IOUpay (ASX:IOU) — which operates in Southeast Asian countries, and business lender FlexiGroup (ASX:FXL), which has 2.2 million customers.

Several overseas BNPL companies have a presence in Australia, such as Sweden’s Klarna and US-based Affirm.


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