Buy now, pay later (BNPL) companies are an Australian success story that has taken root overseas and is one of the few sectors to flourish during the COVID-19 crisis.

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.

Around 30 per cent of Australians have an account with a BNPL provider, equivalent to 5.8 million people, according to consumer website Mozo.

Homegrown companies like Afterpay (ASX:APT), Openpay (ASX:OPY), Sezzle (ASX:SZL), Splitit (ASX:SPT) and Zip Co (ASX:Z1P) have mushroomed into megaliths that are household names.

Early investors into the sector have seen company valuations soar to astronomical levels.

From a mid-March market low, Afterpay has gone from $8.90 to over $75 a share, Openpay has seen its share price spring from 32c to $3.65, while Sezzle has risen from 40c to $7.40.

Splitit shares are now worth $1.43, up from 46c in mid-March, and Zip is now up at $6.32 from $1.18.

The market capitalisation of Afterpay is $19.8bn, Zip is $2.4bn, and that of the next three largest BNPL companies – Openpay, Splitit and Sezzle – range between $385m and $715m.

APT, OPY, SZL, SPT and Z1P share price charts


Some in the market are wondering whether BNPL companies can sustain their price growth.

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 July 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”.

“We highlight that APT’s shares have rallied +41 per cent since June 1 and did not trade above the $61.75 floor price [for a capital raising] until one week ago,” UBS analysts said.

Meanwhile, Bell Potter analysts adjusted their target price for Afterpay to $81.25/share, raising this from $65/share, in a July client note posted after the company’s equity raising.

“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 to buy now, pay later provider

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

For those unfamiliar with the BNPL sector, five ASX companies dominate the landscape.

Foremost is Afterpay, the market leader in Australia, and the sector’s early mover.

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 10 million customers worldwide and its BNPL system is available in 55,400 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.

Around 40,000 stores offer Afterpay, which is used by 3.3 million Australian and New Zealand customers.

Afterpay’s sales reached $11.1bn 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 $2bn.

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


Medical and dental partnerships for Openpay

Openpay has 319,000 active customers using its BNPL system, up 141 per cent from 133,000 in June 2019, making it fourth in the ASX BNPL sector in terms of customer base.

The company has forged partnerships with medical, dental and health companies.

Openpay said “BNPL payment options are increasingly being offered by pharmacy, optometry, dental and veterinary businesses”.

Total transaction value for Openpay rose 98 per cent year on year to $192.8m in FY 2020.


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

The top five BNPL companies on the ASX are soon to be joined by Zebit, a US -based company preparing to list on the Australian bourse.

Unlike its BNPL peers, Zebit 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 — the US population that have lower credit scores are unlikely to pass a credit check.

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

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

They include digital banking company Novatti (ASX:NOV), mobile banking and digital payments company iSentric (ASX:ICU) — which operates in Malaysia, 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.