By: Jackson Roy & Justin Chan
Over the past couple years, companies that offer Buy Now, Pay Later (BNPL) options have become much more commonplace. These companies allow consumers to split up the cost of a large initial purchase into multiple installments spread out over the ensuing weeks or months. There is often no interest to be paid and the ease of stretching out payment timelines often results in consumers being more carefree with their spending. For retailers, the value proposition is clear: increase average basket sizes and reduce dropped baskets. As such, BNPL companies are generally compensated by retail stores through a commission each time the service is used, with no costs being applied directly to the consumer.
The recent growth has been driven primarily by Gen Z and Millennials, who’s use of BNPL options has increased by six-fold and two-fold, respectively. While the concept of purchasing an item and paying in installments at a later date has been around for a while, its integration into the customer journey has been the key point where new BNPL options have differed. Rather than an afterthought that consumers can decide to utilize while checking out, providers have strived to become shopping destinations, with some offering advertising in the form of sponsored listings. Another innovation is increased specialization allowing the providers to better understand the credit risk of the particular consumer set.
While many critics point to the questionable ethicality of encouraging consumers to irresponsibly take on debt, the utility and convenience of being able to access short term financing right when checking out cannot be ignored. Overall, BNPL companies are providing a valuable service and it will be interesting to see what retailers will do with it moving forward.
On August 1st, 2021, Square announced the plan to acquire Australian company, Afterpay for a head turning US$29 billion. The acquisition was done through an all-stock offer that valued Afterpay’s shares at A$126.21. The cost of the acquisition at first glance appears steep, with Square paying a 31% premium, which gives a multiple of 41.8 times trailing-12-month sales. However, Square CEO Jack Dorsey defended the purchase saying “Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles”. Afterpay’s 16-million users will be added to Cash App’s existing user base of 70 million.
Square opting to spend US$29 billion for a BNPL company instead of building the service internally is interesting considering what the team over at Square has accomplished. However, this aggressive acquisition is a way to respond to Square’s competitors who have begun stepping in the space. PayPal has been offering BNPL options through its services and announced the acquisition of a Japanese BNPL firm a month after Square announced its deal with Afterpay.
The addition of a BNPL option targets younger users, which suits Square’s Cash App’s demographics. Cash App has 35-million users in the 18-35 age bracket, which makes up 50% of its total users. Additionally, Afterpay’s revenue has plenty of room to grow considering that of the A$11.1 billion the company reported in sales in 2020, the majority of that was generated in Australia. Therefore, the integration of Afterpay’s product into Cash App has the potential for high growth considering Square’s established market presence in the US. BNPL companies are relatively new to the United States market and despite the steep cost of acquisition, Square has a chance to profit heavily but more importantly remain competitive with rival companies such as PayPal.