Consolidation In The Wings As BNPL Heats Up

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Competition is intense among the BNPL operators, leading to the prospect of the industry struggling for direction before a timely consolidation

-Apple Pay Later could potentially increase the size of the BNPL market
-Main impact may be felt by smaller participants in the BNPL industry
-PayPal may be the biggest threat to established BNPL options
 

By Eva Brocklehurst

The BNPL sector has ridden a wave of popularity yet there are signs it will be a choppy ride to shore. Competition is intense and will become more so. This leads to the prospect that the industry may struggle for direction before a period of consolidation.

The trend towards instalment payments has been validated and Citi looks forward to a future period when the ability to pay this way will become a commodity. Early listed operators Afterpay ((APT)) and Zip Co ((Z1P)) will be successful through owning the consumer shopping experience via their apps and website.

Increased competition should also bring forward the adoption of BNPL, Jarden asserts. The market appears to be viewing the prospect of recently announced Apple Pay Later as negative for the major operators, based on the reaction in their share prices, instead the broker wonders whether this is a positive, as a Apple could increase the size of the market.

The broker believes the competitive advantage and a concerted drive to establish economies of scale should bode well for Afterpay, less so for Zip Co, and possibly negatively for Sezzle ((SZL)). Sezzle recently obtained a three-year contract with Target Corp in the US, adding to its retail base.

Given the size and scale of Apple, Citi agrees Afterpay will be in a comparatively stronger position than Zip, although it will need to continue to invest and innovate to hold the consumer's interest.

There's Afterpay, Zip Co's QuadPay and now there is Apple Pay Later. Apple is partnering with Golden Sachs to launch the service, which is a short-term loan option and a payment made every fortnight. This opens the BNPL functions to credit cards available on Apple Pay.

This is another consumer-side offering which does not compete with Afterpay or Zip Co directly on the merchant side. As currently understood, Apple Pay Later is to be linked to a credit card and, as Macquarie assesses, is more of a direct competitor to Splitit ((SPT)) than other BNPL products.

Splitit sources revenue via transaction fees, paid by the retailer when a customer uses the payment option via an existing credit card online or in-store. There are no late fees.

If Apple Pay Later repayments are limited to credit cards then the potential impact on Afterpay and QuadPay is limited, in Citi's view, as around 90% of Afterpay transactions use a debit card.

On the other hand, it is a larger threat than the offerings from the banks and credit companies, such as Commonwealth Bank's ((CBA)) Step Pay, as Apple Pay has a wide consumer reach, with Citi noting there are 43.9m users in the US.

The main threat appears to be to the in-store take-up of Afterpay and QuadPay, given the consumer experience of using Apple Pay on a mobile website or in-store is also superior. In the case of QuadPay, UBS asserts Step Pay, along with others of a similar nature, is indeed a threat.

Jarden expects the impact will be felt by the smaller participants in the BNPL industry as larger players have more engaged users and a more developed ecosystem. In the case of Afterpay there are loyalty, promotions and greater lending options for repeat customers.

Fee Versus No Late Fee

The main competitive threat to the two established BNPL options comes from PayPal, Citi asserts. PayPal has switched on its Pay in 4 in Australia, offering no late fees.

Macquarie suspects this is good way to encourage adoption of the product compared with other offerings, most of which include just lower merchant fees. Both Afterpay and PayPal, in the case of missed payments, would suspend the users account yet recoup missed payments differently.

Afterpay would send texts and emails but eventually write off the bad debt whereas PayPal would defer to a third-party debt collector. The actual impact on the consumer of either of these choices is yet to be seen, Macquarie points out.

Removing late fees from its valuation of Afterpay results in in a small downgrade to the broker's target while the lack of disclosure makes it difficult to quantify the proportion of revenue Zip Co generates from late fees.

Yet, Macquarie observes Zip Co's account-based product shows a willingness to incur ongoing fees and thus appears to be less sensitive to the potential for an alternative "no late fee" product.

PayPal has 9m users in Australia compared with Afterpay's 3.5m, although PayPal has no presence off-line in Australia. Afterpay's Australasian in-store:online ratio was 22:78 as of the first half of FY21.

More Minnows

The market in Australia may be dominated by Afterpay and Zip Co but there are myriad others jostling for a space in the sector. Layby Group ((LBY)) is one, taking its name from the very old concept of instalment payments.

For those not old enough to remember, this was a time before credit cards when instalments for goods were paid to the retailer and the item kept behind the counter until you paid up fully. Layby Group has a strong presence in the UK which Canaccord Genuity believes is its biggest market for expansion.

Latitude Group ((LFS)) provides a variety of services across personal loans, credit cards as well as interest-free retail finance. Macquarie emphasises it assigns no value to the Latitude Group BNPL product.

In the case of Smartpay Holdings ((SMP)), CCZ Equities expects Australia will be the main focus while noting the company has been successful in taking customers from the big four banks.

Then there is Zebit ((ZBT)), which is an online retailer that allows a customer to purchase items online in instalments without interest and fees, and Openpay Group ((OPY)), for which the main differentiator is its flexible plans and transaction sizes.

Humm Group ((HUM)) also has variable plans, allowing the customer to make fortnightly payments for small items and providing up to 60 months interest-free for large items.

How are all these stocks rated? Most of those on the FNArena database carry Buy ratings. UBS is the key exception and has stood out with its contrary view point on Afterpay, believing whichever way you cut it the stock is way overvalued, despite the positive developments in the industry.

UBS has a $42.00 target for Afterpay while the consensus target is $122.57. Macquarie recently adjusted its target on Afterpay slightly lower, to $130 from $140, to account for market share loss in Australia and to reflect the competitive landscape. The broker also retains a Sell rating on Zip Co (as does UBS). Zip Co has a consensus target on the database of $8.69.

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