01/06/2017
Afterpay (ASX:AFY)
Purchase price: $2.55
For our fourth Stock of the Week we dive into the fintech industry, and take a chance with Afterpay (ASX: AFY). We say ‘take a chance’ because there are a lot of great things about Afterpay, but in an industry where there are some big players – Amazon, PayPal and the big banks – it’s likely to see some competition and evolution in years to come. This makes analysing Afterpay a little more blurry than other companies we have chosen. But that’s the fun of it!
So, why Afterpay? Afterpay offers the online version of lay-buy – you may have seen it online already. They are a technology driven payments company, that has been in operation since 2015. It is a service that allows its retail merchant clients to offer end-customers the ability to buy goods and services on their web sites on a ‘buy now, pay later’ basis. It offers this service without end‑customers having to:
- Apply for or enter into a traditional loan
- Pay any additional amount (by way of interest, or any upfront fees) for the merchant’s items on sale
- Provide extensive personal information that would likely cause delay or failure to complete a purchase
Retail merchants benefit from providing the Afterpay service to end‑customers because:
- A proportion of end‑customers are more inclined to make a purchase and/or will increase the value of their purchase because of the affordability and flexibility attributes of the Afterpay service
- Afterpay pays the retail merchant upfront and assumes all end‑customer non‑payment risks
In addition, Afterpay also have a mobile application that allows customers to walk into a store, set the amount they want to spend, choose their items for purchase and then the application will generate a barcode. This barcode is then scanned at the register and the customer can ‘shop now, take now, pay later’ – the value is evenly split across 4 payments and the customers leaves the store, paying later.
The beauty of Afterpay for retail business, is that it will encourage consumers to buy more in one transaction, spend more than they originally planned, and buy more often. This is, however, a danger for customers, as they may buy more than they can afford to pay off. This is a danger for Afterpay, and we will pay close attention to the amount owed to by customers who haven’t paid off their purchase as time goes on.
Afterpay have 3700 merchants signed up to their system, process 15% of all retail fashion transactions, and have a technology system that creates a competitive advantage. Afterpay System is the payments technology that runs in the background, and it offers real-time fraud and repayment capability assessments. In other words, the system seamlessly, and very quickly, profiles the customer to determine if they are fraudulent or if they have the capability to pay off their purchase. If the system works out that they are not, then the transaction will not go through. This all happens in a matter of seconds, without the customer having to fill in lengthy credit applications or fill in lots of details.
Afterpay has a large market opportunity, strong momentum and and market positioning. The have recently signed an exclusive partnership with Trade Me Marketplace – one of New Zealand’s most influential brands and they have the biggest market share in online retail. This gives Afterpay a great channel to the New Zealand market.
There are dangers and concerns for Afterpay. There is the likelihood that competitors will try to start something similar, and there is little that Afterpay can do to stop them. Economic conditions also play a part in the success of Afterpay. If consumers stop spending discretionary income on retail, then revenue for Afterpay will fall.
Afterpay has potential for significant growth, and the business model is set up for it to scale very well. However, there are risks and in the age of technology, things change very quickly. We like Afterypay in it’s infancy, but will be watching very closely.