The Buy Now Pay Later (BNPL) shares, along with health care shares on the ASX are one of the best places to be over the last 12 months. These sectors contributed to the Australian index funds’ outperformance that wouldn’t have occurred otherwise without these companies. BNPL is one of the significant Fintech innovations homegrown in Australia, and now its main prophets (Afterpay and Z1P) are taking the business model around the globe.
What is Buy Now Pay Later?
As the name suggests, Buy Now Pay Later allows the consumer to complete the purchase in installments rather than paying the full price upfront.
BNPL companies positions themselves between the retailers and consumers by offering credit for consumers and pays for product on their behalf. In turn, they also take on the consumer’s ultimate credit risk.
The common thread amongst the BNPL value propositions is that they provide credit in various formats beyond the traditional credit card offering and without ostensibly charging interest. For better or worse, purchases of goods and services will always increase if credit access is improved.
Depending on the repayment format, account fees are charged, which is interest in another form. We have seen this in other non-bank lending products such as mezzanine facilities, where interest is cut up in other forms but ultimately can be converted into a percentage number.
The similarity between the BNPL platforms and credit cards is BNPL is a disaggregated platform. Whereas on a credit card, all transactions are located in one place, interest and fees are charges on the purchases in total. BNPL offers a deal-by-deal offer where each transaction is split separately.
Why do Retailers Prefer BNPL?
The real value proposition the BNPL platform provides is reflected in where it in the online checkout process, the payment page. This is one of the most valuable real estate and optimized pages on an eCommerce website.
There is a multitude of payment options available but only those that are most widely used (credit cards or Paypal), and now it is essential to convert the customer are placed on the checkout page. Now it is critical for many retailers to include a BNPL option because this option converts a segment of the customer base that wouldn’t have bought the product without the option and, with the shift in credit risk, ultimately a low-risk option for the retailers.
As the BNPL platform takes on the credit risk, the retailer pays the BNPL platform a fee for this service. The service is attractive for retailers as it improves sales or conversion rates due to the target customers being either couldn’t afford it or only pay in installments but had no access to credit or does not have access to credit in general.
By offering the option, the same customer is more likely to purchase the goods than without the BNPL option and, in some instances, increase the basket size or ticket size of the purchase. In a sense, this is a classic win-win scenario for all parties involved.
The customers’ benefit is the easy means of accessing credit without going through a detailed credit application or credit checks.
As with any innovation, this is without controversy. Its critics argue that it is essentially a credit card without credit checks and bypasses responsible lending legislation as it is layering debt on unsuspecting consumers.
List of ASX BNPL Shares
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The largest BNPL shares are included in the S&P/ASX 300 index now; however, most of these buy now pay later shares are not profitable at today’s earnings.
- The shares are expensive due to the high market expectation and measured using common valuation metrics (p/e, p/cashflow).
- The market is pricing them as classic growth shares, and the key metric the market is looking for from these companies is the rate of customer and revenue growth.
- Current earnings are not yet in the minds of the market at this stage, and it is not what any reasonable person considers dividend stocks.
There has also been an evolution in the business model of these companies. Initially, the coverage was on physical products, but now increasingly, they found additional growth in covering the professional services, advertising, and revolving credit lines for anything you want.
Key Players In BNPL
Afterpay
Afterpay is one of the first of many BNPL stocks. Afterpay differentiated itself from traditional banks by offering credit without charging interest and caps late fees. Its earnings are based on the fees it charges merchants; hence revenues are ultimately a volume game.
It was one of the first Australian Fintech to move offshore, and it is making a splash in the United States but not without hiccups.
Zip Co
Zip differs from Afterpay by offering a credit line that is now capped at $1,000 across the platform that takes the Zip Co option at check out. Similar to Afterpay, it offers an installment option but will charge interest after a generous interest-free period.