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Entertainment Afterpay built its business by getting consumers to take on debt, now it wants to help them budget

03:01  27 february  2021
03:01  27 february  2021 Source:   abc.net.au

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text: Millennials and Gen Z customers have always been the core of Afterpay's business. (ABC News: John Gunn) © Provided by ABC Business Millennials and Gen Z customers have always been the core of Afterpay's business. (ABC News: John Gunn)

When Nick Molnar and Anthony Eisen co-founded Afterpay more than five years ago, no one could have expected that the company's market valuation would be nearing $40 billion today.

Thanks to a growing global base of millennials and Gen Z customers who keep ditching their credit cards in favour of the buy now, pay later platform, Afterpay has become the new darling of Australia's share market.

As the COVID-19 pandemic locked down much of the world and turned more people toward online shopping, Afterpay's business — and share price — has continued to surge.

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This modern lay-buy service — red-hot with young consumers, but now also growing in use among an older cohort — has turned Mr Molnar and Mr Eisen into billionaires.

They are now among the top 51 richest Australians, each with wealth of more than $1.5 billion according to the 2020 AFR Rich List (although this week the duo announced they're selling down a small part of their holdings, with the proceeds used in part for charitable purposes).

"Ant [Anthony] and I as a team are never complacent," Mr Molnar tells ABC News.

"I think we have a lifetime of an opportunity given the undercurrent of plates that are moving from credit to debit, offline to online."

Mr Eisen says millennials and Gen Z have always been the core of the business, but he is now seeing new demographics join the platform.

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"As we've matured, particularly in Australia and New Zealand, we're seeing much older people come onto the platform and use it just as effectively," he said.

Afterpay hits more than 13 million active users

While some analysts had expected the company would report a profit for the first time, on Thursday Afterpay reported that its half-year loss widened to $79.2 million.

"A significant amount of that loss actually relates to revaluing our UK entity," Mr Eisen notes, adding that: "I think it's very likely that you'll see in the future, as we scale, profitability emerge."

"What's very important — and we're getting this feedback from shareholders — is investing into an opportunity that's still very nascent when you look at the global opportunity."

Afterpay now has more than 13 million active users around the world, allowing it to fast move in on global competitors such as Klarna, Affirm and Zip Co.

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On average, 23,000 new customers a day are added to the Afterpay platform.

For the year ending December 31, the company's global sales were up 106 per cent to $9.8 billion.

Since 2018, it has grown its list of fashion, beauty and health retailers including Urban Outfitters (and sister brand Anthropologie), Kim Kardashian's KKW Beauty, Forever 21, Boohoo, Bed Bath and Beyond, Adidas and Pandora.

In November 2018, Kim Kardashian West tweeted to tens of millions of followers: "We added #AfterPay to our sites to make purchasing easier! Choose AfterPay at checkout to purchase your #BlackFriday favs and the Must Have #GlamBible in 4 easy payments."

The impact that her celebrity brand — and other global partnerships — have had on Afterpay's success in North America cannot be underestimated.

Afterpay's active customers in North America rose by 1.6 million to 8.1 million the December quarter.

The company is also looking to raise $1.25 billion to fold its US subsidiary inside the rest of the group. That could help facilitate a US listing that some of its investors are pushing for.

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Mr Molnar says while online transactions are growing, the relationship the company has with existing merchants globally means they can make inroads to the physical stores.

"You can Afterpay an airline ticket, or go to the dentist and use Afterpay," Mr Molnar says.

But he notes while the shift to buy now, pay later has been propelled by more people moving online, bricks and mortar still represents 85 per cent of all retail around the world.

The physical world, he says, is "front and centre" of their strategy to further conquer the US, as well as other markets.

Afterpay could get to a place where, when the in-store sales assistant asks a customer how they'll pay for their purchase, they won't just be asking, "are you using Mastercard or Visa?" they will also be asking, "would you like to pay with Afterpay?"

Taking on the banks

In October, Afterpay and Westpac announced a partnership. It will allow Afterpay to provide Westpac transaction and savings accounts and other cashflow management tools to its 3.3 million customers in Australia by the second quarter of the year.

Afterpay wants to further capitalise on its base of repeat and loyal customers by offering a new mobile app called Afterpay Money that will help them better budget.

While that would appear to place Afterpay in direct competition with the banks, Mr Eisen rejects such a notion.

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"We don't think at all about turning Afterpay into a traditional banking service," Mr Eisen said.

"We've got an advantage at the moment in that we have a very frequent and engaged customer base that's very much trusting in our brand.

"[We want] to be able to extend that into managing people's money in a really effective way — and that is really at the core of this relationship with Westpac.

"The key thing about it is, not just to sell financial products. It's the reverse. It's to help customers manage money in a really budgeting-effective way and achieve goals.

"What that means for us as a platform is that if we can increase that engagement and frequency even further, then it gives rise to new revenue streams."

Is the Afterpay share price overvalued?

Amid increased US investor interest, the company is now exploring the potential for its shares to also be listed overseas.

In Australia, its share price has risen 1,400 per cent since its low point in March, when it crashed to about $8.

At the time of the March COVID-19 lockdowns, the market was spooked that platforms that depend on consumers racking on debt would tank.

Instead, the reverse has happened and the most bullish analysts see the share price leaping from its current rate of about $134 to $170 within the next few months.

Some analysts think the Afterpay stock has room to grow. In early February (before its latest results were released), Bank of America Merrill Lynch head of research Sameer Chopra put a $170 price target on the company.

But other analysts are less optimistic, especially as the company still has not made a profit.

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RBC Capital Markets has now set a price target of $107. UBS on Thursday released a price target of only $30.

"Cumulatively, APT has now raised>$2 billion in capital since last July," UBS analysts said in a research note on Thursday before then lifting the valuation to $36 on Friday.

"We believe this vindicates our view that the market continues to mis-price or ignore how much capital is required to fund APT's growth."

But fund manager Michael Frazis, of Frazis Capital Partners, is still backing Afterpay, noting the company has "maintained over 100 per cent growth for several years in a row".

Frazis's fund bought Afterpay stocks in 2017, when the company's shares were trading at just $4.30. Since then, the investment has grown more than 30 times, making it one of the fund's best-performing stocks.

Frazis says they take an unconventional approach to investing. He's not focused on companies making big profits.

"If you use that traditional lens, you're going to miss every single fast-growing software company, every single fast-growing fin-tech company. Companies like Afterpay, companies like Netflix, companies like Tesla," Mr Frazis said.

"It [Afterpay] could be overvalued in the short term but still be one of the best long-term investment opportunities in the Australian market."

Zip makes a big splash in the US

Afterpay isn't the only buy now, pay later stock experiencing explosive growth.

Zip has also been the beneficiary of pandemic-driven spending, and is ploughing revenue into new markets, including the US, and making new investments across Europe and the Middle East.

Like Afterpay, Zip sales are growing in 100 per cent plus year on year. Over the six months to December, sales grew 130 per cent to $160 million dollars.

It now has 5.7 million customers worldwide, up from 1.8 million at the end of 2019.

Zip's share price is also rising fast — it rose more than 800 per cent since March. At close of trade on Thursday, it was trading at under $11.

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While Zip posted a net loss for the six months to the end of December of $455.9 million, the result included a $306.2 million hit related to Zip taking full ownership of the US-based Quadpay business, in which it previously held a stake.

"The Quadpay business is going absolutely gangbusters," Zip CEO Larry Diamond said.

"We acquired the business in September, and by December it was up 140 per cent."

Zip has secured key partnerships with merchants including Gamestop, Fanatics, Newegg and Sunglass Hut in the US, and Harvey Norman, Domayne and Adore Beauty in Australia.

The company also launched in the UK in December 2020 with a number of marquee brands including Boohoo, JD Sports, Fanatics and Cotton-On.

"Zip is the quiet achiever and … if you compare us to our peer sets across transaction margin, revenue, yield, we're definitely punching up there with the competition," Mr Diamond said.

"Our view is, over time investors will understand that. We're spending a lot of time with US growth equity investors, to tell [them] our story, and we're very confident that over time the bridge will be broken."

Regulation still a risk for Afterpay, Zip and other BNPL players

While the buy now, pay later sector is growing fast, it's not without risk.

Corporate watchdog ASIC recently found one in five customers are missing payments.

Consumer groups say these companies shouldn't be allowed to regulate themselves. They want operators to face the same rules as credit card providers.

In the UK, that's already happening. But in Australia, ASIC has agreed not to slap new regulations on the sector, for now.

Instead there will be an industry code of practice enforced by an independent committee, with powers to "name and shame" lenders.

Mr Eisen says that code is sufficient for a buy now, pay later market with a host of different companies with different business models.

He says it's not Afterpay's business model to make money from consumers paying late fees.

"We believe we've set the bar very high and higher than what the national credit code sets for traditional finance companies," Mr Eisen said.

"With Afterpay, the proposition is, you buy things in a way that doesn't allow you to fall into a debt trap or get behind.

"It's four payments, every two weeks. As a customer you can't pay us a fee to kick the can down the road. If you miss a payment, you can't keep using the service. That's a very important built-in protection."

Mr Eisen also notes the average value of Afterpay transactions is small, at $150. And that the average outstanding balance is about $200.

This has seen default rates lower over time. Late fees now represent less than 9 per cent of Afterpay's total income.

Mr Diamond is also supportive of the voluntary code as a "first step". He says Zip does credit checks of their customers, which makes it less likely they will fall into trouble.

"We've done credit checks since inception," he said.

"With a Zip customer, about one in a hundred is late in any given month. Contrast that with one in six — which is what you see with some of the peers and credit cards."

Mr Diamond says there's only a small portion of Zip customers facing financial hardship.

It now has about 500 customers on hardship arrangements, which he notes is just 0.02 per cent of its customer base.

'I should be celebrating but I'm finding it hard' .
There's more support for many in the Budget, but for some it still falls short.Furlough was extended. There was more money for businesses scrambling to stay afloat. And for people relying on universal credit, the extra £20 added last year will stay for now.

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