The Commonwealth Bank has clearly decided the lure of the buy now pay later model (BNPL) popularised by Afterpay is too juicy to ignore, even though it already has a presence in the sector through its stake in the world’s biggest player, Klarna – the Swedish BNPL giant.
CBA owns 5% of Klarna with the investment linked to processing its BNPL operations in the region via a Klarna account in the CBA App. The new offer will be alongside the one from Klarna.
But yesterday the bank revealed plans to directly involve itself in the sector in Australia from the middle of this year.
And a bit of fee cutting will be used to pave the way which will open up a big challenge to Afterpay and its clones by forcing them to cut their merchant fees.
The country’s biggest bank said on Wednesday said it would launch a product allowing its customers to make purchases between $100 and $1000, and repay the money in four interest-free fortnightly instalments.
CBA said it would perform credit checks on all of the customers before allowing them to take out the product, after it noticed people who were struggling with debt during the pandemic had in some cases been using multiple BNPL services.
In a sign of the pressure the bank’s move could put on BNPL margins, CBA said it would not charge any extra fees to merchants beyond standard merchant fees of slightly more than 1% of a transaction’s value.
That compares to the 4% or so charged by Afterpay and others and will force them to slash their fees to remain competitive.
Investors ended up fairly relaxed about the news.
The CBA statement sent Afterpay’s share price down from a high of $113.59 to $110.87 but it rallied to close the day up 1.1% at $112.99, while CBA shares eased 0.08% to $87.11.
The CBA’s announcement coincided with the release of a report on the profitability of the BNPL sector in this country from IBISWorld.
The report said revenue is expected to grow by 25.8% in 2020-21 to $817.1 million.
“However, the BNPL industry has yet to achieve profitability since its foundation in 2011-12,” IBISWorld said in a release.
In the current year, the average profit margin across the industry is anticipated to sit at -2.6%.
“Although the Buy Now Pay Later industry is growing strongly, industry firms have made losses over the past five years and will likely continue to do so in 2020-21.
“While losses as a share of revenue are declining, the industry has yet to achieve profitability,’ according to IBISWorld Senior Industry Analyst, Yin Yeoh.
Reserve Bank data shows the number of credit cards in Australia declined by 6.6% in 2019-20, as more consumers turned to BNPL providers rather than credit cards during the COVID-19 pandemic.
The report said BNPL services, such as Afterpay, Zip Pay and CBA’s BNPL partner, Klarna, have become increasingly integrated into the checkout processes of online retailers.
“Online Shopping revenue is expected to grow by 6.4% in 2020-21, to $31.2 billion.
‘While the industry continues to post losses, the scale of losses has shrunk significantly over the past two years. It is likely that the industry will achieve profitability for the first time before 2023-24,’ explained Ms Yeoh.
