The announcement Monday of a $39 billion takeover bid for buy-now, pay-later (BNPL) company Afterpay Limited (ASX: APT) by US payments giant Square – at a 30% premium to the Australian stock’s Friday close – has caused a ripple effect on the stock market, as traders jumped-in to other BNPL stocks, looking for the rising Afterpay tide to lift all boats.
The huge all-scrip bid – the biggest buyout deal in Australian corporate history – not only carries serious US tech cred (Square is run by Twitter co-founder Jack Dorsey), it could rehabilitate the BNPL sector in investors’ eyes, after runaway share price growth on the back of the pandemic began to falter early in 2021, as investors became wary of the increasingly competitive landscape, weaker-than-expected customer growth and the prospect of regulatory crackdown.
“I see the deal between Square and Afterpay as demonstrating that the BNPL sector is seen by very deep-pocketed investors as a sector that is very much alive and well, and which has got great prospects,” says Gary Rohloff, managing director of New Zealand-based BNPL provider Laybuy Group (ASX: LBY), which saw its share price surge more than 9% on the news.
“I think that validation does help all players in the sector. The market for all the BNPL stocks has definitely been a little softer over the course of this year, but I wouldn’t be surprised if this announcement reignites some interest, just given the fact that this is a product that is only going to grow in popularity – BNPL is still at very low percentages of penetration across the world,” says Rohloff.
“Payment in delayed instalments has been a clear hit with consumers in all of the markets where it’s been offered, but there is still a very large runway for growth. That’s why, ultimately, I see the Square bid for Afterpay as a major vote of confidence in the sector – and I think this could be a catalyst for more corporate activity conversations. I think this will be a very interesting period in the sector, over the next wee while. I think that after the initial excitement, it will make investors look a bit more closely at BNPL providers, because they’re not all the same – and we welcome investors taking a bit of a deeper dive,” Rohloff says.
Afterpay has proven a double-edged sword for many of the BNPL providers that came after it: APT has certainly lifted consumer and investor awareness of BNPL as a business model, but its meteoric market rise (Afterpay floated at $1 in May 2016; the Square offer values it – at current exchange rates – at more than $126) has also created ridiculous expectations of the stocks that followed it onto the ASX. Rohloff’s company has felt the pressure of those expectations more than most, as an initial public offering (IPO) price of $1.41 in September 2020 quickly became $1.76, before commencing a slide that took it as low as 42 cents, before its bounce to 47 cents today.
While companies cannot control their share prices, that trajectory is intensely frustrating for Rohloff. “Ultimately, we can only focus on the things that we can control, which is the performance of our business. We actually couldn’t be happier with that. For our financial year (ended 31 March 2021), we delivered gross merchant volume (GMV) growth of 159%, powered by UK GMV growth of 504% year-on-year. That puts us firmly on track to exceed GMV of NZ$1 billion ($952 million) in FY22. Our active customers increased by 87% for the financial year, reaching 756,000, with UK active customers up 202%, to 463,000,” he says.
It is the strength of its UK bridgehead that Rohloff feels the stock market does not quite appreciate. “Our focus is very firmly on the United Kingdom, where the opportunity is enormous. It is our largest market, followed by Australia and New Zealand. The UK has an addressable retail market of £394 billion, it is about 2.2 times the size of the Australian market in terms of overall spending, and it is also a market where BNPL is still in its infancy, but is expected to grow quickly.”
In the first quarter of the current financial year – that is, to 30 June 2021 – the UK business continued to underpin growth, with its GMV more than doubling year-on-year to £49 million ($90.3 million), up by 107%. UK active customers surged by more than 143% in the year to June, driving a 43% annual jump in total active customers, to 829,000.
“In the wake of the pandemic, there’s been a marked shift to online – and that translates into a rising awareness and acceptance of buy-now, pay-later,” says Rohloff. “But we’re also very excited about people starting to go back into stores shopping as well: the fact is, retail is a multichannel sector, and we are available online and in-store. The interesting thing for us is that, as the UK opens up, we’ve just rolled out our in-store contactless digital solution, “Tap to pay,” and that has really started to gain traction.”
The “Tap to pay” card allows customers to buy goods in-store by tapping their smartphones on chip and PIN devices as they would with a normal contactless card: there is zero integration required and merchants can enable in-store payments in a matter of minutes. The process is also very efficient for customers, allowing them to bypass a number steps which are usually found in BNPL processes: customers simply download Laybuy’s card onto their smartphone wallets, and they can enjoy benefits including zero interest and ability to pay for the purchase in six instalments.
But the crucial aspect of BNPL that many people do not appreciate, says Rohloff, is that it helps merchants as much as it helps shoppers. “For a merchant, you’re offering consumers a payment alternative that’s interest-free, and that enables them to spread the cost of the purchase; but what it does for you is it lifts the average basket spend, it helps increase store sales, and encourages new customers.”
And where some investors might feel the sector is threatened by the recent moves of payment giant PayPal and tech behemoth Apple to offer BNPL capability, Rohloff says it is exactly the same as the Square move on Afterpay.
“For PayPal and Apple to be coming into BNPL, for Jack Dorsey and Square to be buying Afterpay – these moves actually validate BNPL as a solution,” he says. “If you think of the penetration of BNPL as a percentage of point-of-sale purchase in retail, it’s low-single-digits. This is not going to be a ‘two-or-three-players-take-all’ kind of market – we’re talking about people buying stuff. I think the market is big enough to handle a reasonable number of players,” he says.
