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Will Commonwealth Bank Stir Up BNPL?

Australia | Mar 18 2021

This story features COMMONWEALTH BANK OF AUSTRALIA, and other companies. For more info SHARE ANALYSIS: CBA

Can Commonwealth Bank's entry to the BNPL industry with its own virtual card upset the current operators? Will this create churn?

-No surcharge rules likely under scrutiny again
-Marketing expenditure/demand generation less replicable
-Durability of Afterpay's fees to merchants may be an issue


By Eva Brocklehurst

Has Commonwealth Bank ((CBA)) thrown the Buy Now Pay Later (BNPL) fraternity a curveball? As Australia's largest retail bank expands into this segment, the issue of who ultimately pays for the service comes to the fore.

BNPL business models, or points in the transaction process where the provider makes its money, differ widely, so is there evidence yet as to what the winning strategy will be?

BNPL essentially encompasses virtual finance products for the consumer that do not attract upfront consumer fees and have fixed instalment schedules, usually fortnightly. Structural drivers include declining popularity of credit cards (which take fees/interest from the user) and rising use of debit cards (which ultimately earn via bank interchange fees) along with “card free” transactions.

BNPL providers, in order to be successful need scale, as frequency of transaction drives the business. This is why Goldman Sachs believes relatively few operators will dominate the segment in each market and Afterpay ((APT)) has been a winner because, as an early mover, it now has a large merchant/customer base.

For context, the broker estimates Afterpay has 47% of the BNPL customer base in Australasia and makes 76% of the industry's net transaction profits. Afterpay makes more than 90% of its revenue from merchant fees and less than 10% from late payment fees.

Commonwealth Bank's new BNPL service, which can be used anywhere that debit and credit cards are accepted, will be available for up to four million of the bank's customers.

No retailer will be charged more than current credit transaction fees. The “card”, which has a $1000 limit, will be issued to a customer's mobile digital wallet. There will be no ongoing fees and late fees of $10 will be applied for repayments.

Citi does not consider the Commonwealth Bank offering differentiated, as it essentially replicates virtual card "shop anywhere" offerings. The main concern, from the perspective of Afterpay, is the ability to use the bank's BNPL at any merchant that accepts a virtual card, which could potentially reduce Afterpay's customer traction/purchase frequency.


The demand generation and marketing expenditure aspect in the network characteristics of Afterpay and Zip Co ((Z1P)) are less replicable aspects, and Citi considers consumer engagement and usage will determine whether current pricing can be sustained.

Moreover, the broker considers the online user experience in the bank offer inferior, as a user needs to enter card details versus using an Afterpay checkout button. The pay-in-4 instalments as a concept is centred on the consumer and, again, Citi does not envisage this will compete with Afterpay or Zip Co directly on the merchant side.

Morgan Stanley agrees Afterpay has protection from the sales referrals that stem from its merchant base and a well-known brand, including a branded digital checkout with merchants globally. Larger purchases can also be handled.


UBS points out the lucrative economics of BNPL, particularly in Afterpay's circumstances, were always going to attract competition. With credit interchange fees being less than 1%, the cost of Commonwealth Bank's offering is a fraction of Afterpay's, where merchant fees range from 3-7%.

This will bring into sharp focus the "no surcharge" rules that the industry has placed on consumer payment choices. UBS has survey data which indicates that BNPL users are generally unaware of the costs to merchants for the service.

The broker suspects the "no surcharge" rules could eventually be regulated, in line with the RBA governor's commentary last December, and the removal of these rules would be more negative for Afterpay than Zip Co, given the economics of the latter also rely on consumer fees and interest payments.

Goldman Sachs does not anticipate regulatory controls will be an issue, assessing the Afterpay business model is self-regulating. Afterpay has no recourse to the borrower and the value it lends tends to be small. The business model has limited incentive to continue lending to those customers that cannot repay.

Given the costs to a merchant from the Commonwealth Bank offering are lower, the main question Citi asks is whether Afterpay can maintain its fee structure. The durability of Afterpay's fees could ultimately depend on the size of its consumer base and consumer engagement.

Citi agrees Zip Co is less exposed from a merchant fee perspective as it generates the majority of its revenue from the consumer.

Morgan Stanley suspects the reason why Commonwealth Bank can price at standard merchant fees is its offer will be linked to a bank account, and so minimal processing costs occur on repayments.

Yet, to counter this, the broker asserts Afterpay's processing costs of around 110 basis points can be cut substantially. The Commonwealth Bank offering is limited to eligible customers so the net credit losses should be below other BNPL. On the other hand, net margins will also be materially below Afterpay's 220 basis points net margin.


Klarna, along with Afterpay, is a market leader in the US. The Swedish company has a presence in Australia with a pay-in-4 feature through its app or anywhere Visa is accepted.

Commonwealth Bank is not entirely new as a competitor in BNPL because it has a partnership with Klarna. The instalment feature of BNPL has always had low barriers to entry, in Citi's view, and can be replicated easily.

Yet an issue for the industry is whether Commonwealth Bank's replication of the Klarna “shop anywhere” product will have a negative impact on Klarna's Australian prospects.

Citi believes Klarna is actually a bigger threat to Afterpay and Zip Co, with a superior app offering and features such as a WishList and price alerts. From Zip Co's perspective the new offer from Commonwealth Bank could reduce traction for its "Tap & Zip" customers that do not carry over a balance at the end of each month.

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