Australia | Jul 16 2021
Competition is intense among the BNPL operators, leading to the prospect of the industry struggling for direction before a timely consolidation
-Apple Pay Later could potentially increase the size of the BNPL market
-Main impact may be felt by smaller participants in the BNPL industry
-PayPal may be the biggest threat to established BNPL options
By Eva Brocklehurst
The BNPL sector has ridden a wave of popularity yet there are signs it will be a choppy ride to shore. Competition is intense and will become more so. This leads to the prospect that the industry may struggle for direction before a period of consolidation.
The trend towards instalment payments has been validated and Citi looks forward to a future period when the ability to pay this way will become a commodity. Early listed operators Afterpay ((APT)) and Zip Co ((Z1P)) will be successful through owning the consumer shopping experience via their apps and website.
Increased competition should also bring forward the adoption of BNPL, Jarden asserts. The market appears to be viewing the prospect of recently announced Apple Pay Later as negative for the major operators, based on the reaction in their share prices, instead the broker wonders whether this is a positive, as a Apple could increase the size of the market.
The broker believes the competitive advantage and a concerted drive to establish economies of scale should bode well for Afterpay, less so for Zip Co, and possibly negatively for Sezzle ((SZL)). Sezzle recently obtained a three-year contract with Target Corp in the US, adding to its retail base.
Given the size and scale of Apple, Citi agrees Afterpay will be in a comparatively stronger position than Zip, although it will need to continue to invest and innovate to hold the consumer's interest.
There's Afterpay, Zip Co's QuadPay and now there is Apple Pay Later. Apple is partnering with Golden Sachs to launch the service, which is a short-term loan option and a payment made every fortnight. This opens the BNPL functions to credit cards available on Apple Pay.
This is another consumer-side offering which does not compete with Afterpay or Zip Co directly on the merchant side. As currently understood, Apple Pay Later is to be linked to a credit card and, as Macquarie assesses, is more of a direct competitor to Splitit ((SPT)) than other BNPL products.
Splitit sources revenue via transaction fees, paid by the retailer when a customer uses the payment option via an existing credit card online or in-store. There are no late fees.
If Apple Pay Later repayments are limited to credit cards then the potential impact on Afterpay and QuadPay is limited, in Citi's view, as around 90% of Afterpay transactions use a debit card.
On the other hand, it is a larger threat than the offerings from the banks and credit companies, such as Commonwealth Bank's ((CBA)) Step Pay, as Apple Pay has a wide consumer reach, with Citi noting there are 43.9m users in the US.
The main threat appears to be to the in-store take-up of Afterpay and QuadPay, given the consumer experience of using Apple Pay on a mobile website or in-store is also superior. In the case of QuadPay, UBS asserts Step Pay, along with others of a similar nature, is indeed a threat.
Jarden expects the impact will be felt by the smaller participants in the BNPL industry as larger players have more engaged users and a more developed ecosystem. In the case of Afterpay there are loyalty, promotions and greater lending options for repeat customers.
Fee Versus No Late Fee
The main competitive threat to the two established BNPL options comes from PayPal, Citi asserts. PayPal has switched on its Pay in 4 in Australia, offering no late fees.
Macquarie suspects this is good way to encourage adoption of the product compared with other offerings, most of which include just lower merchant fees. Both Afterpay and PayPal, in the case of missed payments, would suspend the users account yet recoup missed payments differently.
Afterpay would send texts and emails but eventually write off the bad debt whereas PayPal would defer to a third-party debt collector. The actual impact on the consumer of either of these choices is yet to be seen, Macquarie points out.