The Buy Now Pay Later (BNPL) sector comprises of players that allow for instant purchase of products, with payments received on a later date. The platform has gained popularity on the back of various factors, including ease of registration, ‘no interest’ benefits, payments in instalments, etc. The sector’s growth is, however, hindered by the high late fees charged by companies. Nonetheless, the sector has witnessed an astounding growth in the last few years due to increased usage of BNPL platforms for purchase of essential items like clothing and groceries.

Going forward, the increased use of mobile payments and a switch to online retail purchases is expected drive the demand for BNPL services. Moreover, companies operating in the segment will face stiff competition as new market entrants or more innovative products challenge the business. Large scale adoption of these services may also compel the government regulatory bodies to intervene and introduce new regulations for consumer protection.

Figure 1. Comparison Chart: S&P/ASX 200 vs S&P/ASX All Technology Index  

Source: S&P Global, Kalkine

Understanding the Business Model: A BNPL service provider simply acts as a connecting link between customers and retailers. As a business, these companies allow for the purchase of goods without any instant payments and ensure cash flows for the retailers, which is not possible if the purchases are made directly. In return for the services provided, BNPL companies charge businesses in the form of transaction fees and commissions. Payments by customers purchasing the goods are allowed in the form of periodic instalments, with a late fee attached to ensure timely payments. 

Figure 2. BNPL Business Model

Source: Laybuy Prospectus, Kalkine

Impact of COVID-19: As the global economies were hit by COVID-19, a decline in consumer spending casted a pall over businesses. Closure of stores and other containment measures led to a sharp decline in sales, which caused the businesses to shift their focus towards other means of making money. To survive in the current economic environment, the presence of well-established digital capabilities helped some businesses to stay afloat. While some of the retail giants in Australia continued to perform well despite the challenges due to their promising history, smaller players in the segment turned towards BNPL services to attract customer traffic. Increased online retailing has been a key catalyst for increased usage of BNPL services after the outbreak of the pandemic. Moreover, a search for alternate means to finance purchases as consumers reduced the usage of credit cards has also contributed towards the sector’s growth.

Reasons for the Changing Payment Landscape

• Demand for Convenience and Personalisation: The payment landscape is expected to see significant changes over the next 5 -10 years, with the increasing shift towards, digital, mobile, and social media. Customers these days prefer personalised experience from financial institutions for convenience. To keep up with these changes, banks and financial institutions have to be proactive in anticipating the customers’ needs and preferences, which calls for an assessment using data analytics. There must be a proper plan in place to ensure privacy and data protection while the customers transform and embrace the digital world.

• Non-Traditional Payment Solutions: Several customers are now using their smartphones to make payments, as innovative solutions from recently established players eclipsed the usage of traditional payment methods. This new wave of consumer behaviour requires the payment solution providers to introduce quicker and secure means of transacting, to incorporate the use of digital currencies to support cross border transactions, and to modify their business model to serve the evolving needs of customers.

• Relevance of Technology: With the increased usage of mobile internet, the demand for digital commerce has been accelerating. Technological advancements in the digital world have led to more and more customer data being shared among banks, retailers, and card providers, which will be used as a tool for growth after customers completely give up the traditional means of transacting.

Key Trends Explained

• Increase in Online Spending: The outbreak of COVID-19 has brought several changes in consumer behaviour, one of them being a shift to online shopping. In the last few months, online retail sales have witnessed a significant increase as sales from physical stores declined due to the risk of infection. In the battle against large and established retail players, small–to-medium-sized businesses are offering flexible payment methods, hence, increasing the demand for buy now, pay later platforms. According to the Australian Bureau of Statistics, 9.8% of the total retail turnover came from the online channel in July 2020, up from a contribution of 6.3% in July 2019.

Figure 3. Online Sales Trend in Australia

Source: Australian Bureau of Statistics

Figure 4. Growth in Online Shopping across different States in April 2020

Source: Australian Post 2020 eCommerce Industry Report, Kalkine

• Focus on Marketing: As more and more consumers began to register on BNPL platforms due to the pandemic, companies resorted to increased marketing investment to support sales growth and global expansion. This forms a crucial step in the journey of establishing the brand name in the current competitive environment.

• Increase in Retail Spending – Apart from a shift to online channel for making purchases, increased spending on retail is a key factor shaping up a BNPL service provider’s performance. In Australia, the adoption of such services has been increasing rapidly in the consumer retail market, which is expected to grow further as consumers continue to purchase essential goods online. Moreover, as the economy reopens and the country adapts to the new normal, both the consumer staples and consumer discretionary players in Australia are expected to witness an upliftment in sales. Notably, the retail sector has continued to be a resilient one during the pandemic due to the ever-increasing demand for essential goods.

Figure 5. Monthly Retail Turnover July’18 to July’20 – Seasonally Adjusted Estimate

Source: Australian Bureau of Statistics

• Increased Customer Savings Backing Demand: Due to the recent economic downturn, a large set of population has been hit by unemployment, that made them contemplate their expenditure and switch to a more conservative approach while making purchasing decisions. As a result, there has been a decline in transactions through credit cards and a halt to extraneous purchases. However, unavoidable purchases, like those of essential daily items, have led to increased popularity of BNPL services among customers. The provision of flexible payment options has helped them continue shopping despite the financial pressures due to COVID-19. As shown below, the usage of BNPL services is highest in the age group 25-34 years.

Figure 6. Usage of BNPL vs Credit Card Services for the 12 Months Ended 30^th June 2018

Source: LayBuy Prospectus 

Recent Developments

• Australian Competition Tribunal (ACT) Support BNPL Providers: The ACT recently reviewed the Australian Competition and Consumer Commission’s (ACCC) conditions relating to BNPL finance to strengthen consumer protection requirements for BNPL providers. ACCC’s decision in 2019 prohibited code signatories to offer BNPL finance in unsolicited sales of new energy products. ACT has now removed this   prohibition on BNPL finance and approved authorisation of a new customer code for retailers offering new energy tech products. . It has also denied the New Energy Tech Consumer Code administrator’s ability to impose mandatory standards on signatories choosing to apply for future new energy tech products and services. The Tribunal summarised its findings stating that “BNPL is a significant and popular form of finance and restricting such finance options to consumers may prove detrimental.”

• Review by ASIC: With many users now registered on BNPL platforms, the sector has gained attraction from regulatory bodies, especially with respect to provisions related to consumer protection. The Australian Securities and Investments Commission (ASIC) is assessing the legal protections in place by other countries and is expected to announce its findings and suggestions in October 2020. The absence of regulations in the BNPL space calls for immediate attention considering massive growth in users and continued expansion by players in the segment.

Sector Risks

• New BNPL Platform by PayPal: Towards the end of August 2020, US e-payment provider, PayPal, recently launched a new buy-now-pay-later platform, ‘Pay in 4’, that relieved the merchants of any extra fee upon installation. The effect of this announcement left the Australian BNPL companies trembling, with shares of large players like APT, Z1P, and SZL falling at a significant rate. Earlier during the year, the company launched its ‘Pay After Delivery’ service in Australia. Therefore, continued development by such large players can hinder the growth of Australia’s BNPL sector. 

• Launch of Interest Free Credit Cards by NAB and CBA: The National Australia Bank recently launched its StraightUp Card, free of interest or other charges with a simple monthly fee. Following its lead, the Commonwealth Bank of Australia launched a similar card named Neo, which will provide customer credit upto $3000, with no interest payment, late fee, or foreign currency fee. The move sees the big banks in Australia attempting to take advantage of changing consumer preferences and diverting the traffic from BNPL players on the back of their rich brand reputation. 

• Competition and Regulation Risk: Apart from the positive trends witnessed by the BNPL sector and a continued rise in demand for such services, there remains a threat of scrutiny by regulatory bodies as companies witness an increase in customer base. In addition, new entrants in the segment will attract further attention and may lead to new regulations that can become barriers to growth. 

• Default by Customers: The risk of default on part of customers registered on the BNPL platform may lead to debt collection and can be a challenge for the company if it fails to recoup those debts. 

Figure 7. Risks/Threats to BNPL Players in Australia

Source: Kalkine

Outlook: A massive increase in customer base of BNPL companies is directly attributable to a transformation in consumer behaviour and businesses to digital channels and a preference for faster and more personalised modes of payment. The increased use of mobile payments and a switch to online retail purchases is expected to drive the demand for BNPL services. After the pandemic subsides, the sector is expected to remain a beneficiary of the new normal as consumers continue to choose digital means of making payments for ease and convenience. Key threats include stiff competition from new market entrants, innovative product launches, new regulatory changes for consumer protection, etc. 

II. Investment theme and stocks under discussion (FXL, Z1P, OPY and APT)

After understanding the sector, let us now look at four companies listed on the ASX. The price potential of the companies under discussion has been analyzed based on ‘Price/Sales’ method.  

1. ASX: FXL (FlexiGroup Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 510.51 Million)

FlexiGroup Limited (ASX: FXL) is a provider of point of sale lease and rental finance for the IT equipment, electrical appliance, and other retail markets.

Valuation

2. ASX: Z1P (Zip Co Limited)

(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 3.28 Billion)

Zip Co Limited (ASX: Z1P) offers point-of-sale credit and payment solutions to customers and integrated Retail Finance solutions to merchants.

Valuation

3. ASX: OPY (Openpay Group Limited)

(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 334.39 Million)

Openpay Group Limited (ASX: OPY) is a provider of payments technology that offers a Buy Now, Pay Later product.

Valuation

4. ASX: APT (Afterpay Limited)

Afterpay Limited (ASX: APT) provides technology-driven payment solutions for consumers and businesses through its Afterpay and Pay Now services.

Valuation

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