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Afterpay

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Afterpay Limited
Type of businessSubsidiary
Type of site
Fintech
FoundedOctober 2014; 10 years ago (2014-10)
Area servedAustralia
New Zealand
Canada
United States
United Kingdom
Founder(s)Nick Molnar
Anthony Eisen
Key people
IndustryFinancial technology
RevenueIncrease AU$924.7 million (FY2021)
Net incomeDecrease AU$159.4 million (FY2021)
ParentBlock, Inc.
Subsidiaries
  • Afterpay Holdings Pty Ltd
  • Afterpay US, Inc.
  • Afterpay Australia Pty Ltd
  • Touchcorp Limited
  • Clearpay Finance Limited
  • Afterpay Canada Limited
URLafterpay.com
UsersIncrease 16.2 million (June 2021)
Current statusActive
Native client(s) on

Afterpay Limited (abbreviated as Afterpay) is an Australian financial technology company best known for its buy now, pay later (BNPL) service. It operates in Australia, the United Kingdom, Canada, the United States, and New Zealand. Afterpay was founded in 2014 by Nick Molnar and Anthony Eisen.[1]

In June 2017, Afterpay merged with one of its technology suppliers, Touchcorp, to form the Afterpay Touch Group.[2] In November 2019, the company was renamed Afterpay Limited.[3] In August 2021, Afterpay and American payments company Square, Inc. (later renamed Block, Inc. in December 2021) announced they had entered into arrangements for Square to acquire Afterpay for US$29 billion (A$39 billion), which was later completed on January 31, 2022.[4][5][6]

History

Afterpay was founded by Molnar and his then-neighbor, Eisen, in October 2014.[7] On 4 May 2016, the company listed on the Australian Securities Exchange with an A$25 million IPO.[note a][8] In January 2018, American venture capital fund Matrix Partners announced its intention to invest A$19.4 million in Afterpay to support its entry into the US retail market. Afterpay was launched in the US in mid-May 2018 with retailers such as Anthropologie, Free People, and Urban Outfitters.[9] With reported underlying sales of A$4.7 billion in the 11 months to May 2019, in June 2019, Afterpay raised A$317.2 million in fresh capital through a share issue, in part to help fund its international growth.[8]

Two months later, the company revealed that it had over two million active users and 6,500 merchants in the US and announced a strategic partnership with Visa Inc.[10][11] On 21 May 2020, the company announced that its operations had grown to five million active customers in the US.[12]

In August 2018, Afterpay acquired 90% of the equity in Clearpay, a UK based BNPL service, for a total consideration of one million Afterpay shares.[13][14][15] In its 2019 financial year update, the company announced that its growth in the UK was faster than that of the US, with more than 200,000 UK customers joining in the first 15 weeks.[16][11]

During the COVID-19 pandemic, many retailers closed physical stores and potential customers were increasingly hesitant to shop in-person. The Financial Review commented that Afterpay's growth was spurred by "investors [who] are seeking exposure to e-commerce as the coronavirus crisis pushes more shopping online, and continuing government stimulus will keep bad debts low”.[17] In 2020, Afterpay unveiled plans to expand its services to at least four continents, including Asia, to capitalize on the online shopping surge brought by the COVID-19 pandemic.[18] This plan would entail the acquisition of Singapore-based, Indonesia-focused buy-now-pay-later service EmpatKali.[18]

In August 2021, Afterpay and Square, a digital payments company, announced that Afterpay would be acquired by Square. Square will pay A$39 billion in stock for the acquisition and the process is expected to be finalised in the first quarter of 2022.[4][5][19] It was reported that Molnar and Eisen will lead Afterpay's merchant and consumer businesses inside Square.[4] Shares of Afterpay in Australia closed higher after the news.[20]

In November 2021, Afterpay announced that they would launch BNPL for subscriptions, such as for gym memberships and entertainment subscriptions, to US customers.[6]

On January 12, 2022, the Bank of Spain approved Block's takeover bid of Afterpay,[21] marking the final hurdle in the acquisition merger. On January 19, 2022, Afterpay suspended trading of its shares on the ASX.[22] On January 20, 2022, the merged entity trading as Block commenced trading on the ASX under the ticker SQ2.[22] On January 31, 2022, Block completed the acquisition of Afterpay, officially making it a subsidiary.[6]

Business model

Afterpay is best known for its "pay later" service that allows in-store and online customers to purchase a product immediately and pay with four equal fortnightly repayments. The repayments are interest-free, but if they are not paid every two weeks as required, late fees of (in Australia) $10 per indiscretion are incurred.[23][24]

The business is supposedly paid the full amount within a few days, less a processing fee of 4.19% (as of January 2019). Afterpay bears the risk of default by the customer. Its income consists of processing fees and late payment fees.[24][25]

Impact, criticism and regulation

The rise of BNPL services such as Afterpay has been cited as a cause of decreasing credit card use in Australia.[26] From 2018 to 2019, the number of credit card accounts dropped nearly 5% from 16.7 million to 15.89 million,[27] with 69% of millennials using their credit card less as a result of Afterpay.[28]

In February 2020, Afterpay was reported to have 3.6 million active customers in the US, 3.1 million in Australia and New Zealand, and 600,000 in the UK.[29]

Millennials are Afterpay's main customer demographic, accounting for 75% of all users.[30] Another significant segment of Afterpay's customer base is university students, of which one third have been found to use short-term borrowing.[31]

Afterpay has been criticized as being harmful to consumers. Studies have found that in order to keep up with payments, some users experience financial stress, incurring debt and neglecting essential needs.[32][33] PRObono Australia said in 2019 that it was "putting vulnerable young people into vicious cycles of debt that follow them long after they stop spending".[34] Despite this negative press, in 2019, it was reported that 95% of payments had not incurred a late fee.[35]

In 2018, Afterpay announced it earned 24.4% of its income from late fees and 75.6% from merchant fees.[36]

Market commentators suggest that while BNPL payment options (such as Afterpay and its competitors) are showing significant upside for investors, such growth may not be sustained unless the company continues to show that it is able to generate larger basket sizes (i.e., extra sales that consumers would not otherwise have made).[37]

In April 2019, legislation was passed to provide the Australian Securities & Investments Commission (ASIC) with "Product Intervention Powers" (PIP). These powers provide ASIC with authority to intervene where it identifies a risk of significant detriment to retail consumers (including those using BNPL services like Afterpay).[38][39] The company supported the introduction of these powers as a way to provide regulatory oversight and protect consumers.[40]

In June 2019, Afterpay disclosed that it was under probe by AUSTRAC for potential breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF regulations). The company is "in dialogue" with the regulators, and the outcome of the probe has yet to be determined.[41] AUSTRAC, upon identifying several concerns with its compliance, ordered the appointment of an external auditor at Afterpay's expense to examine its compliance with the AML/CTF regulations.[8][42][43]

In November 2020, the ASIC released a report on the BNPL industry, highlighting the need for consumer protections via existing and impending regulatory changes, yet did not call for any new regulation. The Australian Finance Industry Association's Code of Practice, which came into effect on 1 March 2021, is voluntary, so it does not have the teeth of financial regulation.[44] BNPL platforms charge no interest to its customers, and hence are not subject to Australia's Credit Act.[44] However, during June 2022, the Albanese Government announced that it planned to regulate the BNPL sector under the Credit Act.[45]

In November 2023, Afterpay came under fire on A Current Affair for holding funds from allegedly high-risk businesses, causing a liquidity crisis for many small businesses. Small businesses are at a particularly high risk of having their cash reserves depleted due to delayed payment from Afterpay, often as much as three months.[46][47] Afterpay's use of a 'rolling reserve' means that individual businesses can be out tens of thousands for up to three months, with these funds only gradually released in the form of micropayments e.g. $50 at a time, but not the interest on these funds. Customer use of Afterpay is so high for some businesses, however, that opting out may translate to significant lost business.[48]

Notes

  • ^[note a] : Guardian Australia reported that Afterpay raised A$125 million to list on the ASX; however, A$25 million was raised.[49][50]

References

  1. ^ Willis, Charlotte. "How a recession gave one Aussie guy a billion-dollar business idea". news.com.au. Retrieved 7 January 2021.
  2. ^ Simmons, David. "Afterpay and Touchcorp Merger is Now Complete". Business News Australia. Retrieved 31 March 2019.
  3. ^ "Results of 2019 Annual General Meeting". APT: Announcements. Australian Securities Exchange. Retrieved 7 November 2020.
  4. ^ a b c Shapiro, Jonathan; Eyers, James (2 August 2021). "'Perfect partner': Square buys Afterpay in $39b deal". Financial Review. Australia. Retrieved 2 August 2021.
  5. ^ a b "Square, Inc. Announces Plans to Acquire Afterpay, Strengthening and Enabling Further Integration Between its Seller and Cash App Ecosystems" (Press release). Square, Inc. 2 August 2021. Retrieved 2 August 2021.
  6. ^ a b c "Block, Inc. Completes Acquisition of Afterpay" (Press release). Block, Inc. 31 January 2022.
  7. ^ Kauflin, Jeff (3 July 2018). "How A 28-Year-Old Turned Layaway For Millennials Into A Billion-Dollar Business". Forbes. Retrieved 2 August 2021.
  8. ^ a b c McGowan, Michael (19 June 2019). "Buy now, pay later: how Afterpay went from a triumphant share issue to an Austrac investigation". Guardian Australia. Retrieved 2 August 2021.
  9. ^ Faint, Paris. "Afterpay lands in the US, keen for a slice of $3.8 trillion market". Business News Australia. Retrieved 1 April 2019.
  10. ^ Kruger, Colin (9 August 2019). "Add now, profit later: Afterpay wins half a million new US customers". The Sydney Morning Herald. Retrieved 9 August 2019.
  11. ^ a b Eyers, James (27 August 2019). "Afterpay customers exceed 5 million". Financial Review. Australia. Retrieved 28 August 2019.
  12. ^ "Afterpay share price on watch after hitting 5 million active US customers". The Motley Fool Australia. 21 May 2020. Retrieved 23 May 2020.
  13. ^ "International Expansion Progresses and Capital Raising" (PDF). ASX Announcement. Afterpay. Retrieved 1 April 2019.
  14. ^ Baird, Roger. "Afterpay fine tunes UK expansion". Altfi. Retrieved 1 April 2019.
  15. ^ Wightman-Stone, Danielle (6 June 2019). "Afterpay Touch Group launches 'Clearpay' in the UK". Fashion United. Retrieved 7 June 2019.
  16. ^ "FY2019 Results Announcement" (PDF). Afterpay Touch Investor Centre. Retrieved 28 August 2019.
  17. ^ "Afterpay defies gravity amid e-commerce scramble". Financial Review. Australia. 3 July 2020. Retrieved 30 October 2020.
  18. ^ a b "Tech in Asia – Connecting Asia's startup ecosystem". www.techinasia.com. Retrieved 11 December 2020.
  19. ^ Peters, Jay (1 August 2021). "Square to buy Afterpay, which offers a 'buy now, pay later' service, for $39 billion in stock". The Verge. Archived from the original on 1 August 2021. Retrieved 2 August 2021.
  20. ^ Rooney, Kate (2 August 2021). "Square to buy Australia's Afterpay in $29 billion deal as 'buy now, pay later' trend takes off". CNBC. Retrieved 3 August 2021.
  21. ^ Danckert, Sarah (11 January 2022). "Block's Afterpay bid wins final approval from Spanish central bank". The Sydney Morning Herald. Retrieved 27 January 2022.
  22. ^ a b "Afterpay clears last hurdle: Block to trade on ASX". Australian Financial Review. 11 January 2022. Retrieved 27 January 2022.
  23. ^ Bourlioufas, Nicki. "Afterpay's US Foray Carries High Expectations". FN Arena. Retrieved 31 March 2019.
  24. ^ a b "Should your business use Afterpay? All the pros and cons explained". SmartCompany. 15 January 2019. Retrieved 9 December 2021.
  25. ^ "Investor frenzy in 'buy now pay later' as Australians wipe billions of dollars off credit card debt". ABC News. Australia. 16 August 2020. Retrieved 18 November 2020.
  26. ^ Khadem, Nassim (17 August 2020). "Australians ditch credit cards as millennials turn to BNPL players like Afterpay, Zip". ABC News. Australia. Retrieved 8 January 2021.
  27. ^ "Payments Data". Reserve Bank of Australia. 2019. Retrieved 30 October 2020.
  28. ^ "How millennials manage money". Alpha Beta Strategy Economics. 2019.
  29. ^ PYMNTS (28 February 2020). "Afterpay Has More US Customers Than Australian". PYMNTS.com. Retrieved 30 October 2020.
  30. ^ "Afterpay shows Millennials the new force in markets". Financial Review. Australia. 18 January 2019. Retrieved 30 October 2020.
  31. ^ West, Tracey; Cull, Michelle (17 July 2020). "Future Expectations and Financial Satisfaction*". Economic Papers: A Journal of Applied Economics and Policy. 39 (4): 1759–3441.12292. doi:10.1111/1759-3441.12292. hdl:10072/399080. ISSN 0812-0439. S2CID 225589609.
  32. ^ Eyers, James (16 November 2020). "One in five buy now, pay later users is missing payments". Australian Financial Review. Australia. Retrieved 2 August 2021.
  33. ^ McGowan, Michael (20 September 2017). "Afterpay: buy-now pay-later scheme soars in popularity but experts sound warning". Guardian Australia. Retrieved 10 September 2018.
  34. ^ Michael, Luke. "Crisis coming: buy now pay later services target vulnerable young women". PRObono Australia. Retrieved 14 March 2019.
  35. ^ Boyd, Tony. "Afterpay regulatory risks fading". Australian Financial Review. Australia. Retrieved 4 February 2019.
  36. ^ Chau, David. "Afterpay's late fees make up 24pc of its income; ASIC recommends buy now, pay later law reform". ABC News. Australia. Retrieved 10 September 2018.
  37. ^ Mitchell, Sue (20 December 2018). "Retailers face Afterpay hangover, says UBS". Australian Financial Review. Australia. Retrieved 31 March 2019.
  38. ^ Bindi, Tas (4 April 2019). "ASIC's new product intervention powers becomes official". The Adviser. Retrieved 7 June 2019.
  39. ^ "Design and Distribution Obligations and Product Intervention Powers legislation has been passed". Hall and Wilcox. Retrieved 7 June 2019.
  40. ^ "Business Update" (PDF). Afterpay Investor Centre. 6 June 2019. Retrieved 7 June 2019.[self-published source?]
  41. ^ Kruger, Colin (6 June 2019). "Austrac scrutinising Afterpay over anti-money laundering compliance". The Sydney Morning Herald. Retrieved 7 June 2019.
  42. ^ "AUSTRAC orders audit of Afterpay's compliance with financial crime legislation" (Press release). AUSTRAC. Retrieved 13 June 2019.
  43. ^ Han, Misa; Shapiro, Jonathan (13 June 2019). "AUSTRAC orders Afterpay to hire external auditor". Australian Financial Review. Australia. Retrieved 13 June 2019.
  44. ^ a b "'Regulation is not enough': Afterpay defends the BNPL industry code of conduct, as consumer advocates slam it as toothless". Business Insider Australia. 3 March 2021. Retrieved 26 July 2021.
  45. ^ Butler, Ben (7 June 2022). "Embattled buy now, pay later sector to be regulated under credit laws". the Guardian. Retrieved 12 June 2022.
  46. ^ "The Afterpay fine print crippling Aussie small businesses". 9now.nine.com.au. Retrieved 11 November 2023.
  47. ^ Afterpay fine print 'crippling' small businesses | A Current Affair, retrieved 11 November 2023
  48. ^ Turner-Cohen, Alex (21 November 2023). "Afterpay under fire as more merchants expose 'rort' of rolling reserve". Retrieved 21 November 2023.
  49. ^ Thumm, James (5 May 2016). "Afterpay Lists on ASX". PowerRetail. Retrieved 2 August 2021.
  50. ^ "ASX Announcements: Afterpay Holdings Limited IPO and Business Update" (PDF) (Press release). Afterpay Holdings Limited. 4 May 2016. Retrieved 2 August 2021 – via OpenBriefing.
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