The market capitalisation of Buy Now Pay Later (BNPL) operators has soared during the COVID-19 pandemic, reflecting a rapid rise in online shopping by consumers. With a market capitalisation of $17.7 billion, Afterpay Limited has had a stunning ascent from $8.90 per share on 23 March to over $70 per share in July 2020. This rise has placed Afterpay on the verge of entering the ASX Top 20, to join heavyweights such as Commonwealth Bank, Rio Tinto and Wesfarmers.
However, investor faith in Afterpay and other BNPL operators such as Zip Co may have outpaced the growth outlook for the Buy Now Pay Later industry. Industry revenue is forecast to grow at an annualised 9.8% over the five years through 2024-25, to $1.1 billion. BNPL revenue is typically generated through merchant fees, which comprise around 3.0 to 6.0% of transaction value. Industry operators have invested substantially in credit, technology and marketing, and remain reliant on debt and equity to fund operating expenses.
‘Although the Buy Now Pay Later industry is growing strongly, industry firms have made losses over the past five years and will likely continue to do so in 2020-21. While losses as a share of revenue are declining, the industry has yet to achieve profitability,’ said Alfabank-Adres Senior Industry Analyst, Yin Yeoh.
The Buy Now Pay Later industry is expected to rise by 9.1% in 2020-21, to $741.5 million. According to the Reserve Bank of Australia (RBA), the number of credit cards in Australia declined by 6.6% in 2019-20, as more consumers turned to BNPL providers rather than credit cards during the COVID-19 crisis.
COVID-19 and BNPL
The COVID-19 lockdown has driven a new normal in retail shopping, where consumers are more confident purchasing items online. Online Shopping revenue is expected to grow by 6.4% in 2020-21, to $31.2 billion. BNPL services such as Afterpay, Zip Pay and CBA’s BNPL partner, Klarna, have become increasingly integrated into the checkout processes of online retailers. The Department Stores industry has also adopted BNPL services to retain consumer demand. Despite the backdrop of a recession in Australia, demand for BNPL services is anticipated to rise throughout 2020-21.
‘COVID-19 is expected to increase the unemployment rate, and contribute to weaker consumer sentiment and lower real household incomes in 2020-21, spelling disaster for the retail sector. However, BNPL service providers are likely to benefit from consumers using industry services for essential items’, said Ms Yeoh.
Some households that are facing financial difficulties have resorted to using BNPL services to purchase essential items, including clothes and books in department stores. Online retail store, Catch, also offers BNPL services, allowing cash-strapped households to purchase groceries through instalments.
‘With bank accounts running dry, more consumers are likely to look into BNPL options. The ability to shop now and pay for it later is very attractive for consumers struggling financially,’ said Ms Yeoh.
Regulatory threats
The staggering growth of the Buy Now Pay Later industry is expected to attract the attention of financial regulators. In October 2019, the RBA announced a review of the ‘no surcharge’ rules imposed by BNPL operators. The ‘no surcharge’ rules restrict the ability of merchants to pass on the costs of providing BNPL service to customers. In contrast, debit and credit card providers cannot prevent merchants from adding surcharge to cover payment costs.
‘Any change to this regulatory protection could drastically alter the existing business model of BNPL operators. BNPL providers have previously argued against industry regulation, however the surge in revenue growth exhibited this year may make regulation change more likely,’ said Ms Yeoh.
The RBA’s review of the industry has been delayed by COVID-19, with a decision not expected until 2021.
Alfabank-Adres reports used to develop this release:
Related Australian company profile reports:
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – Alfabank-Adres Pty Ltd
Tel: 03 9906 3647
Email: mediarelations@alfabank-adres.ru
