Yesterday’s announcement that USA listed Square (NYSE:SQ) will take over Afterpay (ASX:APT) demonstrates just how important the Buy Now Pay Later (BNPL) sector is on a global scale.
In my opinion, the Afterpay deal with Square makes a lot of sense for all stakeholders. Jack Dorsey is a visionary leader in the Steve Job mould. He has grown both Twitter and Square into multi-billion dollar companies that have changed the worlds of media and financial services significantly. Afterpay shareholders will in due course receive shares in Square, an emerging and disruptive financial services company well positioned for the next decade.
When we first looked at Afterpay in 2017 for clients at about $5 a share I had my doubts about it. I was initially concerned that it was just high-risk consumer debt that would eventually become bad debt. But the more closely we looked it was clear that BNPL was in fact disruptive and a far better option for consumers than the alternatives. At its current price of $129 per share Afterpay has become one of the best investments we have ever made.
BNPL has been around in one way, shape or form for years, whether as credit cards or the Harvey Norman ‘interest free’ debt that emerged in the 1990’s. This is a classic example of the incumbents being complacent and ultimately being disrupted. The biggest losers with the emergence of BNPL, especially domestically, are the big banks and their ridiculously high interest rate credit card products.
It reminds me of the famous quote from Amazon founder Jeff Bezos when he said, ‘your margin is my opportunity. That is the case here. I would personally prefer young people don’t use consumer credit at all. But if they are going to, they are better off if they use Afterpay rather than a high interest rate bank credit card.
Perhaps the biggest surprise is just how slowly the banks have been to react along the way. I will never understand why one of the big banks here in Australia didn’t take over Afterpay a few years ago for a fraction of the current price. From here expect more consolidation, strategic partnerships, and takeovers. The BNPL sector is here to stay and is just another example of the changing financial system and traditional banking sector being disrupted.
It also shows just how short-sighted, fearful, and low conviction share market investors can be. It was just 2 weeks ago that Afterpay and the BNPL stocks were smashed on the news that PayPal and Apple were entering the sector. Like most things with the share market that was an overreaction. What it did highlight to me was that the big players are beginning to wake up to the potential opportunity in this sector. BNPL is still in its relative infancy, and these new entrants show there is a long way to go here.
More to the point Apple and PayPal coming to the party was a signal to me that we were about to see a lot more activity. Consolidation amongst the couple of dozen incumbents as well as the bigger first movers looking to develop strategic partnerships with larger players such as Amazon, Alibaba, or the big financial institutions. All of this activity really just helps the BNPL sector become mainstream faster and creates awareness in a product that is significantly better than the competition.
I think Afterpay and Square both have outstanding long-term potential, and I am really excited to see what they can achieve together in the years ahead.
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