Five years ago a small business in Canada, Shopify (NYSE: SHOP), has gone public in the US markets. It’s an amazing stock and a Fool favorite ever since, valued at 3700%. History could repeat itself with a fintech superstar from Australia, Afterpay (OTC: AFTP.F). It went public on the Australian stock exchanges in 2017, and the stock has climbed nearly 3,000% in three years.
Afterpay offers consumers a new way to shop without signing up for a credit card. Let’s say you want some Jimmy Choo boots. A pair will cost you around $ 1000. But maybe you don’t want or can’t pay the retail price in advance. This company allows you to postpay your purchase. With the service, you only pay $ 250 at checkout. Afterpay pays the rest (minus the cost to the retailer). Then you owe Afterpay $ 750, which you pay back in three installments over the next six weeks.
For consumers, it’s the equivalent of an interest-free loan. As Cosmopolitan put it in a recent article, “Your Credit Card Could Be Replaced.” It is not surprising that Visa (NYSE: V) wants to enter this market. And now Shopify wants to compete inside too. Does that mean the party is over for Afterpay?
First, let’s run some numbers
Afterpay just reported that buyers paid A $ 11 billion for products in its last fiscal year. This represents an increase from A $ 5.2 billion in fiscal 2019. The company has nearly 10 million active customers worldwide and 55,000 retailers participate in its network.
In the United States, growth has been even more spectacular. Afterpay now has more buyers there (5 million) than in Australia (over 3 million). In the United States, the underlying sales on the Afterpay platform increased by 330% compared to the previous year.
Of course, this fantastic growth spawned many imitators, including a company called Affirm, a ‘buy now, pay later’ start-up led by Max Levchin, the co-founder of Pay Pal (NASDAQ: PYPL). Affirm recently signed a collaboration agreement with Shopify. Could this partnership damage Afterpay? Or does it really validate the economic model?
Afterpay vs Affirm
At first glance, Affirm’s deal with Shopify makes the outfit seem like a pure copy of Afterpay’s business model. Excerpt from press release: “Upon checkout, approved Shop Pay customers will be able to divide the total amount of their purchase into four equal, bi-weekly, interest-free payments.” As Motley Fool Australia say, “This is the same as the Afterpay model.”
On closer inspection, however, there is an important distinction between the two companies. Afterpay does not perform credit checks on customers and is promoted as an alternative to credit cards. Affirm always performs credit checks. And if you use Affirm at a retailer outside of the Shopify network, your loan is no longer interest-free and you may be paying 15% interest. Right now, Affirm is more like a virtual credit card company that turns into an Afterpay clone in order to access Shopify’s network.
How does Afterpay avoid the risk of default if it does not perform a credit check? When a buyer selects the Afterpay option at checkout, the company’s software performs an internal check for fraud and refund capability. Every Afterpay buyer has account limits that start low and increase when your refund history is positive. Afterpay only approves one order at a time, and if a refund is not issued on time, customers cannot use Afterpay until the refund is issued (with a late payment). Therefore, Afterpay’s net transaction loss due to non-payment is only 0.6%.
Afterpay vibrates in the real world
At present, all of Afterpay’s business in the United States is derived from Internet commerce. This changes, as the company now collaborates with Apple (NASDAQ: AAPL) to enable shoppers to postpay for in-store purchases, using Apple Pay. He also works with Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) to provide post-payment functionality with Google Pay. This shift to mobile payment options gives Afterpay a huge advantage over its online competitors.
In Australia, 40,000 stores use Afterpay to facilitate shopping. About a quarter of the company’s sales come from physical retail. It looks like Afterpay’s incredible growth in the US continues as the fintech The company is expanding its credit-free offerings from internet commerce to real-world shopping.
It is still very early in the company’s journey. But it’s possible that Afterpay actually wins this credit card war. And so far investors have won anyway.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.