Afterpay’s sale to Square might be the life raft investors need as major competitors come ‘breathing down its neck’

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  • Square has placed a $39 billion bid to acquire Afterpay and integrate it into its own Cash app.
  • The deal would see Afterpay shareholders receive Square stock, with co-founders Nick Molnar and Anthony Eisen to end up with around $2.6 billion worth each.
  • Payment consultant Brad Kelly told Business Insider Australia that both are getting out of the sector right before major competitive threats and increased regulatory oversight put Afterpay’s future at serious risk.
  • Visit Business Insider Australia’s homepage for more stories.

The surprise bid for Afterpay by payment giant Square has created a major stir among market analysts, as they guess at what it all means for the buy now, pay later (BNPL) sector.


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If successful the $39 billion offer, announced to the ASX on Monday, would see Square acquire Afterpay outright, with plans to integrate it into its existing Cash App.

The deal appears to recognise the potential of the payment niche, which sprung up in Australia and parts of Northern Europe, but is quickly spreading through the United States, United Kingdom and an array of emerging markets.

The pitch to the market was clear from both side of the negotiating table. For Square, the acquisition would “deepen and reinforce” relationships with customers and help it to roll out the feature as part of its offering to retailers. Afterpay meanwhile claims the deal gives it an inside lane on the all-important US market, as well as “access to a new category of in-person merchants”.

That’s before mentioning the pay day it represents for Afterpay investors. All will nab a 30% trading premium in converting their existing shareholders to Square ones. Co-founders Nick Molnar and Anthony Eisen will each receive a stake worth $2.6 billion in Square for their trouble.

Not bad at a time they faced growing competition at home and the ever-present threat of regulation.

“Any change to current regulatory protection could drastically alter the existing business model of BNPL operators,’ IBISWorld senior analyst Yin Yeoh said. “BNPL providers have previously argued against industry regulation, but strong revenue growth this year may make regulation change more likely.”

The writing on the wall

The pressure on Afterpay and its rivals had been mounting for months as they braced for the entry of four different behemoths into the BNPL space.

“Afterpay had Apple, the largest company in the world, PayPal, the world’s biggest payment gateway, Citibank, one of the world’s biggest banks, as well as Australia’s largest, the Commonwealth Bank, all breathing down its neck,” payments consultant Brad Kelly told Business Insider Australia.

From that perspective, the timing could almost not have been better for smaller challengers, even ones with billion-dollar valuations, to consolidate.

Afterpay would be offered via Square’s Cash app and would bolster Square’s own merchant numbers by up to 100,000, according to Royal Bank of Canada (RBC)’s capital markets team.

But Kelly believes there was also a personal impetus for the founders to sell as the buy now, pay later growth story began to fade.

“There’s only so many customers they can have in Australia and it has peaked. There’s no more growth,” he said. “The founders know this and they are hitting the eject button and cashing out.”

The possible end of BNPL companies

In that sense, it’s a reasonable risk management strategy, allowing Molnar and Eisen to convert their stock from a mercurial and controversial payment niche to Square’s larger, more diversified payment network.

Prior to the bid, Afterpay was trading at around a 38% discount to its all-time high of $158 per share. While it’s not perfect timing, Kelly says it’s about as good as company was going to get.

“They’re selling it now because no one else is going to buy it,” he said. “Buy now, pay later is purely a feature, it is no longer a product in and of itself.”

According to Kelly, CBA for example will use the feature to convert people from debit cards, which charges around 2 cents per $100 transaction, to a BNPL feature from which it can derive 80 cents revenue.

Square, meanwhile, has its eye firmly on PayPal, Wilson analysts said.

“We see the expansion of functionality as a direct attempt to compete against PayPal, particularly given PayPal is slating [calendar year] 2021 for launch of their “super-app”, which includes numerous existing Cash-app features [such as] crypto, investing, [and] payments.”

As these payment giants get ready to battle it out, and regulators face greater pressure to intervene, there may be a big question mark over the viability of those small BNPL companies left behind.

They of course face the same threats Afterpay did. As a group splitting around 40% of the local market between them however, they may not entertain the same buyout opportunities.

Insync Fund Managers, which is invested in PayPal, summed up the threat as such.

“As one of the existing 9 million Australian PayPal account holders – 361 million active users globally, representing 55% of all global online transactions outside of China – you check your PayPal account and notice a new button. One click and you have BNPL without being assessed and signing-up for yet another provider. Knowing the above facts, which would you choose? Why even go through the hassle to sign up with another provider?”

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