Contactless pay certainly seems to be on the rise. It’s hard to beat the conscience of being able to pay via a cell phone app connected to a bank account or credit card. Afterpay offers a unique solution for contactless pay that many may find more savory than credit cards, some of which have high-interest rates.
Afterpay is a buy now, pay later (BNPL) platform. Customers can purchase goods and services through equivalent payment installments. Late fees are assessed, but there is no interest charged. The company earns revenue through merchant fees, late fees, and cost-per-click advertising.
Learn more in the article below about how Afterpay attracts new customers and whether the formula works. Where Is Afterpay available? Is the company profitable? You are invited to scroll down below to find the answers to these questions and more.
Business Model Of Afterpay
Afterpay was founded in Sydney, Australia in 2014. The company set out to provide customers with a unique contactless pay solution, a way to purchase premium goods and services with a low down payment.
Here’s a summary of the company’s timeline:
- 2015: Officially launched in Australia.
- 2016: Debuted on the Australian public market.
- 2017: 1 million customer milestone reached, operations expanded into New Zealand.
- 2018: Launched in US Market
- 2019: Launched in the UK market under the Clearpay name.
- February 2021: Stock reaches a peak of $119.36 per share in the US.
- August 2021: Square (now Block, Inc.) announces a plan to acquire Afterpay for $29 billion
Buy Now, Pay Later
Have you ever had trouble paying for the new shoes you want? Or perhaps a new suit for work? Afterpay attends to dilemmas like this with a buy now, pay later service. Customers can purchase goods and services and then repay them in installments.
Payment plans typically involve 4 equivalent installments over 6 weeks. How are merchants paid? Afterpay reimburses merchants through reconciliation payments sent to a bank account.
How long it takes for this payment to be fully-processed depends on the bank, but most merchants can expect full reconciliation within 1-2 business days.
No Down Payment Required (Stores Set The Price)
Afterpay also does not ask its users to submit a minimum down payment. However, in some cases, a retailer may request a minimum payment.
Many stores have been known to do this, but it is not clear what impact if any, it has on the customers’ interest in using Afterpay’s services.
Merchants Must Register For Afterpay
It’s important to note that a merchant, such as a store or a restaurant, must enter an agreement to offer Afterpay. This is similar to how retailers accept certain credit cards or mobile payment apps.
A list of companies currently accepting Afterpay can be found here. Brand names include several familiar faces, such as Ray-ban, Pacsun, Levi’s, and Adidas among others.
Data regarding the number of merchants and customers using Afterpay is included in the funding, revenue, and valuation section below.
No Interest Or Credit Check
Afterpay does not require its customers to pay any interest on the installments. Late fees are assessed until a cap of 25% of the original purchase price is reached.
Credit checks are also not required, but the company does reserve the right to block purchases. Financing options are also not diverse, particularly if customers start missing payments.
This could attract customers who are tired of having to deal with credit card companies. Data shows that 23% of millennials don’t use credit cards. This is where companies like Afterpay step in with an alternative mode of payment, a trend that is catching the eye of federal regulators.
Mobile payment apps have skyrocketed in popularity within the past decade, and Afterpay is no exception. This market includes apps that allow contactless pay and allow participants to repay friends for goods and services.
The mobile app is available on both Google Play and the iOS store. Both online and in-store purchases can be processed at participating locations.
Customers have the power to search for products by typing the product name into the search bar. This can be advantageous for participating merchants, to have a third-party listing of their shelves where customers can compare prices with competing retailers.
Which Countries Have AfterPay?
Australia, New Zealand, the United States, the UK, and Canada are all countries that currently offer AfterPay. Afterpay operates under the Clearpay banner in the UK. Availability may be extended to more European nations in the future.
To add to the confusion, there is a Swedish company of the same name that offers the same services but only to Europeans.
How Does Afterpay Make Money?
Are interest-free payment installments too good to be true? What’s the catch? Learn in the section below about how Afterpay is attempting to develop sustainable sources of revenue.
There are three different ways for Afterpay to earn revenue: late fees, charges for retailers, and cost-per-click advertising. Merchant fees exist in two forms: variable and fixed.
Afterpay does not collect interest from users, however, it does assess late fees. These can pile up after missed payment installments. Customers who repeatedly miss deadlines may be unable to make purchases using Afterpay in the future.
Here’s what the late fee structure looks like:
- First missed deadline: $10
- Payments not made within 7 days of deadline: 7 dollars per week
- Cap: Late fees are capped at 25% of the original purchase price.
In FY 2021 it took Afterpay 23 days on average to recoup end-consumer payments. The same year, the company collected $87,306 (AUD) in late fees.
Afterpay introduced new advertising solutions in 2021 that enable brands to place ads directly within the mobile app. Not only can customers discover new stores, but now they can also discover new brands.
Here’s how it works:
- Merchants choose products they wish to promote.
- Listing formats are customizable.
- Afterpay generates revenue on a per-click basis.
Merchants who participate see a 20% boost in sales according to in-house statistical analysis from Afterpay.
It has not yet been revealed exactly how much income Afterpay generates with this advertising since the service is still very much in its infancy. However, with more than a million Afterpay app downloads already occurring, one can infer that cost-per-click advertising should generate a fair amount of revenue for the company.
Merchants do have to pay fees to Afterpay for offering the company’s services. Afterpay charges merchants a flat fee of 4-6% for every payment that is made by a consumer using Afterpay’s service.
Despite the fees, the upside is the potential for Afterpay to attract customers that the store would otherwise not have.
This is how merchant fees are applied:
- $0.30 fixed transaction fee
- 4-6% variable commission rate per transaction
How do merchants feel about the fees? Well, by the end of 2021 nearly 100,000 companies around the world had already signed up for Afterpay. So it would be safe to say that the commission rates have not deterred merchants from utilizing Afterpay.
Sometimes a little positive reinforcement can be a very good thing. Late fees were discussed earlier, but what about customers who always pay on time? Credit card companies have rewards programs, and now so does Afterpay.
In September 2021 Afterpay unveiled its Pulse Rewards loyalty program. There is no fee for joining the rewards program, but Afterpay does hope that the loyalty program does generate more revenue for the company by encouraging customers to use the app more.
Afterpay makes it simple for customers to pay:
- Customers can download the mobile app. This service is only available in the app.
- Once on the app, they can navigate to a Rewards tab.
- There’s a button on the screen that says “Join For Free”.
Every time customers make an eligible on-time payment, they earn 10 points. A 4 installment payment can generate 40 points. Rewards include exclusive discounts at participating retailers.
Afterpay Funding, Valuation, And Revenue
In the following section trends in company funding, valuation and revenue will be discussed. The business model of Afterpay seems pretty straightforward, now let’s see if it’s working.
$29 Billion Acquisition By Square
In August 2021, digital payment giant Square (now Block, Inc.) acquired Afterpay for a hefty price tag of $29 billion. In December, Afterpay’s shareholders formally approved the maneuver to the tune of a 99% majority vote.
Square financed the acquisition through stock. Each of Afterpay’s shareholders before the purchase also received 0.375 shares of Square for every 1 share of Afterpay.
How will this impact Afterpay? Here’s the current thinking:
- Integration of Afterpay and CashApp: This could mean that users will be able to shop their favorite brands, apply for installment payments and send cash to friends, all in a single mobile app.
- Expanding Square’s Range: Afterpay can benefit from Square’s largely American customer base and Square can gain an international presence.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a measure of a company’s overall financial performance. It is sometimes used as an alternative to net income.
Why use this metric?:
- It excludes expenses associated with debt. Instead, it adds back interest expenses and taxes to earnings.
- EBITDA is a simple measure of a company’s profitability.
So with that let’s look at Afterpay’s self-reported profitability over the last two years.
|FY2021||FY2020||Change % (2020-2021)|
|EBITDA (in AUD)||$38.7 million||$44.4 million||-13%|
|EBITDA (in USD)||$28.1 million||$32.25 million||-13%|
Courtesy: Courtesy: Afterpay FY21 Annual Report
Stock Performance & Valuation
The proliferation of new customers using Afterpay during the pandemic was reflected in the company’s meteoric rise in stock. At its peak (as of December 2021), Afterpay was priced at a whopping $119.36 per share.
The company’s market cap as of December 30, 2021, is 24.63B AUD, or 17.91 USD.
|Date||Price Per Share (USD)|
|May 1, 2020||$21.00|
|February 19, 2021||$119.36|
|December 30, 2021||$61.39|
Courtesy: Google Finance
Why did Afterpay shares fall in December 2021? The fall occurred in response to a new probe into the Buy Now, Pay Later (BNPL) sector by the US Consumer Financial Protection Bureau. The share prices of Block, Inc. (formerly Square) fell as well.
|Parameter (in AUD)||FY2021||FY2020|
|Cost Of Sales||$249,564||$134,295|
|Loss After Income Tax Benefit||$159,395||$22,857|
Courtesy: Afterpay FY21 Annual Report
Why did Afterpay report such big losses ($159,395) in FY2021? Afterpay recently announced that its marketing costs more than doubled in FY2021 as the company expanded its operations in the US market.
How Many Customers Does Afterpay Have? Merchants?
For the first time in company history, the North American region exceeded Asia-Pacific countries in total sales. It will be interesting to see if this trend continues in the FY2022 report.
|Active Customers (millions)||16.2||9.9||+63%|
|Active Merchants (thousands)||98.2||55.4||+77%|
|Underlying Sales ($million)||21,087.4||11.114.2||+90%|
Courtesy: Afterpay FY21 Annual Report
Who Are Afterpay’s Leading Competitors?
Afterpay is far from being the only company to dip its toe’s into this market.
One of the leading competitors is an app called SplitIt. Splitt is based entirely on a customer’s credit card. So credit card users can reap the benefits of more customizable payment terms and a credit limit that’s based on their credit card.
Afterpay’s market share according to Datanyze is 1.54%. However, it is ranked #7th worldwide in terms of payment processors.
Is Afterpay Profitable?
In FY2021 (fiscal year ends June 30), Afterpay reported a net loss of $159,395. Operating costs skyrocketed in late 2020-early and 2021 due to the company’s expansion into North American markets. The company’s EBITDA (a measure of profitability) dipped 13% in 2021 while underlying sales increased by 90%.
Company valuation also dipped in December 2021, as a result of US federal investigations into Buy Now, Pay Later (BNPL) applications. Government agencies wish to ensure customers are not being led astray on such platforms.
Conclusion: How Does Afterpay Make Money
Afterpay is a very interesting business model that seems to be designed with both customers and merchants in mind.
The company’s business model is highly disruptive to traditional retail lenders because it allows consumers to buy more goods than they would otherwise be able to afford. By doing so, Afterpay opens up new possibilities for online shoppers, who may be more willing to take a risk on an item they aren’t sure they want if they know they will be able to pay it off gradually over time.
The founders of Afterpay have taken on some ambitious goals, like expanding globally within just two years of launching in Australia. They’ve also been willing to try new things when necessary. For example, they are currently seeing success with their “instant approval” feature so that customers can more easily shop online without having to wait for funds to transfer from their bank accounts into their Afterpay accounts before making a purchase.
As the company continues its growth, consumers and merchants alike can expect more announcements about expansion into other markets in the near future.
OK, so we’ve let you into a little behind-the-scenes look at how Afterpay makes money. Thanks for taking the time to learn everything there is to know about how Afterpay operates on the business side. We hope it’s a little clear!