Square has announced it will purchase Afterpay for US$29 billion. As an Australian, I have to admit a bit of pride in the Aussie-built Afterpay taking its place on the global stage with this deal, the largest in Australian corporate history.
It seems everyone is getting into the buy-now-pay-later (BNPL) boom. What was started by fintechs, such as Affirm, Afterpay, and Klarna, now has credit card issuers, payments firms, and traditional banks clamoring to get in on the act.
Square’s purchase of Afterpay will be like adding rocket fuel to a flame, driving further consumer and merchant adoption of BNPL in the US market.
Regulation May Dampen BNPL Growth
Will regulation lower the BNPL flame? Possibly. To date, the BNPL market has been largely unregulated. Some players only do soft credit checks before lending to customers, and others like Afterpay do no credit checks at all.
Around the world, regulators are already looking more closely at this market with the aim of increasing consumer protection. That scrutiny will likely be music to the ears of traditional banks, which believe it could level the playing field, but it may increase the barriers for new entrants, even for consumers looking to take advantage of BNPL — especially for those who cannot access or do not want traditional credit products.
Why Traditional Banks Should Worry
The acquisition of Afterpay is one more step toward Square’s desire to dominate small business banking and payments. Only two weeks ago, the firm launched Square Banking, which combines checking accounts, debit cards, savings accounts, and loans and connects them directly to merchants’ sales and payments through Square. Adding a BNPL offering will give consumers and merchants additional value and strengthen the ecosystem even further, making it easier for Square to lure merchants away from traditional banks.
After the financial crisis, we saw disruptors swoop into business lending as many banks made it harder and harder for businesses, especially small businesses, to secure the funding they needed. But most of these banks stayed in the business banking space for the deposits. Well, now the large fintechs, tech titans, and payments firms like Square are coming after those deposits, too.
Square Has What’s Needed To Win At BNPL
Most credit card issuers are scrambling to add installment loan options to their cards, blurring the line between credit cards and BNPL with what is effectively a hybrid product. In that market, credit card issuers certainly have a better handle on the creditworthiness and financial health of their customers. (Remember that most fintech BNPL providers only do a soft credit pull or no credit check at all.) But it’s younger consumers and those who either don’t have access to or shun traditional revolving credit options who are most attracted to BNPL offerings. The key to BNPL success for non-credit card issuers will be the size and strength of their merchant ecosystem — and how well they embed the product at the point of sale — and this is certainly where Square is strong.
A Small Word Of Caution About BNPL
One last thing: BNPL businesses have still not been tested by a large economic downturn. It’s still uncertain how such a downturn and increased customer defaults would impact these businesses.
Please reach out if you have any questions or would like to know more.