Should I invest in buy now, pay later companies?

For most Aussies, buy now, pay later (BNPL) services have changed the way they shop by offering greater convenience and manageable costs. Although primarily app-based services, BNPL providers have begun supporting in-store purchases as well, still without charging customers any interest as long as they make timely repayments.

The 55 per cent growth in value of BNPL transactions in 2019-2020 alone underlines the popularity of this payment system. As a result, Australian BNPL companies are offering their services abroad, even as service providers from elsewhere look to cash in on the service’s popularity here.

BNPL companies are becoming high-value targets for investment, as exemplified by BNPL services pioneer Afterpay’s acquisition by US-based digital payments provider Square. Another major BNPL player, Zip Pay, is considering taking over its competitor Sezzle to grow its business. Afterpay was listed on the Australian Stock Exchange (ASX) before its acquisition, as are Zip Pay and Sezzle.

Anyone who had bought these companies’ shares may have a more valuable portfolio given these transactions. You should remember that stock prices tend to rise and fall in tandem with the companies’ fortunes, and investing in BNPL companies also requires considering the factors that may affect the market.

What you should know before investing in BNPL shares

In recent years, more people have started using BNPL services, which has resulted in higher stock market valuations for the service providers. However, BNPL transactions account for a low percentage of consumer purchases, whether online or offline, as noted by the Reserve Bank of Australia (RBA).

Further, the total value of these transactions is significantly lower than the value of debit and credit card transactions, according to analysis from the Reserve Bank of Australia. BNPL companies may need to expand their customer base and improve their acceptability to gain a significant share of the digital payments market. Also, with banks and credit card providers entering the BNPL market, the existing companies face more competition. BNPL companies could need to invest more to maintain their advantage, without which they are unlikely to continue their current success.

Before you invest in a BNPL company, you may need to understand how they have built a presence. For instance, Sezzle positioned itself to “financially empower the next generation”, while Afterpay suggests that you can use the service to pay at stores as well.

Also, consider finding out about their plans to keep their service relevant to customers. Some BNPL service providers may ramp up their product range, while other companies could offer a transaction limit higher than the current range of $1,000 - $2,000. Given that many BNPL companies are yet to find acceptance among merchants and stores, making your investment just before they announce new retail partnerships may give you better returns.

What do BNPL companies offer businesses?

For businesses, choosing to partner with BNPL companies can be a good investment, and not just in terms of growing their customers. Increasing their customers’ convenience is a common strategy for businesses, which can be enhanced by adding BNPL services as a payment option.

However, BNPL service providers offer their business partners data analytics about their customers and thereby help them market their products more efficiently. Some BNPL companies also offer another advertising channel for their merchant partners through the promotional mailers sent to BNPL customers. However, larger stores may benefit more than smaller stores through such partnerships as they have the necessary financial leverage to customise their offerings more rapidly.

Businesses may need to pay a higher percentage of the transaction value as a merchant fee to BNPL companies than the fee paid to a credit card or debit card issuer. BNPL companies, being unregulated, don’t have to comply with existing laws on credit transactions, such as the National Consumer Credit Protection Act 2009.

They can, as a result, dictate terms when dealing with their partners, such as mandating that they do not pass on the merchant fee to their customers as a surcharge. Businesses may need to weigh the gains they are likely to realise from partnering with a BNPL company against the costs involved to gauge the soundness of the investment.