Afterpay is a Fintech company known for its “buy now, pay later” service, allowing online and in-store customers to purchase a product immediately and pay for it later in four equal instalments. Let’s look in-depth at what Afterpay is and how does Afterpay make money.
What is Afterpay?
Afterpay, a consumer lending company, is a millennial take on the Layaway practice, which is a way to finance something that you can’t immediately afford, which can often lead to high interest rates. Afterpay is a deferred payments platform offering the “Buy now, pay later” option that allows customers to stagger the cost of their purchases with regular, interest-free instalments.
How was Afterpay started?
Nick Molnar and Anthony Eisen started Afterpay.
Molnar, who grew up in Sydney, was always entrepreneurial, even at a young age. When he was at school, he was importing and selling headphones from Japan. He attended the University of Sydney through a rugby scholarship and enrolled as a Commerce student.
When he was 19, he started his first e-commerce enterprise by leveraging his parents’ relationships with suppliers to sell jewelry on eBay. After graduation, Molnar felt the need to get a ‘real job.’
He continued working on his business but went to interview at Lazard to become an investment banker. Lazard referred Molnar to Mark Carnegie, the founding partner of Australian private equity firm M.H. Carnegie & Co.
Carnegie told Molnar that more money could be made in mass-produced lower-priced jewelry than high-value products. He pushed him down the entrepreneurial path telling him that he would keep Molnar’s job open for 12 months and encouraged him to run the jewelry business full-time. If things didn’t work out at the jewelry business, he could always return.
Molnar never did. He became the biggest eBay seller of jewelry in Australia. He then convinced U.S.-based jewelry site Ice.com to let him launch iceonline.com.au and grew it to $2 million in annual revenue.
Molnar was befriended by neighbor Anthony Eisen, then Chief Investment Officer at investment company Guinness Peat Group, during one of his regular order-posting trips to the post office. Eisen had seen Molnar’s bedroom light on late in the evenings, and his curiosity was piqued. Eisen and Molnar hit it off instantly.
In 2014, Molnar came to Eisen with an idea to start a company that would take all the risk out of retail for both the retailer and the consumer and convinced Eisen to join him. Molnar believed that Millennials have a total aversion to credit cards because they can lead to compounding debt.
Molnar and Eisen came up with a new, millennial-friendly alternative for deferred payments, which would charge retailers for sales rather than charge consumers for repayments. In this model, customers can spread the cost of purchase (up to $1,115) over four equal, interest-free installments, and participating retailers pay a commission of around 4% to 6% on each sale. If a user misses a repayment, they would be blocked from the service until the total cost of their purchase is paid off.
Molnar had retail experience, and Eisen had financial expertise. They needed technical knowledge, so they partnered with Touchcorp, a company accomplished in processing payments for large-scale operations. Touchcorp’s sophisticated secure transaction processing technology enabled Afterpay to service over 800,000 customers and over 6000 retail merchants smoothly while running real-time security and anti-fraud checks on each transaction invisibly in the background.
Afterpay was launched in late 2014, and the business saw rapid growth. Consumers who were tight on cash liked the equal installments model. Retailers who wanted to boost sales didn’t mind paying a small fee to get on the platform.
Although the concept was simple, Afterpay was unique to the marketplace at the time of its launch. Molnar’s instinct that young shoppers have an aversion to credit cards proved correct.
Within two years, Afterpay raised $18 million on the Australian Securities exchange in a heavily oversubscribed IPO. At this time, it was valued at $140 million.
Afterpay merged with its partner Touchcorp in 2017 and formed a new public company, Afterpay Touchcorp. Afterpay Touchcorp trades under the APT ticker on the Australian stock exchange. Touchcorp’s technology was critical to After pay’s growth, and the merger was a natural progression of a close relationship between the two businesses.
In Jan 2018, American venture capital fund Matrix Partners invested in Afterpay to support its entry into the U.S. retail market. It was launched in the U.S. market in May 2018 with retailers such as Urban Outfitters, Free People, etc.
In August 2018, Afterpay entered the U.K. market by acquiring 90% of the equity in Clearpay, a U.K.-based buy-now-pay-later service, for 1 million Afterpay shares. The growth in the U.K. market was much faster than that in the U.S. market, and 200,000 customers joined in the first 15 weeks. Afterpay took off internationally after reality star Kim Kardashian tweeted about it.
During Covid-19, demand for the ability to buy now and pay later accelerated, and one million customers joined the Afterpay platform. In 2020, Afterpay revealed its plans to expand to at least four continents, including Asia.
This entailed the acquisition of Singapore-based, Indonesia-focused “buy now, pay later” service EmpatKal. It boosted its European expansion efforts by acquiring PMT Technology SLU and the FinTech Pagantis from NBQ Corp. for a minimum of $50 million. Pagantis is the umbrella company that includes PMT, offers payment services for eCommerce businesses in Spain, France, and Italy.
By the mid of 2020, Afterpay had more than 15 million app and site visits. Afterpay’s U.S. Shop Directory contributed nearly 10 million lead referrals to its retail partners.
Just two years after launching in the US, Afterpay has more than 5 million active shoppers in the U.S. and more than 15,000 merchant partners.
In May 2020, Tencent, the Chinese tech giant, paid more than $200 million for a 5% stake in the company. At this time, Afterpay reached $30 billion in value in its market cap.
Afterpay is extremely popular with millennials, young women, and university students who use short-term borrowing. Millennials are Afterpay’s primary customer demographic, comprising 75% of all users.
Despite its popularity, Aterpay has run into criticisms. Afterpay’s growth does raise concerns that it might be putting people in a vulnerable state of spending more than they have. Despite this negative press, 95% of payments have not received a late fee.
Regulators are also concerned that smaller retailers would be unable to absorb the fees of such services as easily as larger businesses, hurting competition.
Furthermore, banks fear that buy now, pay later operators such as Afterpay, which operate outside traditional banking rules, have increased the risk that they will be entangled in anti-money laundering dramas.
They say they cannot see where money is being spent because the new players are standing in between banks and transactions.
Afterpay was subject to a year-long money laundering investigation conducted by financial crime watchdog AUSTRAC in 2019, getting cleared in 2020.
Despite these setbacks, Afterpay continues to grow, serving 11.2 million customers and over 55,000 merchant partners worldwide.
How does Afterpay make money?
Afterpay makes money through merchant fees and late payment fees.
Afterpay makes money by charging retailers a $0.30 fixed transaction fee plus a commission between 3% and 6% on each sale. This commission varies with the value and volume of transactions processed using Afterpay. The more the retailer sells, at a higher value, the lower the percentage fee will be. Although this is relatively high compared to other payment methods, Retailers spend this fee in return for increased sales on the platform.
Late payment fees
Charging customers who don’t keep up with their payments late fees is one other way Afterpay earns revenue. If a payment is unsuccessful, the customer will be notified and given an option to choose an alternate payment method. If the customer doesn’t pay by the grace period indicated on the payment schedule, Afterpay charges an initial $10 late fee. It charges a further $7 if the payment remains unpaid seven days after the due date.
For each order below $40, a maximum of one $10 late fee is applied per order. For each order of $40 or above, the total of the late fees that may be applied is capped at 25% of the original order value or $68, whichever is less.
Afterpay also has a hardship policy and provides customers options to extend payment methods, postpone payments for a set time or waive late fees. Afterpay also sets multiple automatic reminders for users to help avoid late charges.
Afterpay does not report to any credit bureaus, so your credit score will not be impacted even if you miss a payment. However, you can still incur debt if you miss your payments.
How to use Afterpay responsibly
Two in five people who buy through buy now pay later schemes are low-income earners and, of these, two in five are students or part-time workers – all people who are potentially financially vulnerable, making these products a risky choice for them. Here are a few steps to manage your Afterpay account and reduce the risk of running into debt:
- Stick to a budget: Buy only what you need after budgeting for bills, expenses, and savings. You should consider how many payments you can make and allow some room for an emergency.
- Use a debit card: By linking your debit card to Afterpay, you will only spend the money that you have.
- Reschedule your payments if needed: If you think you can’t repay on time, Afterpay allows you to reschedule for up to five days. This can be done three times a year, so if you want to avoid a late fee, you can make use of this option.
Afterpay’s users: Afterpay serves 11.2 million customers and over 55,000 merchant partners worldwide.
Afterpay’s funding: Afterpay has raised a total of $448.7M in funding over three rounds. Their latest funding was raised on Aug 20, 2020, from a Post-IPO Equity round. Mitsubishi UFJ Financial Group and Tencent are the most recent investors.
Afterpay’s valuation: Afterpay was last valued at 28.7 billion USD or 37 billion AUD, although it has never posted a profit. This is because of the pandemic-driven surge in online shopping and rapid expansion in overseas markets, including the United States.
Afterpay’s employees: Afterpay has 665 employees worldwide.
Afterpay had an early mover advantage in Australia and the U.S. The Buy Now Pay Later market has significantly low barriers of entry. This has led to startups such as Klarna and Affirm entering this space and big players such as Visa and Mastercard vying to move in. The company could potentially face increased competitive pressures in key markets. Nevertheless, Afterpay is an impressive gamechanger in the world of fintech.