How Much Is A First Mover Advantage Worth? $39 Billion?

Earlier this week the US Digital payment company Square announced the $39 Billion takeover of Australian Company Afterpay, making it the largest takeover in Australian corporate history (the previous largest takeover was the sale of Westfield for $32 Billion in 2017).

Afterpay was only founded in 2014 and is a Buy Now Pay Later credit provider, however because it doesn’t charge interest on its lending it isn’t subject to the same regulatory requirements of more traditional lenders (such as banks).

Instead, Afterpay makes its money in two different ways:

1. if a customer uses Afterpay to make a purchase, usually through a website, then Afterpay receives a small commission from the retailer, presumably on the basis that without Afterpay the customer would not have made the purchase or would have purchased less; and
2. If a customer makes a purchase via Afterpay they agree to repay their debt in four equal fortnightly repayments. If a payment is missed, Afterpay charges an additional fee, which while usually small (around $10) can be significant relative to the total value of the debt and the length of the lending.  Much like with a credit card if you pay on time it doesn’t cost you anything, but if you don’t then it can be an expensive form of credit.

Afterpay was one of the first Buy Now Pay Later lenders and now is established in Australia, New Zealand Canada and the USA. Whilst it is profitable, it has less than $1 Billion in net assets and the price paid (mostly in square stock) represents a multiple of 120 times forward earnings. For reference the current price earnings multiple of CBA is around 23, which would be considered high by historic standards.

So what are Square getting for $39 Billion?

From Square’s press release they say that the acquisition / merger “brings together two of the fastest growing global fintech companies to advance shared mission of economic empowerment and financial inclusion”(3). Quite rightly, there is an expectation of growth, in March this year Afterpay announced an expansion into Europe. Although, this growth would be expected to be built into the forward earnings figures.

Apart from the fact that Afterpay were the first and that they are relatively established in some markets there does not (on face value) appear to be very much value in the purchase.

1. Firstly, whilst the business model was innovative in 2014, the core principal (lending without charging interest) is not protected by any patent or similar and is relatively easy to copy. Competition is already increasing from the giants of the global payments industry such as Visa and major banks and it is likely in a few years every major bank/payments provider will have their own Buy Now Pay Later product that will look similar to Afterpay.
2. Secondly the service offered by Afterpay (from a consumer’s point of view) is a generic one (it is credit). The customer will not care if the service is offered by Afterpay, Visa, or any other bank. Therefore expectations of consumer loyalty will not be significant.  Afterpay’s viability hangs on retailers continuing to use the service and retailers will be driven by price, it’s not clear that Afterpay will be able to complete with bigger companies with deeper pockets and other revenue streams.

Perhaps the acquisition by Square provides Afterpay with the scale and reach to allow them to take on the giants of the global payments industry which they would not have ordinarily had.

One thing is clear, and that is that the global payments industry is rapidly expanding and has only been exacerbated by COVID-19, the events of 2020 and 2021 have reset expectations and significantly accelerated several existing trends including rapid changes in consumer behaviour and changes to the operating environments for businesses, large and small, worldwide.

Only time will tell if Square’s acquisition is a success.

References and acknowledgements.

1.       Article in the Australian Financial Review Updated Aug 2, 2021 – 5.01pm, first published at 8.00am

2.       Article published on The Conversation written by Lien Dong & Sonny Pham

3.       https://squareup.com/au/en/press/square-announces-plans-to-acquire-afterpay