The recent announcement between Afterpay Holdings Ltd (ASX:AFY) now (ASX:APT) and Super Retail Group Ltd(ASX:SUL) to offer Afterpay’s payment solutions to Super Retail customers is another major step forward for this innovative small company.
Background
If you haven’t heard of Afterpay Holdings Ltd (ASX:AFY), it won’t be long before you do.
Listed on the ASX in May, Afterpay offers customers an alternative to credit cards or higher purchase financing options. Afterpay works by providing credit instantly for consumer purchases with the repayments broken up into four payments over 2 months. This enables customers to buy items in-store, or online instantly, and then repay the purchase over time. The interesting thing is that a credit or debit card is still required to make payment but your payments are broken up over time to match your cashflow.
More details can be found here.
I am sure you’re wondering by now, where does Afterpay make its money? Customers or Merchants.
In theory not from customers.
“Afterpay does not charge a fee to consumers when purchasing. The only fees applied to consumers are late fees if your scheduled payments are unsuccessfully processed and, after being notified, you do not log in to your Afterpay account to make your payment via a different method.”
But of course if payments are not made fees apply.
“If a payment has not been made, it will incur a late payment fee of $10 and a further late fee of $7 if the payment is not made within 7 days”
So the answer is from Merchants with Afterpay receiving its revenue from fees paid for processing payments.
The obvious question is then why would a merchant want to use Afterpay if they are charged a processing fee?
The advantages are twofold. First, once the decision to pay by Afterpay is made, Afterpay bares all responsibility for the debt. Secondly, merchants have found a higher conversion rate (buyers actually buying) when Afterpay is offered and the transaction values on average are higher.
Source: Afterpay Holdings company presentation.
Outlook
Believing a picture is worth a thousand words, the growth from IPO has been nothing short of phenomenal.
Source: Afterpay Holdings company presentation.
Comments
I believe the success of Afterpay Holdings Ltd can be summed up by its motto.
“Life doesn’t wait Afterpay it!”
In my opinion, Afterpay has cleverly tapped into the “need it now and I will worry about how to afford it later” mindset. Much comment has been made about online financing disrupting the big four banks but it appears that new online/cloud lenders are actually disrupting the established lowend financers more, such as FlexiGroup Limited (ASX:FXL) and Thorn Group Ltd (ASX:TGA).
While I was sceptical of Afterpay Holdings Ltd before it came to market, I will definitely not be betting against its future success.
Tip for new investors
Valuing small start up companies is definitely more art than science.
Understanding exactly what value the company brings to its customers is the key. Before investing in any small company, I recommend reading the last 4 quarterly reports paying particular attention to appendices 4C . From this report you can gage if revenue is growing as well as what expenses are being incurred. Importantly, it also keeps track of the levels of cash and cash equivalents the company has remaining.
Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.
Alan Edmunds owns shares in ASX:AFY.