Afterpay and zipMoney: New instalment of old idea gains momentum

Fellow veterans of the “brown paper and string” era may recall lay-by, the instalment schemes offered by retailers before those plastic works of the devil called bank cards came along.

At the risk of going all Bernard Salt on readers, the smashed avocado generation would be aghast to learn that customers of yore were required to put down a deposit on the item, but did not receive the goods until they paid the agreed instalments.

What’s old is new again, and now lay-by is being reverse-engineered in the guise of point-of-sale retail intermediaries that finance “no-interest” payment instalment schemes.

The key difference is they are “buy now, pay later” schemes rather than “pay now, buy later” models, befitting the age of instant gratification.

While the business models vary — Afterpay is card-based and zipMoney is based on a digital wallet — the key element is the instalment arrangement over two to three months.

The providers earn their fees from merchant fees charged to the retailer — similar to PayPal or the card schemes — as well as account-keeping or late fees to customers who have not paid by the required date. In the context of the $250 billion retail sector and our $500bn annual credit card spend, the $10bn point-of-sale financing sector is still a niche category.

But it’s been good business for the entrenched listed player Flexigroup (FXL), now joined by zipMoney (which listed in September 2015) and Afterpay (which debuted in May).

They just keep coming

Another operator in the space, Openpay, plans to list next year, having done a $10 million pre-IPO raising.

ZipMoney founder Larry Diamond says the newcomers expand the market from where products such as Flexigroup’s “no interest ever” Certigy and GE Money’s Latitude left off.

These incumbents have focused on “planned” big ticket purchases such as computers, furniture, travel and education (think Harvey Norman’s interest-free schemes, which are white-labelled GE products).

The newcomers expand the no-interest deals to lower-value goods and services such as clothing.

Credit cards, of course, have been around for decades and prudent users can avail themselves of no-interest periods. But there are signs cards are losing favour with millennial consumers because of high default interest rates and ambitious surcharging on the part of some merchants.

“We are disrupting the credit card sector beyond a doubt,’’ Diamond says.

While merchant fees can be higher than those charged by card schemes or other parties such as PayPal, one advantage is point-of-sale providers bear all the delinquency risk.

ZipMoney last month reported quarterly revenue of $2.9m, up 6 per cent, on steady transaction volume of $33m (taking originations to date to $100m). Merchant numbers rose 83 per cent to 1354, while the number of end customers climbed 86 per cent to 63,000.

Afterpay managed $40m in sales in the first quarter, eclipsing the 2015-16 total of $37m. This translated into revenue for the quarter of $1.7m, compared with $800,000 the previous quarter.

Backed by Bell Potter, Afterpay in October raised $36m in an oversubscribed placement, at $2.40 a share.

“The ‘buy now, pay over a number of instalments’ model has changed the purchasing habits of consumers, principally because of the complete absence of cost to the consumer,’’ says Bell Potter adviser and star stockpicker Hugh Robertson.

Along with a $20m banking facility under discussion, this capital adds to the company’s lending firepower. The shares have more than doubled since listing, for a market cap of $165m.

ZipMoney shares have more than trebled, for a market cap of $200m. In an intriguing side foray, zipMoney in September acquired personal financial management app Pocketbook for an upfront $6m, plus deferred consideration of $1.5m.

Diamond says Pocketbook — “the Fitbit for financial wellbeing’’ — is not profitable, but has a handy base of 250,000 users and it is hoped they will become zipMoney customers.

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Source: Afterpay and zipMoney: New instalment of old idea gains momentum – The Australian