Why Afterpay says it's primed for success as buy-now-pay-later moves offline

By Emily Bary

Afterpay sees opportunities to take advantage of parent company Block's ecosystem, including a loyal base of Cash App Card users

Buy-now-pay-later continues to gain traction in the U.S., thanks to a barrage of payment buttons and apps that let consumers split purchases into installments.

But a new leg of growth is coming, based on recent actions from BNPL providers, and it could change the way people finance purchases if the payment technology's trajectory in Australia is any indication.

In-store commerce represents "the lion's share" of overall retail today, Afterpay's Nick Molnar told MarketWatch, but in the U.S., people aren't using BNPL much for face-to-face transactions. That's poised to change: "In-person commerce will be a critical driver of the continued growth of Afterpay and the broader market," he said.

That has to do with an evolution in the way that people make BNPL purchases. On checkout sites, consumers now are used to seeing buttons for Afterpay and rival services like Affirm Holdings Inc. (AFRM) and Klarna. Those companies also offer apps that let customers manage payback and initiate new transactions.

Those methods are good for online transactions, but increasingly BNPL providers in the U.S. see potential in debit cards and other cards that make it easier for customers to split purchases or otherwise take out simple-interest BNPL loans when shopping in person.

Afterpay has its roots in Australia, where BNPL is much further along in penetrating the shopping experience. Molnar, who cofounded Afterpay and now is co-lead of the service, said in-store commerce represents 30%-plus of Afterpay's Australia business, whereas it's "far from that number in the U.S.," signaling potential.

The card-based opportunity looks particularly interesting for Afterpay in light of the company's acquisition by Block Inc. (SQ), which was completed in early 2022. Block, the parent of Square and the Cash App, already offers a Cash App debit card, and the company said in its earnings materials that it was testing an installment option with Afterpay through that card.

"While early, we have seen strong adoption based on eligible customers," Block said in its shareholder letter.

There were 24 million Cash App Card monthly active users in the first quarter, which is "many multiples larger" than the monthly active customer base for Afterpay, according to Molnar.

"You've got this base of consumers that is using a debit card on the platform and the ability to provide that consumer access to capital is a really attractive value proposition," he told MarketWatch.

With card-driven offerings, consumers would gain the ability to use BNPL for more types of purchases than is standard currently - think dining out at a restaurant or settling a medical bill, for example.

BNPL has its share of detractors, who say the services might tempt people to make purchases beyond their means or take out too many little loans without thinking about the total amount that will be due. But Molnar thinks an expansion of BNPL use cases for consumers is a positive development since Afterpay customers pay back loans more quickly than holders of traditional credit cards do and lose the ability to shop when they're late on payments.

"This next-generation consumer who prefers a debit card over a credit card is using Afterpay for as many places as they can because this is their primary way of managing their money and this is their way that they know they can't get ahead of themselves," he said.

Afterpay customers have flexibility in managing their installments. Even if they split a purchase into four interest-free payments due over the course of six weeks, they have the option to pay the entire amount back at any point in that window as they assess their cash flow.

"Over time, people will continue to use their Afterpay account for more and more things," Molnar said. "It doesn't mean that they're looking for a line of credit for a particular item over and over."

Cards represent a different business model relative to merchant-funded BNPL offers. When consumers buy things from a retailer's website using BNPL, Afterpay earns money from that merchant in exchange for helping to drive conversion - or incentivize consumers to make purchases they might not have had they needed to pay the full amount upfront.

But with the card option, consumers will be able to use BNPL in a broader range of scenarios, including with merchants who aren't Afterpay partners. The company will charge the consumer what Molnar calls "a very small fee relative to alternatives in the finance space" when they use BNPL through the Cash App Card.

Afterpay isn't the only BNPL provider pushing into cards as a way to expand opportunities for consumers to finance payments through their services. Affirm recently crossed the 1 million threshold for active cardholders of its own card product after starting to offer it a year or two ago, depending on when you consider its true launch.

"We believe that our card is one of the best ways to begin addressing offline commerce, which of course is substantially larger than everything online," Chief Financial Officer Michael Linford told MarketWatch after Affirm's earnings report earlier this week. It also unlocks new categories for us and...it's a chance for us to mean more to the consumer's life."

See more: Affirm's upbeat earnings reflect differentiated buy-now-pay-later approach

-Emily Bary

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05-10-24 1125ET

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