How much trouble is Afterpay really in?

Some of these problems are, of course, the risks of being a pioneer. While the concept of “Laybuy” has existed in some form or another for hundreds of years, Afterpay was one of the first companies to formalise the concept as a tech business preying on the spending habits of Gen Y, and that’s going to come with some growing pains. 

The twin challenges now facing Afterpay are its ability to storm the US market, and regulation. 

The US is shaping up to be a serious landgrab for buy now, pay later (BNPL) services, but at this point Afterpay knows the playbook, and it’s not unreasonable to expect they’ll do well. Afterpay has also been much more successful in terms of brand recognition than other BNPL services, and one could argue that the company has built up a sustainable competitive advantage – but credit card use is incentivised in the US, and it’s difficult to determine to what degree consumers will embrace the newcomer service. 

Part of the challenge in this area is the nature of the competition they face. Credit providers like Visa have caught on to the novel idea of launching their own BNPL products. Similar to how Netflix was only able to disrupt cable until cable embraced streaming, Afterpay is going to find itself competing in a crowded field – one where its service might be substantially less attractive. But there’s nothing to suggest that consumers will opt for the Visa product over one they’re already familiar with. 

The other challenge is regulation, and that might prove tougher for Afterpay. The RBA has announced they’ll be reviewing their card payments regulation in 2020, with BNPL services part of that review. Afterpay has succeeded in part because they can do what the issuers of credit cards can’t – prevent merchants from passing on the surcharge to customers. So what happens to Afterpay when they have a level playing field?

There are definitely subsets of Afterpay customers that surcharges won’t impact, but the people who use it as a cash flow management tool – instead of, say, a credit card – might be less likely to. Hidden costs are always a deterrent. 

While it’s impossible to quantify exactly what impact regulation will have, it’s fair to say it’ll have an impact. But that’s still a long way off – and might not even come at all. Stranger things have happened.  

Until then, Afterpay will continue to be the ASX’s golden problem child.