Afterpay has been one of the ASX’s strongest performing shares since the COVID-19 crash. It has continued to report soaring growth of merchant and customer numbers, leading to fast growth of underlying sales.
However, the attraction of Afterpay is that customers can pay for things through instalments rather than an upfront payment. The key was that, for the retail customer, the service is interest free as long as they paid on time. It was the merchant that paid for the costs by paying a fee of something like 4% to 6% of the transaction to Afterpay.
PayPal could be about to shake things up in the sector.
It is launching a service called “Pay in 4” which it says is an interest-free instalment solution at no extra cost. It obviously means you can pay for things over four payments. Does that sound familiar?
Consumers can pay for items costing in a range of $30 to $600. This will appear in a customer’s PayPal wallet.
Here’s the kicker – merchants won’t have to pay more fees to offer the option. It will be included in the existing pay structure.
Whilst the PayPal service is initially free for customers who pay on time, there will be fees for people who pay late.
Doug Bland, SVP, Global Credit at PayPal, said: “In today’s challenging retail and economic environment, merchants are looking for trusted ways to help drive average order values and conversion, without taking on additional costs. At the same time, consumers are looking for more flexible and responsible ways to pay, especially online.
“With Pay in 4, we’re building on our history as the originator in the buy now, pay later space, coupled with PayPal’s trust and ubiquity, to enable a responsible and flexible way for consumers to shop while providing merchants with a tool that helps drive sales, loyalty and customer choice.”
What does this mean?
Pay in 4 will be available to consumers for qualifying purchases in the early part of the fourth quarter of 2020. That suggests October is the target launch.
For starters this will be offered in the US. But that’s where Afterpay is looking to deliver the most growth, so it could be bad news for Afterpay’s US operations.
Afterpay is priced as though tremendous growth is assured, but competition can pop up and really disrupt things, as PayPal as shown. If Afterpay can’t maintain its high merchant margin then it won’t generate the expected future profit.
I wouldn’t want to buy Afterpay shares today, I’d actually consider taking some profit off the table. There are other ASX growth shares I’d rather buy first. I outlined three here where I talked about the three ASX shares I’d buy in September.