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Big US BNPL player coming, will Zip (ASX:Z1P) shares suffer?

A big US-based buy now, pay later player called Affirm is reportedly coming to Australia. Will Zip Co Ltd (ASX: Z1P) shares suffer?

What’s going on?

The Australian Financial Review’s Street Talk is reporting that one of the biggest buy now, pay later (BNPL) players called Affirm is thinking about coming to Australia.

Affirm has reportedly been thinking about coming to Australia for a while. The AFR wasn’t sure how advanced the plans to enter Australia are, but it is getting one of its products ready for the market.

At the moment the BNPL business only has operations in the US and Canada. Australia will be its first foray outside of North America.

According to Citi, whilst it may have less customers than Afterpay and Klarna, it actually has more monthly users.

A key difference between Affirm and other players like Afterpay is that repayment schedules are stretched over six, 12 or 18 months.

What will this mean for Zip and Afterpay?

Well obviously it’s too early to tell at this stage. At the moment Affirm isn’t even operating in the country.

Zip and Afterpay may be too entrenched for Affirm to make much of a difference in the market. However, if it offers the longer payment periods in Australia as well then some customers may be attracted to that.

For me, it’s not the growth of customer numbers that’s the issue. I am concerned that more competition in the buy now, pay later market will mean that profit margins will be reduced at some point.

If the options are interest-free, then it may not matter to customers which provider they go with. But merchants are the ones largely paying for the system. A new competitor like Affirm could offer lower merchant fees to attract retailers to the system.

When you look at the net transaction margin, Zip and Afterpay have pretty narrow margins. A one percentage point decrease of the merchant fee would make a massive difference to the potential future profit of the local BNPL companies.

There’s still a lot more growth of users, merchants and underlying sales for Afterpay and Zip, which may keep driving the share prices higher. But the profit growth isn’t as certain.

I would much rather invest in payment businesses like Pushpay Holdings Ltd (ASX: PPH) or perhaps EML Payments Ltd (ASX: EML) which are much more likely to generate good profit growth (at a reasonable price) in the coming years.

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