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Australia's 'buy now, pay later' trailblazers face test of survival

INSIDE BUSINESS

ASIA

Jamie
Smyth

Until coronavirus upended
the world economy, After-
pay was a stock market dar-
ling, inspiring copycats and
attracting luminaries —
including economist Larry Summers —
to join its advisory board.

But as credit markets tighten, retail-
ers close their doors and many of the
Melbourne-based fintech's millennial
customers face job losses in the coming
recession, the "buy now, pay later" busi-
ness model is coming under scrutiny.

The sector has expanded rapidly by
enabling young consumers without
credit cards to buy products such as
clotheS or electronics without paying
upfront. In 2018 at least one in 10 Aus-
tralians used a digital BNPL service,
which, like an old-fashioned catalogue,
allows people to pay for their purchases
in instalments.

Australia has become a global hub for
BNPL companies, with Zip, Sezzle, Spli-
tit, Openpay and Afterpay all listing on
the ASX and attracting investment for
overseas expansions. Their business
models typically rest on providing small
amounts of unsecured credit — nor-
mally up to about A$I,OOO (US$580) —
to consumers at no cost and charging
merchants a fee to process transactions.

The wave of BNPL start-ups has bene-
fited from easy access to funding and
light-touch regulation to supercharge
their global growth. But regulators have
started tightening rules in the sector
and the coronavirus crisis threatens to
unleash a credit crunch that could put
some of the companies' survival at risk.

Steven Ng, portfolio manager at
Ophir Asset Management, an Afterpay
• investor, said the sector faced a triple
whammy from reduced availability of
funding, higher funding costs and
reduced consumer demand as unem-
ployment spiked. BNPL businesses face
an even harder hit than traditional lend-
ers because of their reliance on younger
consumers — analysts estimate up to 40
per cent of Afterpay's millennial cus-
tomers are in casual employment and
vulnerable to unemployment in a pro-
longed downturn.

Afterpay, which was founded in 2014
by Anthony Eisen and Nick Molnar, is
one of the world's
biggest BNPL pro- 
viders with 7.3m
customers in
Australia, the US and 
UK. It has grown
rapidly and last 
month surpassed a 
market capitalisa-
tion of A$1Obn. But as market turmoil
smashed the sector, its shares plunged
60 per cent injust two days last week.

Afterpay's millennial
customers customers are in casual
work and vulnerable to
unemployment in a
prolonged downturn.

"We are fortunate to have a business
model, balance sheet and customer base
that creates a level of protection in times
of economic uncertainty," wrote Mr
Eisen in a letter to shareholders follow-
ing the share price plunge.

The soothing message did not work.
On Monday, Afterpay shares slumped
28 per cent to A$8.90, taking them even
further below an all-time high achieved
just a month ago, while the benchmark
S&P/ASX 200 fell to 4,546.

"The 'buy now, pay later' business
model remains untested in a crisis and
things will be tough ... cash is king,"
said Siraj Ahmed, analyst at Citi.

Afterpay is lossmaking and has priori-
tised customer growth over profit. In
February, it signalled an expansion into
Canada, even as it reported a wider-
than-expected loss of A$35.8m in the six
months to the end of December.

Citi believes Afterpay should be able
to withstanda six-month crisis because
of its strong balance sheet, with a pre-
dicted cash balance of A$370m at the
end of 2020. The investment bank says
Afterpay's cash burn in the first half of
2020 was A$60m.

But nothing is guaranteed given the
scale of the crisis. A surge in unemploy-
ment is expected to increase bad debts
and reduce the number of transactions
on the company's platform.

Customers who default on their debts
to Afterpay and other BNPL providers
are typically kicked off the payment
platforms, which could dent revenue
growth if a large number are excluded
during a steep downturn.

UBS predicts Zip Co, a competitor
with 1.6m customers in Australia, may
be better placed to cope with bad debts
because it conducts credit checks on its
customers. In a March 13 note, UBS said
it believed Afterpay did not know the
employment status of its customers.

But the bank warns that Zip's balance
sheet risk is higher because of its greater
reliance on debt funding. Zip had
A$39.1m of cash and cash equivalents,
and A$984.1m in customer receivables
on its balance sheet at the end of 2019,
with total liabilities of A$965.4m.

Long queues of laid-off workers out-
side Australian welfare offices on Mon-
day hoping to sign on for unemploy-
ment benefits suggest that the BNPL
model is about to face a very stern test.

jamie.smyth@ft.com