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Surprising truth about Afterpay and its rivals

Jessica Yun
·3-min read
close up customer woman hand using smartphone for paying bill by using payment machine at table in the cafe , contactless payment concept
The buy now pay later sector is one of the least profitable in Australia. (Source: Getty)

The buy now, pay later industry has been named as one of the least profitable sectors in Australia by a leading research house.

Afterpay, ZipPay and Openpay have become household names after buy now, pay later (BNPL) services surged in popularity.

The industry is among one of the fastest-growing in Australia, with revenue expected to rise by more than a quarter to $817.1 million in the 2020-21 financial year, according to IBISWorld senior industry analyst Yin Yeoh.

The take-up of buy now, pay later services is expected to grow further, with FIS’ latest global payments report predicting these services will more than double between 2020 and 2024.

This will come at the expense of credit cards and bank transfers, which have already started declining: the number of credit cards in Australia fell by 6.6 per cent during 2019-20, according to RBA figures.

But despite its popularity and growth, the industry is struggling to turn a profit, with its average industry profit margin sitting at -2.6 per cent.

“Although the Buy Now Pay Later industry is growing strongly, industry firms have made losses over the past five years and will likely continue to do so in 2020-21,” said Yeoh.

“While losses as a share of revenue are declining, the industry has yet to achieve profitability.”

However, the volume of losses has dropped in the last two years as revenue continues to climb, Yeoh noted.

Line chart on buy now, pay later revenue vs profitability in Australia.
Buy now, pay later revenue vs profitability in Australia. (Source: IBISWorld)

“It is likely that the industry will achieve profitability for the first time before 2023-24,” she said.

BNPL under fire

The buy now, pay later industry has attracted criticism amid concerns that it has led the sector’s predominant customer demographic, young Australians, to fall into debt.

“While most buy now pay later arrangements are marketed as a budgeting tool or a way to make purchases more affordable, some consumers are missing payments and incurring fees as a result,” stated an ASIC industry report from November.

“Our consumer research indicated that 21 per cent of buy now pay later users who were surveyed missed a payment in the last 12 months.”

Missed payment fee revenue came to more than $43 million in the 2018-19 financial year.

Some customers who use BNPL services were found to be going without essentials or taking out extra loans in order to make their BNPL payments in time, the report added.

On 1 March, a new industry code that sets out minimum standards for the BNPL sector came into force. However, consumer groups have argued that it does not go far enough and that the platforms need to be treated as credit providers.

Afterpay’s share price has dipped by around 30 per cent in the last six weeks amid the tech stock sell-off as investors move towards bonds.

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