Out with Lay-by in with Afterpay
I was recently walking around my local shopping centre behind two girls in their early 20’s when I overheard one of them saying she couldn’t afford the new top she wanted because she wasn’t getting paid until the following week. Her girlfriend told her not to worry about it just use ‘Afterpay’.
The very next day I received email after email from all of my (and my daughter’s for that matter) favourite brands letting me know it was ‘Afterpay day’ with links to their online stores. The company has only been listed on the Stockmarket since July this year and are obviously gaining traction very quickly.
For those of you who don’t know who Afterpay is they are today’s equivalent of Lay-by except you get to take the goods straight away. Basically you pay 25% upfront and then pay the remaining balance in three equal 25% installments every two weeks without paying interest using either your debit or credit card.
Afterpay makes their money from the retailers rather than the customer. They pay the retailers upfront, and take on the credit and fraud risk themselves and charge the retailers a margin and small transaction fee on each purchase processed using Afterpay. The margin was 4.1% last financial year which was up from 3.7% the year before. The retailers benefit because they are able to increase sales to customers who would normally not be able to afford to make purchases in a single lump sum (like the girls I overhead talking).
Retail companies join up to Afterpay by signing up on their website and the great thing is Afterpay haven’t had to put in too much effort marketing themselves as management have said retailers are signing up on their own accord.
My main concern when I thought about investing in this company is people not paying. The current level of Bad debts has actually been improving due to their algorithm based system that they use to minimize risk. Also the average transaction size for the Company is likely to be low (less than $200), so repayments should be manageable. This could change going forward as the Company moves into higher price point items but for now their transaction losses from Bad Debts sits at 0.6%
Over 7,000 retails are implementing this innovative model into their business and with the likes of Jetstar and Target just signing up momentum looks like it is going to continue.
Buy Afterpay now and watch it pay off later!
I own this one myself and the company is on the higher side of the risk curve so only allocate a smaller amount to your Super Fund.