Now that Afterpay is formally part of Block (the parent company of Square and CashApp), the role the buy now pay later platform will play in Block’s longer-term strategy is a bit clearer. It seems that Afterpay will be a significant component in Block’s march toward super app status. And this applies equally to Block’s consumer (CashApp) and B2B (Square) ecosystems.
Last August, Block bet $29 billion of its chips on Afterpay. The all-stock deal closed at the end of January. When it was announced in August 2021, the deal got mixed reviews.
Many analysts cited it as a smart move to forge relationships with larger retailers. Up to this point, Square has focused mainly on small fry customers. Others derided Block (then Square) for overpaying for what is essentially a feature. However, those critiques were a bit unfair. Founded in Australia in 2015 by Nick Molnar, Afterpay was among the buy now, pay later pioneers, along with Klarna, Affirm, and others.
On the earnings call, Block CEO Jack Dorsey and CFO Amrita Ahuja laid out how Block sees Afterpay fitting into the larger operation.
First, Afterpay plugged a gaping hole in Block’s B2B and B2C offerings.
“In January, we closed our acquisition of Afterpay and introduced Afterpay Buy Now Pay Later for Square online sellers in the U.S. and Australia,” Dorsey said on the call. “[It’s] an offering that’s been long requested by sellers and customers. Looking ahead, we intend to integrate Buy Now Pay Later more deeply in our ecosystem over time, and we believe Afterpay will accelerate the connections between our Square [B2B] and Cash [B2C] ecosystems.”
Digging a Little Deeper
Block’s top execs laid out how Afterpay is a key link in the company’s omnichannel strategy.
“On the Square side, this is something that our customers have been asking for, for quite some time. Both for themselves as sellers but also for their customers,” Dorsey said. “Their customers are driving some of this adoption. The interesting thing about Afterpay is it gets us much closer to much, much larger retailers, continuing to go down our omnichannel strategy, making sure that we are meeting our customers wherever they are in whatever size merchants that they wanted to shop at.”
For CashApp, Afterpay offers an opportunity for merchant discovery.
“Now we have an opportunity for a whole lot more discovery on the Cash App side,” Dorsey said. “And giving Cash App customers entirely new capabilities that they haven’t had certainly in a Cash App before, but I don’t think in any financial instruments.”
CFO Ahuja offered a little more color on this.
“Afterpay’s retailers have shown a lot of excitement about a potential integration opportunity being developed right now with Cash App, including the combination of Buy Now Pay Later with Cash App Pay, which, as you know, we just launched a few months ago,” Ahuja said. “We’ve also built in Cash App an initial search page for customers where they can discover Buy Now Pay Later offers within Cash App.”
Growing Defaults
On the call, Block also shared details on Afterpay’s financial performance during 2H 2021. The bottom line is the BNPL business saw strong growth, with some potentially concerning signals on consumer defaults.
Afterpay followed a fiscal year ending June 30. On the earnings call, Ahuja shared Afterpay’s financial details for the second half of calendar 2021. The results were not included in Block’s 2021 earnings.
Afterpay grew its gross merchandise volume by 54% in 2H 2021. And both revenue and gross profits grew by 54%. For the full year, Afterpay’s GMV was $19.7 billion.
Afterpay ended 2021 with 122,000 active merchants, which is up 64% over the previous year. The platform has more than 19 million active consumers, up 47%.
All good metrics. The one that might signal trouble ahead is the modest rise in consumer losses, which we presume means BNPL consumer purchases that were not fully repaid. Losses on consumer receivables were 1.17% of GMV, which was up 8 basis points over 1H calendar 2021.
Ahuja attributed this to the holiday season and “a greater mix of volumes from newer products and regions.”
We will see if this is just a seasonal blip or a sign of a growing problem. As it is, BNPL stocks are under pressure due to macro factors like inflation and rising interest rates. However, the latter has more of an impact on BNPLs that charge interest, like Affirm. Still, there is general concern over rising default rates in the sector. It’s probably good timing for Afterpay to nest itself within Block.
