Affirm and Amazon just tossed a grenade into the crowd of competitors in the white-hot buy now, pay later space.
The U.S. BNPL platform has signed a deal with Amazon to offer its installment payments solution to Amazon customers at checkout. This is a major deal in a space where major deal one-upmanship is an everyday occurrence. For example, just in the past several weeks, we’ve seen the following.
- Square acquiring Aftepay for $29 billion.
- Apple working with Goldman Sachs to roll out its Apple Pay Later BNPL offering.
- Paypal announced it was ending the practice of assessing late fees on delinquent BNPL accounts. This was a clear sign that Paypal was concerned about losing business to other platforms like Afterpay that do not assess late fees.
U.S.-based Affirm likely felt left out of the recent wave of publicity for BNPL. Its deal with Amazon brought the company roaring back into the conversation. Affirm’s stock price has surged since the announcement on Friday.
Amazon’s grip on the growing U.S. eCommerce market remains tight. According to Digital Commerce 360, Amazon commanded 31.4% of the $535 billion U.S. eCommerce market in 2020.
Not Quite Interest-Free
The deal announcement was scant on details. The announcement says that Amazon will give “select” customers the option of splitting up payments valued at greater than $50. Amazon will abide by Affirm’s no late fee policy.
The following statement from the announcement is interesting. “Approved customers are shown the total cost of their purchase upfront and will never pay more than what they agree to at checkout.”
This suggests Amazon-Affirm might tack finance charges onto the bill. Most BNPL platforms are free of interest and fees to the consumer. This is a big reason the payment method has become so popular with Millennial and GenZ consumers. The platforms tend to make their money from merchant fees. CNBC reported on Friday that interest changes would be assesses based on the individual consumer’s profile.
There was a fairly lengthy discussion of the news on CNBC when it came out Friday, after trading hours.
Valuations in the BNPL space have gotten extremely fat and are getting fatter. Privately held Klarna raised $639 million in June after raised $1 billion in March, at a $45.6 billion valuation. These booming valuations likely played into Square’s decision to buy Afterpay. Some analysts criticized Square for paying so much for Afterpay, albeit all in stock, for essentially a “feature” that it could have built itself. Our sense is the answer lies in Afterpay’s valuation.
Afterpay currently has an enterprise value of $41.1 billion, and an enterprise value to revenue ratio of 41.1X. Square, by contrast, has a much higher enterprise value at $120 billion, but its ratio is 7.6X. The Square-Afterpay deal is expected to close in Q1 2022.
The Affirm-Amazon deal was revealed after the U.S exchanges closed last Friday. Affirm’s stock closed Friday at 67.9. It opened Monday at 96.24 after surging in after-hours trading. At this writing, it was up over 100.00. Amazon was up slightly.
Before the Amazon deal came through, Affirm was under some fire for being over-reliant on its deal with fitness equipment maker Peloton. Affirm also has a big partnership with Amazon’s rival Walmart. Affirm’s stock price was down nearly 4% the day before the Amazon deal was announced.
It’s unclear if the Amazon-Afrfirm deal is exclusive, or if Amazon can seek similar deals with other BNPL players.
One of the analysts raises an important point about the broader BNPL space in the CNBC discussion shared above. He asked what is the quality of the consumers on their books? In good economic times, perhaps good. But are these platforms vulnerable if there is a shock that drives up unemployment?
So is there a credit bubble brewing in BNPL? True, the case that BNPL is better than revolving credit is strong. Afterpay, for example, doesn’t charge interest or late fees. But it does shut off consumers who miss a payment, allowing them back only when they catch up. It also starts consumers off on a low spending limit and nudges their spending power up gradually based on their payment history.
Still, consumer advocates are beginning to fret a bit over BNPL. One concern is that if consumers use multiple BNPLs to make purchases, will there come a point where defaults spike?
Another concern about BNPLs is that the current competitive intensity may be leading platforms to make sweetheart deals with major retailers. Trading margin for market share is a proven tactic if you have the resources to get big fast. But if this is in fact happening, it’s likely to produce a reckoning as weaker players feel the pressure to follow suit. This space could look very different in six month’s time.