Buy now, pay later (BNPL) is where a customer will buy a product and pay for it later without interest. There have been a number of catalysts in the BNPL space such as a challenging liquidity environment, no interest on payments, and booming e-commerce sales due to COVID-19. The BNPL market is set to grow at a compound annual growth rate of roughly 45% in the coming years to reach $3.98 trillion by 2030.
We look at several companies in the payment industry and their moves to try and dominate the increasingly competitive BNPL space.
Affirm: Bull vs Bear arguments:
Affirm (NASDAQ: AFRM) is a leader in the BNPL space and was founded in 2012, going public in January this year.
The company has a mission to “deliver honest financial products that improve lives” and operates a mobile app and solutions for merchants and consumers. It states that its solutions are built on trust and transparency rather than legacy payment options such as credit cards that can be deceptive with hidden fees and penalties.
The company is also founder-led, with Max Levchin at the helm, who has a successful track record being a ‘PayPal Mafia’ member. Levchin also owns roughly 11% of Affirm, which aligns his value with shareholders.
The company has been growing rapidly and in Q4 2021, it reported revenue growth of 71% year-over-year (YoY), reaching $261.8 million. The number of active consumers almost doubled to 7.1 million while the number of merchants surged by 412% to nearly 29,000 and includes Walmart, Peloton, and more. The company has also partnered with Amazon and Shopify and is another exciting area for growth.
It also reported a net loss of $128.2 million in Q4, compared to a profit of $34.8 million the year prior, primarily due to an increase in stock-based compensation after the IPO. Another risk to the business is its dependence on Peloton, which accounted for approximately 28% of revenue in fiscal 2020 and 31% for the first nine months of fiscal 2021.
Square: Bull vs Bear arguments:
Square (NYSE: SQ) is a payment and technology company co-founded in 2009 by Jim McKelvey and current CEO Jack Dorsey.
Despite challenges with its seller segment due to the pandemic, it has returned to growth, and Square is emerging in better shape with an increase in digital payment adoption. In Q2 2021, Square reported a revenue increase of 87% YoY to reach $1.96 billion excluding Bitcoin revenue, with its Cash App reporting 40 million monthly active users.
Square recently made a significant acquisition with a $29 billion deal for Afterpay, which it describes as a category leader in BNPL. The company has a growing consumer and merchant base with 16.2 million active consumers and nearly 100,000 active merchants. The company also has strong revenue growth with a 92% compound annual growth rate from fiscal 2019-2021 and reached $693 million in 2021.
This acquisition of Affirm will add another dimension to Square’s ecosystem as it is integrated into both the seller and Cash App. Users will find BNPL options through the Cash App and give existing merchants the ability to accept this, thus connecting the ecosystems.
However, despite Square’s strong growth, it reported a loss of $204 million in the quarter. Furthermore, it holds Bitcoin on its balance sheet, which could fuel volatility along with the integration risk of Afterpay.
PayPal: Bull vs Bear arguments:
PayPal (NASDAQ: PYPL) is the oldest company on this list, founded in 1998, and is a leader in the digital payments space and BNPL.
PayPal recently announced the acquisition of Paidy for $2.7 billion, which has pioneered BNPL in Japan, the third-largest e-commerce market in the world. The deal is set to close in Q4 2021, subject to regulatory approval. Paidy has six million registered users and 700,000 merchants, including the top 10 Japanese marketplaces. This expands PayPal’s footprint in Japan, where roughly 70% of transactions are still done in cash. According to CEO Dan Schulman, this latest acquisition is another add-on to its relatively new BNPL offering, which has continued to grow from “strength to strength”.
This acquisition was relatively small overall, with PayPal generating $6.27 billion in revenue in Q2 2021, increasing 19% YoY with 403 million active accounts. Despite its size, management sees further upside and accelerating growth in fiscal 2022 and continues to innovate as it attempts to cement its place as the go-to digital payments platform.
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Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.