Do you remember the Good Guys advert set to the tune of ‘Good Vibrations’?
‘Pay cash and we’ll slash the prices…’
It’s been about four years since the famous slogan itself was cut from use.
The appliances retailer realised in a new world of digital payments, they could no longer favour cash buyers to the expense of other shoppers.
The CEO at the time explained:
‘Customers have so many other ways to pay and our online prices are the same as [prices] in store. The power has shifted from the retailer to the consumer and the consumer has become digitally empowered.’
It’s yet another example of how changes in technology can have big implications for businesses.
But the reason I thought about the Good Guys jingle today was because of the potential arrival of negative interest rates to Australian shores in the near future.
This unprecedented monetary experiment could result in some topsy-turvy outcomes.
Such as cash buyers being charged more!
A complete 180 from the old Good Guys business model of rewarding cash buyers.
Let’s explore these weird outcomes…
Pass the parcel
Negative interest rates change thousands of years of accepted business practice.
Think about this for a second…
If it costs a business to hold cash, then a rational business would rather receive payment later!
It’s like a game of pass the parcel where no one wants to hold the cash for too long.
I’ve heard stories about car dealerships in Switzerland begging people to take out car finance as opposed to paying cash.
Car dealers have always made more money from selling car finance than cars. But now it’s even worse as a cash buyer will eat into that slim profit margin even further.
Which makes you think…
How will all this play out in the wider retail world?
Well, it gets very interesting for one particular line of business…
You see, guess which company might suddenly be even more appealing for a lot of ‘cash shy’ businesses.
That’s right, Afterpay Touch Group Ltd [ASX:APT].
‘Buy now, pay later’ started off as a good way to get buyers to bring forward their purchases. Especially younger customers who are steering clear of credit cards.
But it might not just be a good marketing gimmick for retailers in the future. It might actually be a way to reduce the costs of holding cash.
If you’re a global retailer holding hundreds of millions of dollars in banks at -0.75%, this is a big new cost. Deferring that through pushing finance, might be a wise move?
To be clear, we’re not at that stage yet…
But if this is the world that we’re moving towards, then it pays to start thinking about how it all plays out now.
Because big change creates big opportunity…
The true value of Afterpay
Of course, it’s not just the potential for negative interest rates that’s driving the growth of Afterpay.
It’s just one of a number of factors.
I’ve banged on a bit about this in Money Morning in recent months. But at the risk of repeating myself, it’s a combination of new technology, changing demographics, strange economics, and changing consumer behaviour that is driving a huge change in the whole world of banking.
I call it the ‘Great Bank Unbundling’.
The process by which the banking industry is being simultaneously torn apart and reshaped. This process is creating and destroying shareholder value at a rapid pace.
But back to Afterpay…
Investment House Morgan Stanley just released a 69-page report on Afterpay with a $44 price target. As I type it’s trading at $36 per share.
I don’t usually pay attention to such freely available reports, as you never know the true motivations of the authors for putting them out there.
But on one point I agree with them…
They argue that Afterpay is still an ‘early growth’ story. That can sound strange as the stock price has grown by over 12 times in the last two years.
But the fact is, Afterpay operates in a sweet spot with huge potential still. And they’re going after a global market. Most importantly, they’re a favourite of the coveted millennial generation — the banking industry’s most lucrative future customers.
A weird world of negative interest rates might just be yet another tailwind to their business model…
What do you do?
The truth is no one really knows how a world of ultra-low and negative interest rates will work out.
It might cause property bubbles to grow?
It might hasten the demise of fiat currencies and lead to the rise of independent currencies like bitcoin?
Or it might destroy the financial fabric of society and result in a prolonged depression?
Like we said, we’re in uncharted territory here, so it’d be foolish to guess the future with any certainty.
But our instinct here at Money Morning is it’s the wrong course of action over the long term.
When central planners try to control the economy like this, history suggests they’ll stuff it up.
And yet despite that, it could still throw up some wonderful investing opportunities for the prepared who can see the big changes before the herd.
All we can advise is to pay attention and play your cards wisely.
Editor, Money Morning
PS: Bank Busters! Three Aussie tech plays outsmarting the ‘big four’ banks. Click here to download.