The Banks Still Don’t Get It — The Real Threat of BNPL Companies

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No stock embodies the ASX tech rally quite like Afterpay Ltd [ASX:APT].

While 2020 has been a year of pain for most businesses, Afterpay is certainly not one of them.

Their share price has reached dizzying heights. Their market growth has spread far and wide. And they have quickly become a household name, even by those who don’t use their service.

However, the fact that they have a market cap that is nearly half of ANZ’s and close to a third of Westpac and NAB’s is bound to irk some. Not least, the banks themselves…

After all, Afterpay is still yet to make a profit.

Meanwhile the banks are delivering billion-dollar bottom line results. And yet, the comparisons between each will not stop. As people, myself included, continue to tell you that Afterpay has tapped into the future of finance.

Granted, that doesn’t mean they’ll replace the banks. Just eat away at parts of their operations.

As expected though, the banks aren’t going to go down without a fight. And this week we’ve seen two banks throw their first real punch at Afterpay.

The only thing is, it isn’t exactly a good punch…

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Plastic problems

If you haven’t heard, NAB announced a new product to try and lure younger customers on Wednesday.

A product that is designed to win over the Afterpay generation. Trying to lure them in with the promise of no-interest, no late fees, and no strings attached. Well…sort of.

The only problem is…this product is a credit card.

NAB is calling it the ‘StraightUp’ card. Which, as the name implies, is meant to get rid of all the hidden surprises that usually come with credit cards. Vying to be as transparent as possible with how debt and borrowing is handled.

Here is how the AFR described it:

NAB’s StraightUp card will never charge interest to the customer, in contrast to the 20 per cent rates on many credit cards.

Users will instead be required to pay a minimum amount each month (depending on the card’s credit limit), including a monthly fee. There are no late fees and no fees if the card is not used.

It’s certainly not a terrible proposition. Arguably, this is how credit cards should have worked from the get-go. But of course, that wouldn’t deliver the kind of record profits that banks are accustomed to, would it.

It is only now, thanks to the competition of Afterpay, that the banks have had to reel in their greed.

So, instead of interest, users of this credit card will pay a set, regular fee instead. A payment model that is designed to be predictable and reliable.

For a $1,000 limit, expect to pay $45 a month. $2,000 worth of credit will cost you $90 a month. And a $3,000 limit clocks in at $130 per month.

Now, while that is pretty good for a credit card. I can’t imagine many Afterpay users will be racing out to grab one. Because at the end of the day, Afterpay only charges its users when they fail to pay on time.

There is no interest, no monthly cost, and no real set limits to availability to credit. As long as you keep paying on time, Afterpay will let you keep using their service.

Instead, it is the merchants who are slugged with the costs and fees. A business model that consumers love, but businesses put up with (at best).

I can’t see how NAB’s credit card can compete with that.

Sure, businesses may love not having to foot the bill, but that won’t matter if people aren’t using the card. And as long as Afterpay — or any ‘buy now, pay later’ (BNPL) service — exists, I can’t imagine consumers will be rushing to get their hands on this card.

More importantly though, it tells me that the banks don’t understand the real threat of Afterpay.

The real appeal

See NAB isn’t the only one opting for this new credit card option.

CBA followed up yesterday (the day after NAB’s announcement) with their own ‘Neo’ card. A product that, just like the ‘StraightUp’ card, will rely on monthly fees from users.

Again, I can’t see why an avid Afterpay user would jump ship to these types of cards. The only people it will really appeal to is those who are in desperate need of credit. And honestly, taking on more debt is not what the younger generation is all about.

Here’s the thing though. Credit, debts, and fees are the least of the banks’ problems when it comes to Afterpay.

The real strength of this BNPL pioneer is how easy it is to use.

It may be a generalisation, but millennials really do hate cards. Not just because of their history of stinging people with unexpected costs, but because they’re outdated. This can be especially seen when it comes to e-commerce.

As petty as it may sound, no one really wants to take the time to enter the same 16 digits every time they make an online purchase. Afterpay, on the other hand, will simply process your transaction with the click of a button.

Better still, it will even tell you how many instalments you can pay in and when those payments are due.

I’m sure to many people this may seem extremely trivial. The notion that a few seconds of entering card details is the difference between someone making a purchase or not may sound absurd. But I guarantee you, it is anything but.

The psychology of buying behaviour is a weird and wonderful world. One that Afterpay has managed to leverage to their advantage when it comes to younger shoppers.

And try as they might, I have yet to see the banks acknowledge this. Whether it is because they can’t or simply don’t want to, is only something they can tell you. But, as long as they choose to ignore this fact, I can’t see them competing with Afterpay.

Even if the BNPL sector is in a bit of a bubble right now, you can’t deny that.

Which is precisely why, whatever happens from here, Afterpay has changed the way we shop forever. Whether that will ever see them deliver a profit…is another matter entirely.


Ryan Clarkson-Ledward Signature

Ryan Clarkson-Ledward,
Editor, Money Morning

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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