Australian installment lender finds bigger following in the U.S.

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Afterpay has found an opening in the U.S. by targeting the millennials who don't have a credit card to use at the point of sale.

One effect of the CARD Act of 2009 — which largely forbids issuing credit cards to consumers under 21 and severely restricts credit card marketing on college campuses — is that many millennials have thin credit histories. This, paired with their large amount of student debt, has kept many millennials out of the mainstream credit card market.

The end result since launching in the U.S. in 2018 is that Afterpay now has 3.6 million consumers using its platform, compared with just 3.1 million in Australia and New Zealand, where it has operated since 2015. And momentum is building — Afterpay's U.S. customer base has grown by 1 million since November.

“I saw this shift in how millennials were paying for things, wanting to use debit cards to pay online. They also wanted to have an alternative to credit cards. Our research shows that two out of three millennials don’t have a credit card,” said Nicholas Molnar, an Afterpay co-founder and its U.S. CEO.

Afterpay's adoption in the U.S. eclipsed that of its home market despite offering a more limited version of its product. In markets such as Australia, Afterpay is an omnichannel provider and generates 25% of its business offline. In the U.S., Afterpay is currently online only, however Molnar indicated that it plans to add the omnichannel capability in the future, possibly in 2020. It launched in the U.K. last year, and has 600,000 consumers in that market.

Afterpay is offered on more than 10% of fashion and beauty websites in the U.S., including Steve Madden, DSW, Anthropologie, MAC, and Haus Laboratories.

The Afterpay product looks like a loan, but it’s free to the consumer (unless the consumer incurs a late payment fee). The purchase is split into four equal transactions and charged to a consumer’s payment card every two weeks.

About 85% of consumers use their debit card to make payments to Afterpay, with the balance tied to a credit card. In addition, Afterpay is challenging POS lenders such as Affirm and Klarna, which are competing in the $160 billion U.S. installment loan market. In the buy-now/pay-later segment, its closest competitors that offer short-term, interest-free consumer loans charged to a payment card include Splitit and Quadpay.

“Afterpay seeks to provide a budget-friendly alternative to paying for an item in one lump sum, while allowing its users to avoid using credit cards or other loan products. Many younger millennials and Gen Zs would prefer to avoid taking on debt and potentially paying more in interest and fees than they anticipated,” said Leslie Parrish, senior analyst in the retail banking practice at Aite Group.

Merchants pay a fee similar to interchange to Afterpay, which debuted in the U.S. in May 2018, starting with 50 or so retailers including Urban Outfitters, Lorna Jane and others.

Today, Afterpay is offered on more than 10% of fashion and beauty websites in the U.S. including Steve Madden, DSW, Anthropologie, MAC and Haus Laboratories.

Since Afterpay started raising capital 4.5 years ago in Australia, then going public, it has built a global base of almost 7 million customers and over 42,000 retailers. It most recently expanded to the U.K. in 2019. It had AUS$5.2 billion (about $3.4 billion) in underlying sales in its fiscal 2019, up roughly 140% from AUS$2.2 billion (about $1.45 billion) in its fiscal 2018. Afterpay’s total income in fiscal 2019 was AUS$251.6 million (about $165 million).

Once Afterpay is able to acquire a new customer, its experience is that in subsequent years the customers not only make return purchases, they also purchase more frequently. Customers obtained during its 2015-17 fiscal years today make about 22 purchases a year, customers acquired in its 2018 fiscal year make 14 purchases a year and those acquired last year are averaging about seven transactions.

“Unlike credit cards, we make more money when people pay on time," Molnar said. "Our losses in the last year were about 1% compared to credit cards that average 3% to 4%. Going forward we see demand will continue to grow as Gen Z" — those roughly in the 18-23 age bracket — "has a far greater affinity for debit than millennials. Since our product allows them to pay over a period of time with a debit card, our value prop is even stronger. Plus we’ve only tapped 5% of millennials in the U.S."

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