How Afterpay Went From Zero To Hero

With it's recent sale totalling $39 billion dollars, Afterpay is a homegrown success story that cements the fact that 'Buy Now, Pay Later' is here to stay. 

While it can be easy for us mere mortals to forget, some of the world’s biggest corporations and enterprises started with just one small idea - and that’s exactly how it all began for Afterpay founders Nick Molnar and Anthony Eisen. 

Considered to be one of Australia’s best exports since Vegemite, the market for Afterpay’s ‘reverse layby’ model cannot be overstated - especially in the midst of a global pandemic. Founded in a suburban Sydney garage in 2014 by Molnar and Eisen, Afterpay as we know it is now regarded as one of the pioneers of the ‘Buy Now, Pay Later’ (BNPL) payment platforms that have since taken the world by storm. In theory, it’s as simple as receiving your goods, and paying them off later in four fortnightly, interest free instalments. 

The Origins Of Afterpay

In essence, Afterpay acts as an intermediary platform between retailers and customers. The platform pays the retailer upfront for the goods on behalf of the customer, and the customer in turn pays Afterpay back. For the customer, this is an alternative method to using a credit card, and requires as little as 25% of the purchase upfront. For retailers, Afterpay has significantly proven to expand their client base - without the risk of the customer defaulting on the payment plan. 

Globally, Afterpay has 8.5 million active customers in 2021. While the vast majority of these users have long been regarded as Millennials and Gen Z users, the company also boasts a 134% increase year-on-year, primarily thanks to its expansion to the United Kingdom, United States and New Zealand - but if it doesn’t charge interest like traditional credit cards, how do they manage to turn a profit?

Although Afterpay doesn't charge interest, it does charge fees to merchants who offer the service, and late fees to users who don't keep up with payments. The vast majority of Afterpay's revenue stems from its 43,000 active merchants. It's been reported that Afterpay charges them a $0.30 fixed transaction fee, plus a commission between 3% and 7% on each sale. While this is considerably higher than the 1% to 3% that retailers are traditionally charged by banks to process other payment types, what retailers spend in fees - they hope to make up for in increased sales.

For shoppers, the ease of using the platform is one of the most appealing platforms. To sign up, all you need is to be aged over eighteen, hold a valid Visa or Mastercard debit or credit card in your name, and to be deemed capable of entering into a legally binding contract. Users sign up via a verified email address, phone number and photo identification. Once this is approved - which is almost instant - users are free to get busy shopping either online or instore with selected retailers. The more you shop and show that you can successfully pay back your purchases on time, the higher your approved spending limit goes. 

How The Sale Of Afterpay Might Affect You 

Needless to say, it’s almost unimaginable that this business concept was once scoffed at in financial circles. Despite this, in early August 2021, the co-founders announced an acquisition with digital payments company Square for the amount of AUD $39 billion dollars, with the co-founders also joining the team at Square once the deal is completed in the first quarter of 2022.

This staggering sale price is actually forty two times Afterpay’s revenue, making it the biggest merger announced in Australian history. While both Molnar and Eisen now hold stakes in Square at roughly 6.8% each, they also stand to make around AUD $2.7 billion dollars each after the sale, and will both be paid out via stocks - not bad at all for a company that still hasn't turned a profit, nor paid out any dividends.

Despite headaches from finance industry regulators and a global pandemic, the rapid rise of Afterpay as a global titan is nothing short of extraordinary. By combining a game changing concept, delivering consumer flexibility and possessing the ability for merchants to grow their customer base with the potential of increasing transaction values, Afterpay’s aggressive expansion plan has very clearly worked - after all, they’re a brand that has become a verb. 

For many innovative and fast growth companies, the eventual sale is the end game - more often than not to another company in the same or similar market that is willing to pay a premium for the opportunity. Afterpay has achieved that in spectacular style, and just about anyone can see the appeal of a business model that is replicable, utilises unique systems and technology, is adaptable, and has proven its ability to grow and expand globally.

If the transaction proceeds as scheduled, then Afterpay shareholders have two primary options: either receive NYSE-listed shares in Square, or receive shares in Square that are now listed on the ASX. As Square will soon establish a secondary listing on the ASX, this will allow Afterpay shareholders to trade Square shares via CHESS Depositary Interests (CDIs) on the ASX. Afterpay has formally stated that the transaction is intended to be tax-free for Australian shareholders who elect to receive NYSE-listed Square shares or CDIs. 

However, among the conditions is a ruling from the Australian Taxation Office (ATO) for Australian shareholders to apply scrip-for-scrip capital gains tax (CGT) rollover relief. If the rollover applies, then the cost base and acquisition date of the Square shares will basically remain the same as your Afterpay shares.

The takeover also caps a remarkable recovery in Afterpay’s share price, which fell as low as $8.01 in the depths of 2020, before reaching a record high of $160.05 in February this year. With online shopping booming at never before seen rates, it’s unlikely that Afterpay is an interest free concept that’s likely to go away anytime soon. 

Taking The Stress Out Of Doing Business

If understanding your finances, tax obligations, or the in’s and outs of doing business isn’t exactly your strong point, then it may be reassuring to know that you’re not alone. In fact, many businesses big and small enlist the services of an accountant and business advisor as a means to free up their time, while knowing that their financial obligations are already taken care of by the professionals. 

What you choose to invest in or shy away from as a business owner can have a domino effect that ripples through your entire team - so are you confident in your financial choices? At Muro, we are more than just accountants. We offer our clients strategic business advice and ongoing support to help them reach their business and financial goals. Get in touch with us at Muro today to ensure that you’re on the right path for success in starting a business in 2021.