Afterpay will pay a fee to Apple and Google to allow its instalment payments to be made through their smartphone digital wallets, but the deal will reduce Afterpay’s costs of rolling out to new merchants and help drive customer adoption.
Afterpay said on Wednesday it would turn on Apple Pay and Google Pay in select US retailers this month, while Australian customers would be able to use their phones to make ‘tap and go’ instalment payments “in the coming months”. Analysts said the deal would put further pressure on credit cards.
The move will help launch Afterpay into in-store payments in the United States, as its retail economy starts to open up in the wake of the coronavirus crisis. Most of Afterpay’s US volume has been online sales, but in-store sales make up almost one-quarter of sales in Australia. The deal will allow Afterpay to expand its US merchant base by allowing acceptance from existing payments terminals.
Afterpay, whose shares rose on Wednesday after the agreements were announced to the ASX, is keen to grow in-store sales as an overall proportion of sales to create a better picture of customers, which provides richer data back to retailers to justify its fees.
The deal will provide exposure for the US technology giants Apple and Google, which have been moving into payments for several years, to buy, now pay later transactions as they grow in popularity.
If Afterpay continues to scale in the US, the deal could be important for Apple, which has been slow to gain momentum in the US, where credit cards dominate. Apple Pay accounts for about 5 per cent of global card transactions and this could rise to 10 per cent by 2025, according to data from Bernstein, reported in Quartz in February.
Apple prevents banks and all companies it deals with from disclosing anything about its fees, but it is thought that it takes a few cents of revenue per $100 of transaction value. Afterpay said it could not comment on particulars of the deal.
Analysts said the impact on Afterpay’s net transaction margin is unclear. It is understood that strategic rates negotiated with Visa and Mastercard will offset the fee that Afterpay will pay to Apple, so there will be no material change in processing costs.
Pressure on cards
The deal will make it more attractive for customers to use Afterpay in physical stores because it will involve waving their phone at an existing payment terminal rather than having to photograph a barcode to complete purchases. Users will see a card icon in their Afterpay app to activate a digital Afterpay card in the Apple Wallet.
“This is breaking new ground in the sector,” said Shaw & Partners analyst Jonathon Higgins. “Importantly this announcement continues to indicate market share gains away from major financial institutions as closed loop banking systems are opened up to fintech players, which consumers prefer to deal with. We should continue to see credit cards eroded, shift to non-cash payments and structural change towards buy now pay later and other wallet players.”
The deal will reduce the cost for Afterpay of rolling out its services because it will not need to integrate its software into each merchant’s point of sale systems but instead will be able to rely on existing payments terminals. Afterpay is therefore able to to piggy-back off the investment in payments systems made by banks.
The deal will make it easier for Afterpay to on-board new customers. Last week, it said global users had surpassed 10 million.
The move comes after ANZ Bank jumped ahead of its rival major banks by enabling Apple Pay in 2016. The three other major Australian banks initially fought the US tech giant through the Australian Competition and Consumer Commission, but when the ACCC declined to provide authorisation for collective negotiations, each bank buckled and did a deal with Apple. This resulted in them giving up a small slice of their payment revenue to the tech giant in order to prevent customers switching to other providers offering the service.
Afterpay said retailers Forever21, Fresh, Skechers and Solstice Sunglasses will be among some of the first stores to offer Apple Pay.
Earlier this week, Goldman Sachs upgraded its forecasts for Afterpay following last week’s trading update “to capture stronger consumer growth, frequency of use and operating leverage”.
This story originally appeared in the Australian Financial Review. Read the original story here.
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