Afterpay is allowing some users to ‘shop anywhere’ using a digital card – forfeiting margin as it looks for market share

Afterpay is beginning to roll out one-time cards designed to be used at major US retailers. (Noam Galai, Getty Images)
  • Afterpay will begin allowing customers to split payments at retailers with which it doesn’t already have a partnership.
  • Initially, select users in the US will be able to generate a ‘one-time card’ to make purchases with Afterpay at the country’s largest retailers, such as Amazon and Nike.
  • Pocketing affiliate fees instead of a direct margin, some analysts believe this will help grow revenues as well as its user base.
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Afterpay is changing the way shoppers use its product, as it aggressively goes after market share in the sector’s biggest growth market.

In an announcement to the ASX, the buy now, pay later company revealed it is allowing some users to shop at some of the largest retailers in the world, despite the fact none have agreed to a direct partnership. Instead, Afterpay will rely on affiliate agreements to generate revenue.

American users will be able to shop at retailers including Amazon, Dell, Nike, Sephora, Target, Victoria’s Secret, Walgreens and others, representing nearly half of the country’s entire ecommerce market.

The move represents a major shift in how Afterpay is used, generating a “one-time card” at checkout through the app. Historically, users have only been able to split payments with Afterpay at retailers that have a pre-existing agreement with the company.

The shift means Afterpay will give up its normal margin – between 4 – 6% paid by the retailer – and instead pocket affiliate and other fees as part of forming a broader merchant network.

It also mirrors the way the sector appears to be tackling North America. Afterpay’s largest competitors in the market, Klarna and Zip’s US arm QuadPay, have long-been running similar products, enabling users to ‘tap and go’ at any checkout.

With the North America market representing the biggest growth driver for all three, the buy now pay later sector is engaged in a land grab to seize as much of the market as they can, as more mature markets like Australia become overcrowded.

Nor has the US adopted the payment method as quickly. New data out on Thursday from retail platform BigCommerce shows just one in five US medium-sized businesses accept BNPL on their online stores, compared to almost one in two Australian ones.

“As we celebrate the physical re-opening of stores, consumers still want the convenience and flexibility of buying with the click of a mouse as part of their ‘new normal’,” Zahir Khoja, general manager of Afterpay North America, said.

“We are thrilled to continue to support our customers by allowing them to shop every day at their favorite brands with Afterpay for things they need and want in their lives.”

Competition ramps up in the race to scale

It comes as some payment analysts question the sustainability of the buy now, pay later model, particularly as it struggles to grow into a meaningful segment of the payment landscape.

“They’ve done a great job promoting these products but they are still less than 1% of all payments after more than seven years,” managing director of financial services consultancy McLean and Roche Grant Halverson said. “As a category you need to get over 10% otherwise you don’t last.”

While there has been an explosion of smaller rivals in the last few years, including ‘Afterpay copycats’, there has also been the more recent and more threatening entry of major payment companies into the market.

PayPal, the $445 billion payments giant, has already begun to split payments for customers on any purchase in the US with plans to do the same in Australia. The Commonwealth Bank, Australia’s largest bank, is rolling a similar feature out here to its millions of customers without the need to form partnerships with merchants.

While Afterpay may be ubiquitous in Australia, and quickly growing overseas, it is dwarfed by these much larger, much more established payment companies overseas and at home. At the same time it is fending off challenges from Klarna, Zip, US-based rival Affirm and others.

In this furious bid to reach scale, the strategy to more quickly acquire customers and business makes sense to analysts.

“Using a one-time virtual card to facilitate the purchase, we think this functionality will be materially incremental to volume and frequency over time in the US, generate revenue yields likely in excess of integrated merchant fees, and unlike some competitors will not include any additional customer fees,” RBC Capital Markets analyst Tim Piper said in a note.

“While accelerating growth, we also see this as a move from [Afterpay] to leverage its material BNPL network to evolve into a broader commerce and marketing platform that will leverage [its] data on customers to drive more relevant, personalised lead volume and data to merchants.”

It might be late to the ‘pay anywhere’ party, but Afterpay is hoping there’s still plenty of life in it yet.