Merchant networks, not payment tech, will decide BNPL winners

The buy now, pay later market has become a battleground, but not for the reasons most investors think. When Apple announced Apple Pay Later in partnership with Goldman Sachs this week, and PayPal flipped the switch on its Pay in 4 feature for nine million Australian customers, the stock prices of Afterpay and Zip collapsed. Millions in market value evaporated in hours. Yet analysts across the country barely shrugged. The real competition, they say, has never been about the payment technology itself.

The sector has exploded into a crowded field. Afterpay and Zip dominate the headlines, but they share the space with Openpay, Splitit, Humm, Oxipay, Klarna, Sezzle, and Affirm, among others. Commonwealth Bank just rolled out StepPay. Citi has FlexPay. American Express offers Pay It, Plan It. Westpac partnered with Humm to bring the service to New Zealand. The model—letting customers buy now and pay in instalments without the punishing 20 percent interest rates that credit cards once charged—has become so easy to replicate that it is now, by definition, a commodity. "The buy now, pay later model is completely commoditised in Australia now," says Siraj Ahmed, head of Australian technology research at Citi. "Innovation is no longer the competitive edge."

What matters instead is what sits underneath: the ability to funnel new customers to the merchants who use the service. Afterpay operates the Afterpay Merchant Index, a directory where thousands of retailers get a profile and exposure to the platform's user base. Zip has its own shopping app. These are not payment systems. They are lead generation engines. When Lucille Ruehland, who runs a print store, got listed in the Afterpay Merchant Index, she gained access to traffic that cost her nothing—a rarity in a world where she pays Google, Facebook, and Instagram for every eyeball that lands on her site. "It doesn't cost anything and it's another form of traffic for me," she says. "And while it's not the biggest influx of traffic, it's some."

This distinction matters enormously. Apple and PayPal can replicate the payment function easily enough. What they cannot replicate, at least not yet, is the merchant ecosystem. Matthew Wilson, senior research analyst at Evans & Partners, puts it plainly: replicating Afterpay's merchant-value proposition—the ability to help generate new leads for businesses—is far harder than replicating the payment model itself. "The merchant, who is the paying customer, derives benefits from Afterpay's user network and user information," Wilson says. "These are not being exactly replicated by Apple and PayPal, given there is no shopping portal or retailer ecosystem underpinning the buy now, pay later functionality." Lucy Huang, equity researcher at Bank of America, agrees. Apple's announcement, she notes, reads as a payment option, not a marketing tool. It is nothing like an Apple shopping directory targeting Millennials and Gen Z—the demographics these companies are hunting. Those two generations make up 45 percent of the labour force but only 25 percent of total retail spending, a gap the sector is designed to close.

The opportunity is vast. Credit Suisse expects the $9 trillion payments market across Australia, New Zealand, the US, UK, and parts of Europe to deliver 15 to 20 percent compound annual growth through 2023. Merchants pay an average fee of around 4.1 percent in Australia, 3.6 percent in the US, and 3.5 percent in the UK—commissions calculated as a percentage of transaction value plus a fixed fee per transaction. A survey found 95 percent of merchants thought the service was good value, citing not just the payment option but increased basket size, new customer acquisition, and improved satisfaction.

But the sector is fragmenting by use case. Afterpay, Zip, Sezzle, and Klarna target lower-value purchases—clothing, homewares—with smaller credit limits. Openpay allows borrowing up to $20,000 and serves higher-end verticals: healthcare, dentistry, auto servicing, home renovation. Humm offers the largest limit at $30,000 and made headlines by becoming the first buy now, pay later provider to fund IVF procedures. Late fees have become controversial. ASIC reported that 21 percent of users missed a payment in the past year, with 47 percent aged 18 to 29. Afterpay charges $10 plus $7 more if unpaid for seven days. Zip charges $5 once an account is 21 days overdue. Humm charges $6 with an $8 monthly fee. In 2019, Openpay had the highest proportion of transactions incurring late fees at 19 percent, followed by Oxipay at 14 percent and Afterpay at 10 percent.

The market can sustain multiple players, analysts say, because penetration remains low. But survival depends on what you offer merchants. Afterpay, founded by Nick Molnar and Anthony Eisen in 2014, now has a market value near $30 billion and about 17 percent of all Australian adults using the service. It has expanded to the US and UK. But the company's real moat is not its age or its scale. It is the network effect—the fact that merchants keep paying because the platform brings them customers. As Ruehland puts it: "Rather than focus on the payments in instalments, which is kind of old news, the platforms who can help me get eyeballs to my site will be the ones who ultimately will win out."