August 4, 2021
Square—the San Francisco-based digital payments company—has agreed to acquire Melbourne, Australia-based Afterpay in an all-stock deal worth around $29 billion; illustrating how financial technology companies are seeking scale to challenge banks for a bigger slice of the payments industry, The Wall Street Journal reports..
Afterpay’s technology allows users to pay for goods in four, interest-free installments while receiving the goods immediately.
It’s similar to the credit-card scenario; but the company says it protects the customer’s credit, while a payments card doesn’t. Customers pay a fee only if they miss an automated payment—a transgression that also locks their account until the balance is repaid Afterpay, which has yet to turn a profit, says this limits bad debts, particularly in a downturn when job security is shaky and household finances are stretched.
Square said a key attraction of the deal was a growing wariness toward traditional credit among younger consumers, a group particularly hard hit by the COVID-19 pandemic, as lockdowns crushed many hospitality and casual jobs.
Most of Afterpay’s revenue comes from retail merchants, which pay a percentage of the value of each order placed by customers, plus a fixed fee.
“Square and Afterpay have a shared purpose,” said Jack Dorsey, Square’s chief executive. “We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.”
U.S. consumers flocked to buy-now-pay-later services like Afterpay during the pandemic. But credit cards appear to be coming back in favor. Demand for general-purpose credit cards rose sharply in April compared with the same period last year, according to credit-reporting firm Equifax.
The Afterpay deal is Square’s biggest ever. Square has been looking for ways to tie its Cash App and seller ecosystems more closely together, Dorsey said on a call with analysts earlier this year.
The Afterpay deal is a big step in that direction. Square, best known for its signature white card reader that plugs into phones and tablets, plans to add Afterpay as a financing option through the smaller merchants it serves.
Afterpay customers will be able to make payments on their installment loans through Cash App, Square’s digital payment services that allows people to store and transfer money as they would at a bank. And Cash App customers, Square said, will be able to use the app to find merchants that offer Afterpay’s buy-now-pay-later financing.
Cash App’s growth exploded over the past year, largely the result of a flood of pandemic stimulus payments. Users deposited their stimulus checks with Cash App, then used the service to send money to friends and family, make purchases online with their Cash App debit cards, and buy bitcoin and stocks through Cash App Investing.
Research contact: @WSJ