Is Square’s Acquisition of Afterpay a Game-changer?

As reported by WWD, Square Inc. revealed it has reached a deal with Afterpay Ltd. to acquire the buy now, pay later company for $29 billion in an all-stock deal this weekend. With the acquisition, Square said it “aims to enable the companies to better deliver compelling financial products and services that expand access to more consumers and drive incremental revenue for merchants of all sizes.”

According to Christopher Brendler, senior research analyst at D.A. Davidson, the deal wasn’t all that surprising. In fact, it was something that his team saw coming and believe that the deal will put Square in the lead for the race to build a U.S. “fintech super app.”

“The more we learned about BNPL, the more we believed it was only a matter of time before [Square Inc.] got involved,” Brendler said. “Indeed, as recently as our July 12 BNPL Biweekly, we put [Square] at the top of our list of candidates that may be Zip’s new strategic investor. Why? Because BNPL is so squarely in Square’s wheelhouse: data-driven, tech-powered innovation that both consumers and merchants love and with millions of sellers, it was only a matter of time before Square added this compelling checkout option to its merchants sell more.”

At the same time, Brendler said the deal can be seen as an “incredibly compelling strategic fit across geography, merchant and channel mix.”

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“Square didn’t need to buy Afterpay to offer a powerful BNPL solution to its Sellers, and Reuters reported talks started as a partnership. “What’s so exciting, in our view, is the opportunity on the consumer side as Square plans on integrating the Afterpay directly into Cash App. Although the deal price limits near-term accretion, we see massive potential synergies between the two franchises, especially on the consumer [Cash App] side. Adding Afterpay to Cash App not only expands the base into new geographies and demographics, but it also adds a compelling reason to engage more frequently and drive traction across the growing product set.”

Afterpay’s partnership with Westfield shopping centers provides BNPL at in-store retail locations. Courtesy Image.

Similarly, shortly following Square’s announcement, Ravi Sharma, lead banking and payments analyst at GlobalData, said Square’s news to acquire Afterpay is “the latest development in this space, as it looks to expand into the growing BNPL market. The rapidly growing e-commerce market has further accelerated the demand for BNPL.”

According to GlobalData, Australia’s e-commerce market is forecasted to grow from $46.7 billion in 2021 to $70.5 billion in 2025 [figures are in Australian dollars]. The company’s 2021 Banking and Payments Survey also indicates that Afterpay accounts for 7.7 percent share of the total Australian e-commerce market, compared to 5.5 percent in 2020.

Moreover, Sharma noted BNPL’s increasing prominence in Asia Pacific with a large number of payments and fintech companies looking to get a slice of this market.

“The COVID-19 pandemic has further accelerated the demand for BNPL. As the pandemic affected income levels, consumers are increasingly preferring BNPL payment method to make purchases affordable,” Sharma said. “With consumer spending gradually recovering from the COVID-19 pandemic, BNPL presents huge potential not just in Asia Pacific but other regions globally. The acquisition of Afterpay will help Square expand in new geographies by leveraging Afterpay’s robust customer and merchant base.”

Meanwhile, Holden Bale, group vice president and head of commerce at Huge, the global experience agency, pointed out that the acquisition of Afterpay also “allows Square to move into e-commerce, a space they’ve previously tried to enter to compete with companies like Shopify.” The deal, Bale said, was “advantageous for Square because they gained Afterpay’s e-commerce client base and core product without having to spend the time and resources to build it themselves.”

“This acquisition is also a way for Square to solidify their position as a broader financial services company, as Afterpay has been expanding their offering beyond e-commerce,” Bale said. “Square’s acquisition of Afterpay also demonstrates the company’s intent to double down on being a critical enabler for Millennial shopping in-store. Traditional retailers have typically struggled to convert them in-store, but the availability of services like BNPL helps to level the playing field and capture the sale in the moment. Expanding BNPL through Square merchants is a powerful tool for capturing the immense buying power of younger consumers offline.”

As BNPL continues to expand everywhere, Zachary Aron, U.S. banking and capital markets payments leader and co-leader of the global payments practice at Deloitte Consulting, told WWD that we can “continue to expect to see BNPL be an important part of an overall payment solution for merchants. Merchants will want to easily accept payments based on customer preferences. The ability to easily extend credit at the point of sale as part of an overall payments acceptance strategy will further enhance their ability to provide an improved customer experience.”

Overall, in the BNPL space, Aron said there is an “increased potential for merchants to offer more personalized, custom methods of payment at the point of sale,” such as co-branded/private label BNPL programs.

“We also continue to see all payment companies look to develop and offer services that provide mutual benefit to both merchants and consumers,” Aron said. “We [see] BNPL as an example of the changing nature of credit products. The ability to offer consumers more personalized payments experiences, including a mobile/digital form factor and tailored to how they would like to spend money, is becoming increasingly more important and essential to winning the trust of consumers.”

Regarding who uses BNPL, it’s a favorite of Millennials and Gen Z. According to recent data from eMarketer, nearly 75 percent of BNPL users in the U.S. are Generation Z or Millennials. Researchers at the firm said more than 45 million people above the age of 14 will use BNPL this year, which represents a staggering 81.2 percent gain over the number of users on the platform in 2020.

“Millennials will continue to make up the greatest share of the user base through the end of our forecast in 2025,” the authors of the report said. “Last year, more than 40 percent of BNPL service users were Millennials. That said, Gen Z will eat into this share over the next four years, as this cohort ages into digital shopping.”

In 2018, Generation Z had 1.7 percent penetration of the BNPL user base, which compares to 1.4 percent for Millennials and 0.6 percent for Generation X. By 2025, Generation Z is forecast to have 47.4 percent penetration of the user base compared to Millennials’ 40.6 percent penetration and Generation X’s 30.9 percent. The figures represent the penetration rate of digital buyers in each group, and not the market share of all users.

“A major draw of BNPL services, particularly for younger cohorts, is financial flexibility,” eMarketer said. “These solutions provider younger consumers, whose cash flow tends to be more limited, with great flexibility in payments, especially for larger-ticket items.”

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