Breakingviews: Fintech payment pioneers face war on two fronts

Fintech disruptors are starting to get disrupted. Afterpay, an $18 billion Australian “buy now pay later” company, has lost about 10% of its market value after U.S. payments giant PayPal said it would offer similar products. The faster this funky form of credit grows, the more competition – and regulation – it will attract.

Buy now pay later groups let customers get goods upfront but pay for them over time in interest-free instalments. Shoppers only go through a loose credit check and pay modest fees if they miss a payment. The BNPL provider makes most of its money by charging the merchant. This new spin on consumer credit has proven remarkably successful among millennials and spawned a host of fast-growing competitors, from $5.5 billion privately-held group Klarna to Sydney-listed Afterpay. The latter’s shares have risen over 800% since the March low this year.

Success breeds imitation. On Monday the $247 billion transfer group PayPal announced a similar instalment offering for its U.S. customers. Worse, it will bundle the product into the fees it already charges retailers to use its online payments service, currently about 2% of the value of each transaction. Afterpay typically charges fees of 4%-5%.

PayPal’s move will make it much harder for the BNPL providers to expand in the United States, one of world’s biggest market for online goods, worth about $600 billion in annual sales. Afterpay’s American business grew threefold in the year to June and accounted for 36% of its total sales. To keep growing, Klarna or Afterpay may have to lower fees, a tall order when both are still lossmaking. And competition is just getting started: credit card groups Mastercard and American Express have recently announced copycat products. Amazon and Google could follow.

The arrival of competition from bigger players may also prod regulators to look more closely at buy now pay later products. In Australia, Afterpay’s home market, the Australian Securities and Investments Commission is considering imposing the same legal obligations on BNPL companies as traditional lenders. In Sweden, regulators are increasingly worried that the product may drag consumers into debt.

Despite the recent share price fall, Afterpay is still valued at 25 times forward sales, a premium to PayPal’s 10 times multiple, according to Refinitiv data. With both competition and regulatory pressure growing, investors who sell now may avoid paying later.

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