Next in the Australian buy-it-now-pay-later frenzy: consolidation
Australia’s AU$900m buy-now-pay-later sector is likely to see more M&A activity in 2022 as players consolidate to survive rising interest rates and the intensification of competition.
Companies that buy now, pay later or BNPL face higher borrowing costs as economists widely expect Australia to start raising interest rates from a record high later this year. Higher financing costs eat into supply margins interest-free installment loans for point-of-sale buyers. Additionally, the industry’s explosive revenue growth over the past few years has attracted investment from global companies such as PayPal Holdings Inc. and Apple Inc.which will likely crowd out smaller players, analysts say.
The greatest risk for BNPL businesses is higher interest rates, said Grant Halverson of McLean Roche, a retail banking and payments consultancy. “I don’t think the BNPL fintechs want to consolidate. However, if they don’t, they won’t survive.”
“MMost startups will be bought or wither without being able to raise more funds,” Halverson said.
The BNPL boom in Australia is likely at a tipping point this year, as higher rates could disrupt a business model that has attracted more than 30 players to the market. Low interest rates in recent years have allowed BNPL operators to borrow cheaply to bridge the gap between paying merchants and getting paid by customers. The funding environment in recent years has also given BNPL companies the opportunity to offer more concessions to retailers in order to increase their market share.
Zip Co Ltd., the country’s second-largest BNPL operator by market share, said in its 2021 annual report that its after-tax loss would increase by A$9.1 million for the year ending June 30, 2021, if the bank note swap rate increased by 1 percentage point during the period. The company posted an after-tax loss of A$658.8 million for the year ended June 30, 2021, compared with a loss of A$19.9 million a year earlier. The banknote swap rate is a short-term interest rate most commonly used for pricing floating rate bonds.
Zip’s borrowings secured by floating interest rates totaled A$1.63 billion as of June 30, 2021, up from A$1.05 billion a year earlier.
Economists generally expect the Reserve Bank of Australia to raise the interest rate at the end of 2022 as economic growth and inflation continue to accelerate.
The central bank kept the cash rate at a record low of 0.10% at its last policy meeting on March 1. She said she would not raise the rate until actual inflation was sustainably within the 2% to 3% target range. Headline inflation reached 3.5% in the quarter ended December 31, 2021, although the Reserve Bank of Australia said at the March meeting that it was too early to conclude that it was in a sustainable position. the target range.
BNPL’s Australian sector is dominated by three major players, which has already prompted some companies to seek acquisition targets to grow in the face of concentrated competition.
The top three players are estimated to account for more than 80% of industry revenue, according to the latest data from IBISWorld. Since June 2021, Afterpay Ltd. had a 43.8% market share, according to IBISWorld. Zip’s share was 23.6%, while Humm Group Ltd., formerly FlexiGroup, held a 13.7% market share. Other players accounted for only 18% of the remaining market share.
“In 2022, we expect further mergers and acquisitions in the Australian payments industry — especially in areas such as BNPL — as financial services organizations seek to drive increased value and scale,” said Tim Coyne, Head of Financial Services Strategy and Transactions in Oceania at EY.
“We are also seeing an increasing number of non-financial services players moving into financial services leveraging payment capabilities. This in turn increases opportunities for mergers and acquisitions, alliances and partnerships between non-financial services players and payment providers,” Coyne said.
Recent deals driven by the need to expand include Zip’s agreement in February to acquire Sezzle Inc. in an A$491 million deal. The deal, which is expected to be finalized in July, will add momentum to the combined companies. The merged entity will have more than 13 million customers.
Non-bank lender Latitude Group Holdings Ltd. signed a binding agreement in February to acquire Humm’s consumer finance business. Humm’s consumer business, which includes its BNPL and credit card operations, has more than 2.6 million customers. Latitude CEO Ahmed Fahour said the acquisition will provide additional scale for Latitude. Latitude is aiming for full integration by the end of 2023.
Survival is likely to be the main driver of business activity in the Australian BNPL sector. This will be a change from recent years, when many deals were primarily driven by global and local companies seeking a share of the growing market revenue when the country’s benchmark rate was close to zero.
“There is growing competitiveness in the Australian payments industry. This interesting landscape in the payments industry creates the potential for M&A-driven consolidation in 2022,” said Con Boulougouris, partner at the law firm. MinterEllison, at S&P Global Market Intelligence.
One of the latest deals involving non-Australian companies was US-based Block Inc.’s acquisition of Afterpay, Australia’s main provider of BNPL loans, in a AUD 39 billion deal struck in february.
Global giants such as Paypal, The Goldman Sachs Group Inc. and Apple have also invested in the Australian BNPL space. PayPal launched its own BNPL service in 2021, offering no late fees and lower minimum purchase thresholds. Apple has acquired UK-based fintech startup Credit Kudos Ltd. in 2022 after it was reported in 2021 that the iPhone maker was looking to introduce BNPL functionality to Apple Pay.
Credit card giants Visa Inc. and Mastercard Inc. have also started offering BNPL products in Australia.