Afterpay Case Study - S1 assignment regarding after-pay and their competitive market. PDF

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S1 assignment regarding after-pay and their competitive market....

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1. Afterpay is the leading buy now, pay later (BNPL) service, with the business expanding its operations worldwide. The business operates by allowing customers to split their payments into 4 fortnightly instalments, adding no extra costs to the consumer, if paid on time. It is evidently clear that Afterpay’s dominant orientation towards today’s society is profit maximisation (PM), as merchants are forced to lower their prices, in the hope that Afterpay will bring increased customer sales to compensate for the commission Afterpay is entitled to. Consequently, this results in Afterpay applying a $0.30 fixed transaction fee to the merchant, as well as a 3-7% commission through factoring (Evans, 2021). It is rightfully so, that Afterpay generates 80% of its $519m revenue from merchant fees (other 20% from missed payments fees), which proves critical in the commanding role of PM (Afterpay fact sheet). Afterpays ability to achieve such outstanding financial figures from PM, comes a result of administering significantly higher commission and fixed transaction fees, compared to competitors like ZipPay who only assert a $0.15 fixed transaction fee to merchants and a 2-4% commission, leading to a mere $161m in revenue, a fraction of Afterpays $519m (Ewart, 2017) (Zip-pay financial report). With the BNPL industry average for merchant costs (BNPL commission) around 4%, its clear that PM, through substantially higher fees, plays a pivotal role in Afterpays success (CBA, 2021). The BNPL industry continues to grow, with CBA recently announcing the implementation of their own BNPL product, which also like competitors, undercuts Afterpay, with lower merchant fees (1.4%) and in this scenario, no fixed transactions fees (Eyers, 2021). Therefore, when compared to the industry average of 4%, Afterpay is able to establish PM as their dominant role in society, which has proven to be thoroughly successful in recent years with their total revenue increasing 97% from 2019 to 2020 (Afterpay financial report). The consequent results of an increased demand for BNPL services, saw Afterpay experience a 116% increase in active customers, in conjunction with underlying sales and active merchants expanding by 112% and 72% respectively, proving the critical nature of PM (Afterpay financial report). Despite PM being Afterpays dominant role, the business also conducts creating shared value (CSV) as a silent role, through the “enhanced competitiveness of a company (Afterpay) while simultaneously advancing the economic and social conditions in communities in which it operates” (Porter & Kramer, 2011, p6). Afterpays services have created immense profits for the business, as well as addressing societal needs and challenges, specifically, income reliant individuals and families benefitting the most. Regardless of the CSV, it is undoubtedly clear that Afterpays dominant direction towards society revolves around PM, due to their significantly high merchant commission and fixed transactions fees, compared to competitors. Furthermore, majority of businesses in the world including Afterpay, aspire to maximise their profits, making it a priority goal, as without profits, opportunities transform to limitations, as businesses can only operate for so long without profit.

2. The most effective and appropriate process to analyse Afterpays competitive environment in detail is through the application of the PESTLE framework. Formulated by Francis Aguilar, PESTLE covers political, economic, social, technological, legal and environmental factors that may influence a business and their position within their competitive environment. In recent years, Afterpay and other BNPL services have received a tremendous amount of support, especially from the Morrison government, with Fintechs (financial technology), being responsible to challenge the previously established financial services who continue to dominate the sector (banks) (Kehoe, 2019). This is positive encouragement for Afterpay, especially following extensive investigation by the RBA into the ‘no surcharge’ rule for BNPL consumers (Kehoe, 2019). This revolves around BNPL operators like Afterpay, preventing merchants from applying transaction fees to consumers, which is where the RBA are calling for change, despite the government’s attempts to reduce living costs. In response to the effects of the COVID-19 pandemic, Prime minister Morrison has taken aim at BNPL services, to “step up and help customers as the pandemic continues to shutter businesses and force workers out of jobs” (Plastow, 2020). These developing calls to provide those financially affected by the virus with repayment relief, follow the banks prior acts in supporting such consumers. Afterpay has greatly benefitted from government stimulus packages in all operating nations, especially Australia’s Job-keeper/seeker, providing consumers with funds that can be potentially used through Afterpay. However, Afterpays UK operations are under serious threat, with the government soon to apply regulations surrounding credit checks, following a review by the UK Financial Conduct Authority. Trade protection scares including the US-China trade war harmed Afterpay as “US exporters, importers, and multinational firms are more efficient than US firms without international activity”, meaning Afterpay’s US merchant sale figures severely suffered (Bas & Ledezma, 2019). Whilst there is very little Afterpay can do in preparation for unknown political influences, the business should continue to closely follow political guidelines and suggestions, as neglecting such, can have adverse effects for Afterpay. The economy has never conducted a more central role than it has over the past year, and consequently, this trend will continue, as the pandemic has highlighted the critical influence economic conditions have on all businesses, especially Afterpay. Initially, the pandemic saw “1 in 4 BNPL customers delete their accounts to take control of their finances”, hence Afterpay severely suffered with their share price dropping from $39 (7-Feb) to $8.90 (23Mar) (Plastow, 2020). Albeit this paraded the businesses ability to capitalise on consumer priorities especially, convenience rather than price, which has ultimately led to the business succeeding during times of economic uncertainty. This lies within the business model (4fortnightly instalments), allowing consumers to ease financial pressures, through a greater level of flexibility provided by Afterpays ability to disperse and efficiently manage payments. Therefore, it wasn’t too long after this downfall that Afterpay began to quickly resurrect itself, as the shortage of employment and consequent lack of income, meant that the instalment plan offered a more convenient and suitable method of payment, particularly for income dependant individuals as seen through 20,500 new customers every day in the June quarter (Eyers, 2020). Hence, Afterpay has been able to utilise opportunities from the pandemic, as reflected through their share price skyrocketing from $8.90 to $160.05 (Feb-

2021). Whilst the extent of the pandemic begins to fade in Australia and New Zealand, it is crucial that further worldwide operations for Afterpay, continue to capitalise upon the circumstances, as the virus continues to rapidly spread, providing opportunities for Afterpay to grow. The social structure of Afterpays consumers is imperative to the business, as changes in consumer preferences, cultural shifts, value changes and demographics, can ultimately determine the businesses success. With 33 being the average age of consumers using Afterpay, it comes as a result that 75% of Afterpays customer base are comprised of Millennials and Gen Z’s, hence it is vital that Afterpay situate their focus around the consumer preferences of people in these demographics (Afterpay, 2020). Influences like ageing populations in Afterpays worldwide operations, creates a dynamic environment, to be considered in the future. Consumer preferences also have a significant influence on Afterpay as variations in trends, effect what products are purchased. An example of such is fashion (Afterpays biggest merchant sector), which requires the business to do up-to-date analysis and market research on the direction of consumer preferences. This would exhibit Afterpay ensuring that their service is available with merchants, providing such goods, to align with the preferences of consumers. This will continue to prove critical for Afterpay to evolve with the dynamic nature of consumer preferences, like the shifts towards vintage clothing and environmentally sustainable products. However, if Afterpay fail to account for adjustments in preferences, then the business will begin to lose its competitive nature. Thus, in order to maintain Afterpay’s competitive stance, the business will also need to continually conduct research regarding cultural shifts and value changes for target consumers (millennials and Gen Z’s). This is demonstrated through the world-wide consumer shift towards cleaner, more eco-friendly goods, which caused Afterpay to adapt to such transformations, through the creation of the new “eco-friendly’ category, presenting a range of such products. Afterpay are well-known as a one of the leading fintech’s, which highlights the businesses technological aspects, with customers being able to use the service through their phone. This was first achieved in Afterpays emerging years, when the business created a $500m merger partnership with Touchcorp (payment firm) (Gupta, 2020). Following this in 2017, the business partnered with Dovetail, which formulated the online presence strategy of the business. This involved thorough design of the iOS and android apps, in conjunction with the design, development and infrastructure of the business’s online establishment, which proved to be extremely successful with consumer engagement figures skyrocketing. More recently, Afterpay has implemented its own sale by sale, customer approval process, which relies on data collected by Afterpay, in order to come to a conclusion on whether or not consumers will be granted the payment. However, Afterpay have also included within the terms and conditions, their right to obtain information regarding customers from third parties including credit reporting bodies (Barry, 2017). This proves to be essential for Afterpay as the business attracts customers by stating ‘no credit checks before you apply’, however through such information from third parties, the business is able to form a much more holistic outcome for sale-by-sale approvals. One technological limitation of Afterpay is their inability to patent their processes, as competitors have since created very similar services (Zip-pay). With continuous advancements in technology, Afterpay should extend

their application of technology within their business process, to increase ease of consumer use, which is a critical aspect of Afterpay when compared to competitors. The business of Afterpay was established on a loophole in the National Consumer Credit Protection Act 2009, as by not charging any interest to customers, the business is therefore not subject to the national credit act. Thus, this consequently results in Afterpay not having to conduct credit checks on consumers, unlike banks, saving both time and money. This also provides further benefits including Afterpay not being regulated as a credit provider, however, this is not the case for all of Afterpay’s operating markets with regulation to be imposed in the future for the UK and NZ market (not currently legislated). This came as a result of the UK Financial conduct authority highlighting “potential harms to consumers” (FCA’s former interim CEO Christoper Woolard) (Anne, 2021). The ‘Woolard review’ also stated, “BNPL should be brought under regulation to both protect consumers and ensure the sector is sustainable” (Anne, 2021). Whilst only 5% of Afterpays sales, 10% of active customers and 2% of active merchants are situated in the UK, the decision will still have significant effects on Afterpays future (Afterpay financial report). Furthermore, the outcome, may also possibly lead to a domino effect with both ASIC and the RBA, already investigating the exemption from regulation in the Australian market. Linking with the cultural shift and value changes towards eco-friendly products, environmental factors can heavily influence Afterpays competitive environment, as the growing trends of environmentally conscious consumers, has forced Afterpay to take action. Thus, this led to the creation of the ‘eco-friendly’ sub-section on the website, in which an increased volume of ecologically sustainable merchants have been congregated to appeal and account for the shifts in consumer culture. This advantageously assists Afterpay in comparison to their competitors like Zip-pay and Open-pay who don’t openly advert such eco-friendly products. Afterpays first mover advantage has granted the business 73% of the BNPL value in both Australia and New Zealand, as well as further growth in other countries (ASIC, 2020). However, its promptly clear that the business is experiencing a developing level of threatening influences with political constraints, ageing populations and investigations and reviews surrounding their avoidance of credit checks. Albeit the businesses integration of advancements in technology, application of environmental consciousness and capitalisation of volatile economic conditions, has proven to highlight the businesses successful processes within their competitive environment.

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