Prof Janek Ratnatunga
CEO, CMA Australia & NZ

In early August 2021, payments fintech Square announced its intention to acquire Buy Now, Pay Later (BNPL) firm, Afterpay, for A$39 billion (US$29b) – the biggest ever merger and acquisition agreement in Australian history.

However, this tech company is still to make a profit.

“This is not unusual for hyped-up tech-stocks”, says Prof Janek Ratnatunga, the CEO of the Institute of Certified Management Accountants (Australia & NZ).

“Amazon took 12 years to turn in a profit. Tesla has never made any profits from selling cars. Airbnb and Uber are still to be profitable.”

“Clearly today’s valuations are based not on financial performance but on expected off-balance sheet potential, i.e., scaling and creating an eco-system – i.e., connecting both the buyer and the seller to have enough hooks to influence behaviour and a lifestyle.”

So what hooks is Afterpay using to get customers to its BNPL platform? Is it just tech-hype or are there real financial and other benefits to users?

For Afterpay to generate the market share required to justify its billion-dollar price tag, it must deliver a truly compelling product and service for merchants and consumers, that is significantly different to its competitors – other BNPLs and Banks and credit card companies.

Both these payment platforms allow a customer to have immediate access to the product or service; and if payment is made within a certain period (ranging from 28 to 56 days) there are no further charges.

So, the real pitch of Afterpay is to say that its ‘Late Fees” are capped to a maximum of $68, whilst the sky is the limit on credit card interest.

Prof Ratnatunga says this is tech-hype aimed at financially unsavvy millennials.

In a detailed analysis titled “Afterpay: The Hype and the Reality” he shows that in reality, the late fees charged by Afterpay relative to the amount and days outstanding works out to an Effective Interest Rate (EIR) of 435% that the customer is paying Afterpay for a $40 purchase; and EIR of 56% for a $1,500 maximum purchase. This is substantially higher than the 20% average EIR charged by credit card companies.

In the article, he shows that paying credit card interest is cheaper than Afterpay up to a 2-months in arrears for large purchases ($1,500) and a whopping 15 months for small purchases ($40).

Afterpay founders have admitted that its platform was designed for Millennials – who are a digital-savvy bunch who are unafraid of trying new things.

“Unfortunately, being digital-savvy does not often equate to being financially savvy”, says Prof Ratnatunga.

The other hook to entice customers is that Afterpay is easy to sign onto; and as it does not run a credit check.

“This is another clever illusion”, says Prof Ratnatunga, “the only way to pay the quarterly instalments to Afterpay is via credit and debit cards. Afterpay does not accept payments by BPAY, Bank Transfer or Pre-Paid cards.”

“In effect, by linking their payment platform to a credit card, Afterpay is effectively using the credit card company’s credit check on the customer!”

“If a payment (either on time or late) can be made only via a credit card, then all Afterpay is offering is a very short window of time before the cost of the purchase hits the customer’s credit card anyway!”

Card members also benefit from buyers’ assurance and purchase protection combined with rewards as a currency – these are tough to match by BNPLs.

Further, many Afterpay members complain that for every transaction, no matter, how small or big, they get a minimum of 6 messages on their phones, one saying a fortnightly payment is due, and one confirming receipt of the payment. So, if one has 10 transactions per month, that is 60 messages! With a credit card, it is all recorded on one statement.

Clearly, Afterpay and similar BNPLs give less services for higher costs.

“Not much of a hook if you can do the numbers”, says Prof Ratnatunga.

Whilst the hooks for BNPL platform users are mostly illusionary, maybe customers were only used as bait to attract large predatory fish. By convincing Square that its data base of customer and seller ecosystems will enable it to deliver even more compelling (and often illusionary) products and services for merchants and consumers, it has reeled in the big-game fish.

One must congratulate Afterpay in doing an excellent job in getting to scale ahead of the BNPL pack with great tech hype.

For further comment on the above topic, please contact:

Prof Janek Ratnatunga
CEO, ICMA Australia & NZ
Mobile: +61432758380
Email: [email protected]

About the Author
Professor Janek Ratnatunga is the CEO of the Institute of Certified Management Accountants, Australia & NZ. He has held senior appointments at the University of South Australia, Monash University, University of Melbourne, and the Australian National University in Australia; and the Universities of Washington, Richmond and Rhode Island in the USA. Prior to his academic career he worked as a chartered accountant with KPMG. He has also been a consultant to many large Australian and international companies and to the World Bank.