Is this record-breaking ASX 200 player on a correction mode: Afterpay share price & sector squeeze?

Summary

• The advent of Paypal in the BNPL market has created a ripple with all BNPL stock prices turning south.
• PayPal, with a database of more than 300 million users and 26 million merchants, is a potential threat to present BNPL players.
• With a network of more than 26 million merchants, it is easy for PayPal to add this service digitally and thus giving the merchants another option of providing instalment payments services in return of a purchase made by a user.
• The share price of many pure-play BNPL players witnessed a steep decline as investors wary on the future performance of the pure-play BNPL players.

The advent of Paypal in the Buy Now, Pay Later market has created a ripple with all BNPL stock prices turning south. On 1 September, the share price of the ASX200 players Afterpay Limited (ASX: APT) went down by 8.04% to A$84.09. Other BNPL stocks such as Zip Co Ltd (ASX: Z1P) experienced a fall of 12.77%, Sezzle Inc. (ASX: SZL) fell by 14.70%, while Openpay Group Limited (ASX: OPY) fell by 7.18%. Splitit Payments Ltd (ASX: SPT) also declined by 7.26%.

BNPL Investors became wary as the multibillion-dollar company with more than 300 million customers announced launching a BNPL product - Pay in 4.

Interesting Read: ASX BNPL Players Afterpay and Zip Co Share Price Down ~5%; PayPal Enters the Lucrative Industry

What’s PayPal’s deal?

PayPal has announced launching "Pay in 4”, BNPL product in the US. The ticket size of the deal loan is between $30 and $600, which has to be repaid without interest in four instalments spread over six weeks. On default, customers will be paying a late fee. Pay in 4 services will be available via PayPal's wallet app with repayments being automated.

The model is very similar to that of Afterpay’s and other BNPL players who also have a zero-interest repayment model with loans to be repaid within six weeks in four instalments.

PayPal is a potential threat to present BNPL players as it’s backed with a database of more than 300 million users and 26 million merchants. With a network of more than 26 million merchants, it is easy for PayPal to add this service digitally and thus give merchants another option to provide instalment payments services to their customers in return of a purchase made by a user.

On top of that, Paypal without charging anything extra from the registered merchants is integrating the service for free. In the US, Paypal charges 2.9% + $0.30 per sale from merchants, whereas international sale encounters a transaction fee of 4.4% in addition to a fixed price depending on the currency from merchants.

Also read: PayPal Introduces BNPL Product: What Does it Mean for the Existing BNPL Players?

How is Afterpay positioned?

Afterpay charges 30 cents fixed fee plus a commission on the sales value that ranges from 3% to 7%. The fees charged are higher than what PayPal will charge from its retailers and is also considerably higher than the credit card charges that a retailor pays over a transaction value.

Afterpay’s 9.9 million customers and 56K+ registered merchants also seem minuscule when compared to PayPal.

Till now, Afterpay had been experiencing a spectacular business growth with share price skyrocketing to a 52week high of A$95.970 recorded during the day on 27 August 2020. The price rise was backed by customer growth experienced in the US and the UK in the last six months, along with positive earnings. However, following Paypal’s announcement on launching a new BNPL product, the share price of Afterpay has taken a hit and closed at A$78.200 on 4 September 2020, down by almost 19% from its 52-week high. It closed at A$76.35 on 7 September 2020.

Also read: BNPL strong run on ASX & changing stance on stimulus: Are stocks done with the run-up?

What should Afterpay do?

With Paypal having access to a larger pool of merchants and consumer, Afterpay needs to slash its fees charged as commission from the Merchants significantly to give more competition to PayPal. The company may also have to seek new strategies to retain merchants and consumers.

In the lending side, the users may seek more leniencies while paying a late fee or on the duration of paying the four instalments. In Business expansion side, the BNPL players may need to invest more to expand to newer markets. They may have to raise in more capital or increase debt burdens to facilitate expansion and support working capital.

More Competition and Market squeeze

During the Pandemic, the Buy Now Pay Later service market has proven instrumental in encouraging e-commerce sales, providing customers with an option to buy when cash is hard to come by. The retail sales took a hit worldwide during the lockdown.

Apart from PayPal, Shopify, a US e-commerce giant and Canada's biggest company, has announced launching "Shop Pay Installments," service, a buy now pay later option.

However, PayPal is expected to make the market more competitive as the company will charge lesser transaction fees compared to other pure-play BNPL players, driving the later to demand less from the Merchants, causing margins to shrink further.

Good Read: ASX 200 Corner: Why investors can't get enough of Afterpay share price bump

Conclusion

BNPL players will see their profit margin squeezing because of new product launch from Paypal. These players, who saw a sudden hike in demand and were floating on cloud no 9 primarily due to COVID-19, have already started feeling the heat with the share prices declining. With the BNPL market expected to stay because of the unprecedented times, the share price trajectory of Afterpay is only going to get more unpredictable backed by the fear of shrinking margin and increased need for capital raise from the market.

Interesting Read: Is the drop in momentum temporary for these buy now, pay later stocks: Splitit, Openpay Group, Sezzle?