Square Announces Afterpay Acquisition, Potentially Disrupting Everyone

Square Announces Afterpay Acquisition, Potentially Disrupting Everyone

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Square Announces Afterpay Acquisition, Potentially Disrupting Everyone


The News: Square announced last week the acquisition of Australian buy-now-pay-later provider Afterpay for AUD $39 billion ($29 billion US). Read the full Square press release here.

Square Announces Afterpay Acquisition, Potentially Disrupting Everyone

Analyst Take: Square’s impending acquisition of buy-now-pay-later provider Afterpay is arguably the biggest takeover deal in Australian corporate history. Square, the payments provider helmed by Jack Dorsey, is on a mission to build tools to empower businesses and individuals to participate in the economy. From its humble roots of providing the white square-shaped dongle that turned iPhones into point of sale (POS) terminals and enabled card acceptance for micro-merchants, the company is rapidly growing and expanding into adjacent fields and this recent announcement is in this vein. And with this Afterpay acquisition, Square is primed to disrupt pretty much everyone.

The traditional world of payments, remittances, and how money flows through the economy is changing. Whether used by small traditional merchants operating at a farmers’ market, or for new cloud native online businesses, the way money flows through the system is being upended. And Dorsey’s Square is at the epicenter of this transformation — clearly looking to be a disruptive force for the little guy in the world of finance.

The Allure of the Buy-Now-Pay-Later Model is Very Real

Square’s acquisition of Afterpay is another step on this journey of providing the capabilities often only enjoyed by larger retailers to the masses. With its buy-now-pay-later (BNPL) offering, Afterpay has been focused on transforming the way customers pay by allowing customers to receive products immediately and pay for their purchases over four installments, always interest-free. In a move to transition how people pay from the likes of Mastercard, Visa, and AMEX the service is completely free for customers who pay on time. This model is designed to help people buy what they want, when they want it, in a responsible way without incurring interest, fees, or revolving debt. Imagine that — a payments solution actually developed with customers in mind.

Over the last year the number of merchants offering Afterpay’s BNPL as a payment option increased by 77% to 98,200 and the company lists more than 16 million customers. I believe the pandemic played a valuable role here, spurring adoption of the BNPL. For consumers trapped at home for the last 18 months, the ability buy and get what we want now, and pay for it over time without suffering through excessive interest fees has been a logical step.

The Square Afterpay Acquisition Details

As to the Square Afterpay acquisition details, under the terms of the Scheme Implementation Deed, Afterpay shareholders will receive a fixed exchange ratio of 0.375 shares of Square Class A common stock for each Afterpay ordinary share they hold on the record date. Square may yet elect to pay 1% of total consideration in cash.

Square, with a market cap of about $123 billion at the end of last week, may pay 1% of its buyout offer in cash, but the rest will be in stock, giving Afterpay shareholders 0.375 shares of Square for each Afterpay ordinary share. The stock swap means the implied price Square is paying for Afterpay share is about AUD $126.21 billion — a premium of about 30.6% to its closing price last Friday. With Square’s share price increasing after the announcement by $25 billion, one could argue that for all intents and purposes, this acquisition is largely free.

How Afterpay Works, Why Australia, and How These Companies Will Scale an Ecosystem

BNPL companies work differently from traditional credit companies. The reason they grew in popularity so rapidly in Australia can be linked both Australia’s credit regulation laws and to spirit of invention inherent in Australia’s retail and finance sectors.

Under Australia’s National Consumer Credit Protection Act, credit is defined as a method of paying for goods with the credit provider making their profit through charging interest. However, Afterpay does not charge end consumers interest. The Afterpay model is innovative, in that the vast majority of its revenue comes from fees charged to merchants. The merchant is charged a commission of 4%-6% on the value of the transaction, plus a small fee for every purchase. The only customer-facing fee is a charge if or when customers fail to make repayments on time. Afterpay’s standard repayment plan is four equal installments every fortnight over two months.

The reason this Square Afterpay deal works is pretty simple: Square has the merchants, Afterpay has the credit customer base. The acquisition is an opportunity for both Square and Afterpay to scale a two-sided, multichannel payments, commerce, and financial services ecosystem. The combination leverages Square’s integrated POS platform and merchant services capabilities to keep and grow an expanded merchant base.

The acquisition provides both Afterpay and Square’s Cash App users with a clear incentive to do more business within their newly formed ecosystem. With Square’s bank charter, over time more banking and financial services capabilities will likely extend the functionality of this network for consumers and merchants and grow exponentially as network effects kick in. This virtuous circle will attract more merchants to the platform, which will attract more consumers, and so on.

I believe that this acquisition is strategically important and shows how Square will look to add features to its offerings over time. While the $29 billion headline looks a lot, and certainly represents the largest ever acquisition of an Australian listed company, we need to look deeper. This acquisition is a completely stock driven acquisition, with Square agreeing to buy all outstanding shares. Assuming the deal goes through, $29 billion and 12 years later, Square will have fulfilled its ambition of becoming that two-sided network, both online and off, and not just for small merchants — and it also has the critical mass to grow rapidly.

Square Buys a Feature for $29 Billion

The way to frame this acquisition is less around Square buying a company, and more the company buying a key feature to round out its offerings and then bring that to market at scale. Buy now, pay later has been a powerful growth tool for sellers globally and with the Afterpay acquisition, Square adds only add this product to the company’s Seller ecosystem, but gets the opportunity to do it with innovative team and an existing revenue stream and customer base,

The addition of Afterpay to Cash App will fortify the company’s growing networks of consumers around the world, while supporting consumers with flexible, responsible payment options. In addition, Afterpay will reinforce the connections between Cash App and Seller ecosystems, accelerating the company’s ability to offer a full suite of commerce capabilities to Cash App customers.

Square and Afterpay Have Huge Synergies — and Dorsey Has a Plan

Dorsey’s ambition with the Square Afterpay acquisition is to create a consumer/merchant network that can leverage connected devices, digital payments including cryptocurrency, the cloud, and data to reinvent payments and commerce for consumers and the small merchants where they shopped.

Starting back in 2009, Square’s growth strategy was to leverage what every consumer has in their wallets, namely credit and debit cards, and to then build a base of mainly smaller merchants for which digital payments were hard or expensive to process, or simply just not technically viable. Over these last 12 years, we have all paid taxi drivers, independent coffee shop owners, and farmers’ market vendors using our credit or debit card via the Square dongle. Part of this experience has been to provide these merchants with either an email address or a phone number to receive a digital receipt, but never did we see ourselves as Square customers at any point in this transaction. Square was simply the device that processed the transaction. Against this backdrop, therefore, Square never built a consumer base or developed customer relationships from those email addresses and phone numbers.

Then in 2013, Square introduced Cash App as an alternative to Venmo. Square lists 70 million active Cash App users who, during the pandemic, have used the platform extensively, including cryptocurrency trading, expanding its use base beyond the micro-merchants transacting on the platform. Now with Afterpay, Square has added a consumer credit product for those Cash App users to use at more 96,000 worldwide, giving consumers more of a reason to sign onto the Cash App proposition. For Afterpay, its 17 million customers globally can now become Square Cash App customers, as it added a Pay Now debit product and P2P capabilities to its mobile app and a new source of network effects for the consumer side of its ecosystem. Afterpay is also a very sticky service, with as much as 90% of its customers being repeat users

Afterpay’s 96,000 merchants worldwide will also bring value to Square’s online merchant presence with a typically larger and different type of merchant. These larger merchants have typically remained outside the current Square merchant services, platform but with this Afterpay acquisition, Square has now signaled its intention to serve this valuable merchant space.

The Competitive Landscape of the Payments, Commerce, and Financial Services Ecosystem

What are banks thinking of the entity created by the Square Afterpay acquisition? Traditional banks have the consumers and the merchant acceptance, whether it is online, offline, or in mobile wallets using their credit and debit card products. The challenge for these banks as they evaluate how to either build/buy or partner in the BNPL space — which they absolutely must do — is how they move forward without cannibalizing their existing credit card revenue stream.

One alternative for these big banks and the card networks is to invest heavily in buying a consumer-facing BNPL player and plug this into using their existing credit lines and credit underwriting capabilities for the huge base of consumers they already serve. For those banks, the ability to offer a more inclusive set of credit options, then bank and expand their services could be especially lucrative. The other alternative is to try and organically grow a consumer facing service, although this option will increasingly be difficult given that the existing BNPL consumer has already started to build brand affinity with the current providers.

The other huge players in this market include Apple and Google. Apple Pay and Google Pay both support Afterpay’s offline solution via the Afterpay Card. It will be interesting to watch how Apple in particular responds on their own online store given that the purchase of new iPhones is an obvious purchase candidate for BNPL, or whether Apple continues to partner with Affirm as it is doing in Canada.

With both Apple and Google being under the microscope applied to Big Tech, their options are more limited, and though Big Tech would like nothing more than to create and/or accelerate the scale of their own payments, commerce, and financial services ecosystem, this will most likely face stiff opposition from regulators particularly in the U.S. and the EU.

The other players to consider are challenger or neo banks who are looking to attract and retain the highly attractive younger customer base that is the BNPL sweet spot. These players now face a more challenging and unexpected competitor in the combined Square/Afterpay. Does this mean we can expect acquisition activity where a pure play challenger bank and a well-established BNPL player could start to look appealing?

Then comes other tech platforms, like Stripe, that could consider acquisition to bolster its capabilities and for which a BNPL acquisition could provide a better ROI than a “powered by” partnership. Not to be left out of the equation are commerce platforms such as Shopify that have opted for a “powered by” solution. To give some context, Shopify reported as part of its Q2 earnings that its Shop Pay installments solution volume, powered by Affirm, tripled over the prior quarter.

For the likes of VISA, AMEX and Mastercard, with their network of network strategies, the Square/Afterpay acquisition is both a threat and an opportunity. The good news is BNPL providers ride their debit rails, moving cash purchases online and increasing purchase sizes. The downside is that these services shift purchase volume destined for credit cards to BNPL rails.

With the BNPL market proving to be so lucrative, credit card companies, banks and tech companies are looking to get in on the action. Visa announced its BNPL plans in July 2019 and is starting to roll out its technology to merchants. Paypal launched its “Pay in 4” service last month.

What’s Ahead for Square

What’s ahead for Square? I see the new Square as having an opportunity to create a more powerful, and comprehensive ecommerce platform, one that enables the customers who leverage its service to engage in transparent buying opportunities. It also affords the merchants who buy the service from Square the opportunity to offer new ways to serve their customers. I see this acquisition ending up allowing the merchants, who pay for the Afterpay service, getting higher average transaction sizes, greater conversion on higher ticket items and, ultimately. fewer returns, which is a win/win/win for customers, merchants, and Square.

As Jack Dorsey is such a huge proponent of Bitcoin, it will also be interesting to watch how the rapidly adopted cryptocurrency plays out in this story. Also, I believe it’s important we not forget that Dorsey is also the CEO of social media giant Twitter. While any move to bring this platform into the equation would not be seen a positive by the U.S. regulators at the moment, you can be sure that Dorsey is looking at the long-term horizon and moving the pieces on the chess board to position both Square and Twitter for long term success.

Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.

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Image Credit: Yahoo


The original version of this article was first published on Futurum Research.

Steven Dickens is Vice President of Sales and Business Development and Senior Analyst at Futurum Research. Operating at the crossroads of technology and disruption, Steven engages with the world’s largest technology brands exploring new operating models and how they drive innovation and competitive edge for the enterprise. With experience in Open Source, Mission Critical Infrastructure, Cryptocurrencies, Blockchain, and FinTech innovation, Dickens makes the connections between the C-Suite executives, end users, and tech practitioners that are required for companies to drive maximum advantage from their technology deployments. Steven is an alumnus of industry titans such as HPE and IBM and has led multi-hundred million dollar sales teams that operate on the global stage. Steven was a founding board member, former Chairperson, and now Board Advisor for the Open Mainframe Project, a Linux Foundation Project promoting Open Source on the mainframe. Steven Dickens is a Birmingham, UK native, and his speaking engagements take him around the world each year as he shares his insights on the role technology and how it can transform our lives going forward.

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