Who do you trust more – Afterpay or Commonwealth Bank?
It is a difficult question to answer, although the answer will probably give a good indication of your age.
If you skew younger, you are much more likely to trust Afterpay (ASX: APT), because even though the $30 billion minnow has only been around for a few short years it has an impressive 3.4 million, mainly younger Australian customers.
If you are older, then Commonwealth Bank (ASX: CBA) is a much more familiar and trusted presence as Australia’s biggest bank, with a market worth of more than $150 billion and a massive Australian branch network.
That is what makes the looming battle between the two such an intriguing prospect, with Commonwealth finally deciding it would draw a line in the sand and offer its own buy now, pay later (BNPL) product – in this case as a voluntary four payment option of credit card purchases valued between $100 and $1,000.
At the same time, Afterpay is looking to make further inroads into becoming more of a total banking experience, using a Westpac white label product and its impressive experience in designing simple and appealing online apps to create a banking platform that plays more like a fun trip to the shops.
Benefits and pitfalls
Apart from consumer cool, Afterpay does bring some benefits to this battle that could be decisive.
Perhaps the biggest is a relative lack of regulation compared to the big banks.
So far, Afterpay and the many other BNPL companies have managed to escape being defined as credit products, being seen more as a form of online lay-by or a form of millennial budgeting tool which doesn’t charge interest.
Whether the BNPL crowd continue to be exempt from all of that untidy and onerous regulation and knowing your customer information that credit providers such as banks are subject to under Australia’s credit laws remains to be seen.
For the moment, their main source of regulation is an ongoing brief to the Australian Securities and Investments Commission (ASIC) to intervene if a service leads to poorer consumer outcomes.
This is a huge advantage for Afterpay because it can continue to charge merchants hefty fees in return for increased sales.
As long as Afterpay customers keep up their payments, they also get to effectively use credit without incurring nasty interest costs that are still often above 20% for many credit cards.
However, if those customers miss a payment or two, not only do they lose the ability to make further BNPL purchases, they are up for fees which work in much the same way as interest charges.
So far, the BNPL customers appear to be fairly disciplined, with the prospect of losing their new-found purchasing power enough of an incentive to stay current with their payments, even after the financial shock of last year’s pandemic lockdowns.
The other thing that the nimble Afterpay has on its side is millennial word of mouth.
While banks were rightly dragged through the mud by the Hayne Royal Commission, BNPL operators are more likely to be seen by millennials as wearing the white hats – here to help with an easy-to-understand experience that helps you to budget rather than offering credit cards designed to entrap you with minimum repayments, high interest rates and growing debts.
Banks still a force
Despite the advantages Afterpay enjoys, there is no doubt it faces a formidable opponent in Commonwealth.
Before the Royal Commission caused it a lot of damage, Commonwealth had slowly crawled its way up the reputational stakes and still comes out ahead of the other big banks in customer satisfaction surveys.
It was also an early, enthusiastic and successful investor in technology and as a result has a lot of experience in online apps and banking.
It may not be quite as sexy as Afterpay’s presence, but it still has 15.9 million customers – many of which hold at least one Commonwealth credit card.
That is a massive base to use as a springboard for a new BNPL product which will run within the existing credit card base.
The most interesting intersection is between Commonwealth credit card customers who also use Afterpay.
Will they stay with Afterpay or switch to Commonwealth, or simply use both?
It remains to be seen and there is also a case to be made that Commonwealth’s appearance in the BNPL space will simply expand the market and benefit everybody.
BNPL merchant costs could fall
The other benefit that Commonwealth brings to the table is the ability to chop away at the wholesale cost of BNPL schemes.
While to the customer using either product has no bearing on the price of an item, behind the scenes, merchants are paying around 4% of the purchase price to Afterpay and other BNPL providers as a fee.
Commonwealth has said it will undercut that price, charging standard credit and debit surcharges of around 1.4%.
From the merchant’s point of view, it would be preferable to pay the lower fee but what they really want is a lot of turnover, so they are unlikely to prioritise one form of sale over another.
However, the mere presence of Commonwealth’s BNPL product may put pressure on these merchant fees and erode returns for the other BNPL players.
The other advantage that Commonwealth can claim is that it is offering a fully regulated service that is governed by Australia’s credit laws and offers consumer protections.
How crucial that will be is an open question but while banks might be viewed as dull and stodgy by millennials, they are also likely to be viewed as quite safe.
Afterpay confident it can do banking better than the banks
After running a successful pilot, Afterpay is preparing to launch its Afterpay Money app which is based around making banking like a fun and successful shopping experience.
Forget about accounts and balances and think more about being empowered by money and having wish lists of what to buy next and how to get there.
It is an interesting approach full of money management tips and positive messages that will be familiar to Afterpay customers.
Eventually, Afterpay customers might end up getting home loans and investments through the app but for now it is designed to build on the company’s largely female and millennial customer base and add in some banking functions.
In a way, Afterpay Money encapsulates the competitive dynamic between two very different companies such as Commonwealth and Afterpay.
On the one hand, you have a banking giant that is slowly but surely seeing the need to prevent erosion of part of its massive customer base.
And on the other, you have an innovative company that is thinking “why not”, rather than getting bogged down in a regulatory minefield.
At the very least, it will be an interesting battle and one that will frame the future of financial services in Australia and internationally.
And if it sounds just a little like the plot of a Star Wars movie, that will only add to the experience of grabbing a seat and some popcorn to see where the battle ends up.