Square’s announcement that it’s going to acquire Afterpay for $29 billion just about broke the payments portion of the internet last Monday (Aug. 2). No one saw it coming, many consider it an unlikely pairing, and the premium Square is paying for the deal is a head-scratcher.
For students of platform strategy and ignition, the acquisition makes perfect sense.
Jack Dorsey was one of PYMNTS’ first big interviews a few months after PYMNTS launched in 2009. At the time, Square was the white square-shaped dongle that turned iPhones into point of sale (POS) terminals and enabled card acceptance for micro-merchants.
Even then, it was Dorsey’s ambition to create a consumer/merchant network with Square that could leverage connected devices, digital payments, the cloud and data to reinvent payments and commerce for consumers and the small merchants where they shopped.
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 has the critical mass to grow rapidly.
The acquisition is an opportunity for both Square and Afterpay to scale a two-sided, multichannel payments, commerce and financial services ecosystem that also leverages Square’s integrated POS platform and merchant services capabilities to keep and grow an expanded merchant base.
In theory, the acquisition provides both Afterpay and Square’s Cash App users with an incentive to do more business within their newly formed ecosystem, given the added credit/debit/shopping capabilities each provides to the other. With Square’s industrial bank charter, more banking and financial services capabilities will likely extend the functionality of this network over time for consumers and merchants — and grow quickly as network effects kick in. That will attract even more merchants to the platform, which will attract even more consumers, and so on as the virtuous circle spins.
It’s a move that’s giving every player across the payments ecosystem pause, and one that seems to take particular aim at PayPal (which, by the way, bought a pioneering BNPL network — Bill Me Later — 13 years ago for less than $1 billion.)
The question on everyone’s mind now is what happens next.
The answer rests with understanding how platforms ignite and scale.
To Begin At The Beginning
Twelve years ago, Square’s network ignition strategy was to leverage the consumer’s second-most ubiquitous payment method — the credit and debit cards consumers had in their wallets — and to build a base of the largely smaller merchants for which digital payments was elusive.
That part worked pretty well.
How many taxi drivers, flea market and farmers market vendors or other micro-merchants have you paid using your credit or debit card and the Square dongle? And then over time, at coffee shops and Main Street SMBs using their POS terminals? Lots and lots and lots, I’m sure.
Each time, you were also probably asked to provide those merchants with either an email address or a phone number to receive a digital receipt. But in none of those cases did you or any other consumer think of themselves as a Square customer — no more than you or they thought of themselves as a Verifone or Ingenico customer when paying for purchases in a store. Square was simply the device that accepted a plastic card. It never really built a consumer side from those email addresses and phone numbers.
In 2013, Cash App was introduced as a counter to Venmo — and later, a plastic Cash Card was added for offline use, as an effort to create more of that direct Square/consumer connection. In Q2 2021, Square reported 70 million active Cash App users overall and roughly 40 million actively engaged Cash App consumers in the month of June, 26 million of whom were active on the platform weekly. More recently, stimulus checks, tax refunds and crypto capabilities have added to the stickiness and popularity of that application, expanding its use base beyond the micro-merchants transacting on the platform.
With Afterpay, Square has added a consumer credit product for those 70 million active Cash App users to use at more than 18,000 online merchants in the U.S. (and the 96,000 worldwide) that accept it — giving more consumers more of a reason to sign onto the Cash App proposition.
For Afterpay, its 8.1 million U.S customers (17 million 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. It also comes to the Square ecosystem with a user base that’s pretty sticky — Afterpay says that 90 percent of its customers are repeat users.
Read more: Square Afterpay Investor Presentation
Afterpay’s 96,000 merchants worldwide also bolster Square’s online merchant presence with a larger and different type of merchant, one that has remained outside the current Square merchant services platform but that Square has now signaled it’s ready to serve. You might recall an announcement Square made a few weeks back about upping its POS hardware game, which followed several others hyping its integrated POS capabilities in the all-important BNPL sector: beauty and wellness.
On that point specifically, the latest PYMNTS data on BNPL penetration by category shows that 43 percent of online beauty and wellness sites offer a BNPL payment option. That same study, which will be released next week, shows Afterpay’s penetration of that sector at eight times that of Affirm and Klarna, and four times that of PayPal Pay in 4.
See also: Buy Now, Pay Later Tracker
In light of the Square/Afterpay news, success in the BNPL space comes down to platform ignition fundamentals: what’s needed to create critical mass and network effects for whom — at scale — in a timeframe that’s relevant, and with enough cash to outbid the competition.
Through The Platform Looking Glass: The Banks
The Square/Afterpay acquisition has accelerated the conversations for how traditional banks and card networks should be thinking about their build, buy or partner decisions in the BNPL space. For big banks, there’s a further consideration: how to do that without cannibalizing their existing credit card revenue stream.
Banks have the consumers and the merchant acceptance — online, offline and in mobile wallets using their credit and debit card products. That’s why acquiring a pureplay (maybe even one like Affirm) for tens of billions of dollars — with an average three-month loan value of $302 and an average of a 24-month loan of $1,302 for purchases across many categories, such as travel, for the 5.4 million consumers (as of its last earnings call) with good FICO scores — may give them pause.
Instead, the play for those big banks and the card networks might be to invest the tens of billions they’d spend to buy a consumer facing BNPL player into perfecting and accelerating their own installment programs using their existing credit lines and credit underwriting capabilities for the tens of millions of consumers they already serve. In fact, PYMNTS data shows that a third of consumers who’ve used BNPL solutions have done so via their issuer’s Pay Later offer.
Or for banks to consider the acquisition of BNPL players whose platforms are a complement to theirs, the credit onramp for the sub-prime or thin-file consumer who needs a three-month loan for $150 and for whom existing bank underwriting capabilities are ill-equipped to support making one. For those banks, the ability to offer a more inclusive set of credit options, then bank and expand their services to reach those customers might be especially attractive. For consumers, it’s a way to get and build credit by paying off one small-dollar purchase at a time and establish a more robust relationship with a bank.
PYMNTS’ data shows that although 14 percent of all U.S. consumers have used a BNPL solution over the last year, twice as many consumers with sub-prime or thin credit files have used one to buy and pay for things at online and offline merchants. Their motivation for using Pay Later options is, of course, to get credit and better manage their spending, but also to build their credit profile and improve their credit score. For those consumers, BNPL is a critical credit element that improves their eligibility for traditional credit products down the road.
Through The Platform Looking Glass: Big Tech
Apple Pay and Google Pay wallets both support Afterpay’s offline solution via the Afterpay Card that further expands Afterpay’s acceptance at all of the brick-and-mortar merchants that accept both wallets. No doubt, the announcement by Square and Afterpay has amped up the conversation and likely the strategic path and timelines around their BNPL plans.
Although Big Tech may not bring the same baggage to the Pay Later party as big banks, they bring a totally different set of baggage. For Big Tech, the Square/Afterpay announcement creates a conundrum, since global regulators and legislators are so clearly anti-Big Tech (and anti-Big Tech buying anything).
At the same time, Big Tech would like nothing more than to create and/or accelerate the scale of their own payments, commerce and financial services ecosystem, using BNPL as a key credit cornerstone.
Any Big Tech dreams of BNPL acquisitions face increasing odds of a big double thumbs-down in the U.S., given the current opposition to letting Big Tech grow even bigger, including into adjacencies — and in other jurisdictions where the BNPL players have footprints.
That might not stop some from testing the waters to find out whether the antitrust enforcers can win in court.
Until then, Apple could be left to bet on pulling a rabbit out of its Pay Later hat with Goldman or using others like Affirm as a “powered by” solution, as it is doing in Canada for its own Apple products. And for Google to work with the banks that are already part of the Google Plex (or plan to be) product to integrate installments into GPay. Facebook’s only option at the moment is to explore a powered by Pay Later solution, since even their acquisition of Kustomer is under regulatory review.
Through The Platform Looking Glass: Challenger Banks And Tech Platforms
For challenger banks looking to attract and retain the highly attractive millennial customer base that comprises the BNPL sweet spot, the Square/Afterpay news presents a different, but more challenging and unexpected, competitive consideration. It’s also why a mash-up of a pureplay challenger bank — one with a user base, scale and without credit capabilities — and a well-established BNPL player could start to look interesting, and even timely, for both stakeholders.
Then there is a tech platform like Stripe that could find itself contemplating how and if such a combination could further accelerate its goal of increasing the GDP of the internet — creating a next-generation connected payments, commerce and financial services ecosystem that rivals what exists today — and for which a BNPL acquisition could provide a better ROI than a “powered by” partnership. The commerce platforms that have opted for a “powered by” solution — like a Shopify, BigCommerce or Adobe — are likely doing that same soul-searching, with the benefit of seeing the results of those partnerships. Shopify reported as part of its Q2 earnings that its Shop Pay installments solution volume, powered by Affirm, tripled over the prior quarter.
Integrated issuing and acquiring platforms such as Fiserv and FIS might also start to think differently about buying a capability to help scale BNPL across their merchant and consumer touchpoints to add a new payment method to their mix. Or they might accelerate their investments in (or even buy) one of the emerging pure plays that power BNPL for banks or that enable BNPL in large, high-ticket verticals such as travel and healthcare.
For card networks — and their network of network strategies — the Square/Afterpay news is both a threat and an opportunity. BNPL pure plays ride their debit rails, moving cash purchases online and at higher basket sizes. At the same time, for many of those purchases, they shift the volume destined for credit cards to BNPL rails.
Through The Platform Looking Glass: The Pureplays
For pure plays and their investors, the Square/Afterpay news has sparked a war room conversation with their investors and boards about whether and when to build, buy, partner or be acquired as each builds its own connected payments and financial services ecosystem anchored by a different way for consumers to get credit and repay what they owe.
PYMNTS data shows that BNPL users, when asked, like and want to use credit — particularly those who have few other options. They also don’t mind revolving those balances, since that is what installment plans provide. They prefer a predictable repayment plan: equal installments over a defined time period for a specific purchase such as those jeans, that TV, that rowing machine, the must-have handbag. Consumers also like transparency of fees — which doesn’t mean they expect to have no fees, but that they want clarity about what they will pay for that purchase if the term of their loan goes beyond three or four payments.
For the BNPL pure plays, their long-term ignition strategy means adding credit card-like functionality so that consumers begin to use them as they do their credit cards today. That means giving consumers visibility into how much they can spend before they get to checkout, like they have with credit lines today, and the ubiquity across merchants and merchant categories they enjoy with those cards. It means innovating the experience to create that single place where consumers can pay with money they have now on hand or plan to pay later, according to terms that help them better manage that spend and pay off their debt.