The Afterpay Ltd (ASX: APT) share price has dropped another 4% this morning as investors worry about PayPal Holdings Inc (NASDAQ: PYPL).
Why is Afterpay falling?
Since the start of September 2020 the Afterpay share price has fallen by 12%.
Yesterday Afterpay shares fell heavily when PayPal announced that consumers can pay for items costing in a range of $30 to $600. The service, initially being launched in the US, is called “Pay in 4” which it says is an interest-free instalment solution at no extra cost.
Merchants won’t have to pay more fees to offer the option. It will be included in the existing pay structure.
The service’s target launch is in early in the fourth quarter of 2020, which suggests that October 2020 is the aim.
Afterpay isn’t the only one suffering today. The Zip Co Ltd (ASX: Z1P) share price is down 13.5%, the Sezzle Inc (ASX: SZL) share price has fallen around 12% and the Splitit Ltd (ASX: SPT) share price. Ouch – a painful day for the buy now, pay later sector (BNPL).
What to make of this?
I’m not an expert on the BNPL industry. But it’s clear that many of them were priced for a large amount of growth with little thought of including a margin of error in-case reality wasn’t quite as good as the optimistic thesis.
Other financial players like PayPal weren’t just going to let Afterpay take its lunch. PayPal already has a global network of merchants and customers. It’s already integrated with a large array of online retailers. Are merchants going to want to hand over a sizeable cut of their margin to Afterpay, or pay no extra fees and use PayPal? I know which one I’d rather customers pay with.
Incentives are a powerful tool, as Charlie Munger (Warren Buffett’s business partner) has recognised. A famous quite of his is: “Show me the incentive and I will show you the outcome.”
Afterpay has done a wonderful job of laying the foundations for growth. But there’s more to generating good profit than simply growing underlying sales – it needs a decent merchant margin too, which may come under pressure by players like PayPal offering the BNPL service for free.
When it comes to ASX payment businesses, Tyro Payments Ltd (ASX: TYR) is interesting but I think Pushpay Holdings Ltd (ASX: PPH) is my clear favourite idea with a long growth runway and exposure to a defensive source of donations. But there is a wider group of ASX growth shares out there worth buying too.
