Sunday was a great day in fintech: Afterpay has agreed to merge with Square. This deal leads two of the most admired fintech companies in recent history to become one.
Afterpay and Square have the potential to build one of the largest payment networks in the world. Square has built a very strong commercial payment network and, through the Cash App, a thriving high-growth consumer payment service. However, these two lines of business have historically not been integrated. Together, Square and Afterpay will be able to combine all of these services into a single, integrated experience.
Afterpay and Cash App each have millions of double-digit consumers, and the Square merchant ecosystem and Afterpay merchant network account for billions of payment volume per year. From offline registration and online payment flow to sending money with just a few taps, Square and Afterpay will tell a full story of next-generation economic empowerment.
As Afterpay’s sole institutional venture investor, I wanted to share a perspective on how we got here and what this merger means for the future of the consumer finance and payments industry.
Afterpay and Square have the potential to build one of the largest payment networks in the world.
Critical innovations in fintech
Every five to ten years, the global payments industry goes through a critical innovation cycle that determines the winners and losers for decades to come. The last big transition was the switch to NFC-based mobile payments, which I wrote about in 2015. Leading mobile operating system providers (Apple and Google) cemented their position in the global payments stack by skillfully meeting the needs of networks (Visa, Mastercard, etc.) and consumers through the mobile devices in their pockets. .
Afterpay unleashed the last critical cycle of innovation. Conceived in a Sydney living room by a millennial, Nick Molnar, for millennials, Afterpay had a key idea: millennials don’t like credit.
Millennials came of age during the global mortgage crisis of 2008. As young adults, they watched their friends and family lose their homes by overstaying mortgage debt, reinforcing their already diminished trust in banks. They also have record levels of student debt. So it’s no wonder millennials (and the Gen Z right behind them) prefer debit cards to credit cards.
But it is one thing to recognize the paradigm shift and quite another to do something about it. Nick Molnar and Anthony Eisen did something and ultimately built one of the fastest growing payments startups in history on their core product: Buy now, pay later … and never any interest.
The Afterpay product is simple. If you have $ 100 in your cart and choose to pay with Afterpay, your bank card (usually a debit card) will be charged $ 25 every two weeks in four installments. No interest, no revolving debt and no commissions with payments on time. For the millennial consumer, this meant that they could get the main benefit of a credit card (the ability to pay later) with their debit card, without the need to worry about all the bad things that come with credit cards: high interest rates and renewable. debt.
Everything backwards, without inconvenience. Who could resist? For early adopters, virtually all of whom relied on millennials as their key growth segment, they got a fair deal: paying a small fee on top of payment processing to Afterpay, getting significantly higher average order values, and conversions to buy. . It was a win-win proposition and, with a lot of execution, a new payment network was born.
Imitation is the greatest form of flattery
Afterpay went somewhat unnoticed outside of Australia in 2016 and 2017, but once it arrived in the US in 2018 and built a business there that broke $ 100 million in net income in just its second year, it garnered attention.
Klarna, which had had trouble adapting to the product market in the US, changed its business to emulate Afterpay. And Affirm, which had always focused on traditional credit, which generated a significant portion of its income from consumer interest, also noticed and introduced its own BNPL offering. Then came PayPal with “Pay in 4,” and just a few weeks ago, there was news that Apple is expected to enter the space.
Afterpay created a global phenomenon that has now become a category embraced by the major players in the industry, a category that is on track to take a significant share of global retail payments over the next 10 years.
Afterpay sets itself apart. He has always been BNPL’s leader in practically every aspect, and has done so by staying true to the needs of his clients. The company is excellent at understanding the millennial and Gen Z consumer. It is evident in the voice, tone and lifestyle brand you experience as an Afterpay user, and the merchant network continues to develop strategically. It is also evident in the simple fact that you are not trying to sell revolving debt products to users.
More importantly, it is evident in the usage metrics relative to the competition. This is a product that people love, use and have come to trust, all on better and fairer terms than they ever had available to them than with traditional consumer credit.
Square + Afterpay: the perfect fit
I have been creating payment companies for over 15 years, initially in the early days of PayPal and more recently as a VC at Matrix Partners. I have never seen a combination that has so much potential to deliver extraordinary value to consumers and merchants. Even more than eBay + PayPal.
Beyond the clear complementarity between products and networks, what excites me and my partners the most is the alignment of values and culture. Square and Afterpay share a vision of a future with more opportunities and fewer financial obstacles for everyone. As you move towards that future together, I am confident that this combination is a winner. Square and Afterpay together will become the world’s next-generation payment provider.