How does afterpay work and how does it make money?

Today, in this article we will be diving deep into the afterpay business model to understand “How does afterpay work?” and “How does afterpay make money?”. To explore a company’s business model, we must first have a basic idea about afterpay. So, first thing first! Let’s get the basic idea about the company first.

Afterpay Limited is an Australian fintech company that operates in Australia, United Kingdom, United States, Canada, and New Zealand. Afterpay was first founded by Nick Molnar, the youngest self-made billionaire, and Anthony Eisen, in 2015. In 2017, Afterpay amalgamated with one of its technology suppliers, Touchcorp, to form the Afterpay Touch Group. Then in 2019, it was renamed Afterpay Limited.

Afterpay- The Global Expansion

In the introduction, we have already mentioned that the company started back in 2015. Three years later i.e., in 2018, American venture capital fund Matrix Partners announced its willingness to invest in Afterpay with the intention of supporting the company in entering into the US retail market. In mid-May, the company finally launched itself in the US with retailers such as Anthropologie, Urban Outfitters, and Free People.

By August 2018, Afterpay Limited acquired 90% of the equity in Clearpay for deliberation of 1 million Afterpay shares. With this, the company gains growth in the UK much faster than that of the US. In 2020, Afterpay unveiled various plans of its service expansion in at least four continents, including Asia, to take advantage of the online shopping growth that was seen due to the COVID-19 pandemic. During the worldwide pandemic, many retailers closed their shops and the customers started moving to online shopping. If its plans become successful, it would call for the acquisition of Singapore-based, Indonesia-focused buy-now-pay-later service provided by EmpatKali. Afterpay’s global team is currently composed of 700 people and this number is still growing.

Afterpay Business Model

Afterpay has built its business around the flagship of Buy-now-pay-later (BNPL) service allowing customers to pay for items over the course in 4 installments. BNPL is the fastest-growing market in consumer finances. In the credit card business model, the relationship exists between the consumer and the bank/credit card company. However, it is completely different in BNPL. Here the transactions originate between the consumer and the merchant almost as it was a loan. The main consumers of the BNPL market are the Millenial and Gen-Z shoppers who are more budget conscious and careful than those consumers who make payments through traditional credit cards.

Afterpay encourages its customers to buy from its partner stores using its payment plan. The company works based on an affiliate marketing business model wherein businesses make their money through affiliate commissions.

Afterpay has been there in the market for 5 years and is now set to complete another successful year with an approximately 260% increase in stock price since January. In recent years, it has witnessed immense success and was listed in ASX via an IPO of $25 million in 2016.

Afterpay Business Marketing Model

The two founders, Molnar and Eisen well knew the fact that the key to building a strong customer base was to inform and influence. The biggest challenge for them was to inform customers about how the service works and clear all the security concerns that usually customers have because they haven’t used such a service before. Additionally, the company also had to convince retailers about the fulfilling risk of any payment defaults. With their marketing skills, they successfully convinced their customers and retailers to use their app services.

The attractive designs on websites and social media with the help of Dovetail gave Afterpay a new brand awareness. Also, the strategic moves to enter the retail market helped provide retailers assurance that this kind of concept can actually work. To add more value to its business model, it eliminated any doubt of customers defaulting the payment.

The company deployed lots of marketing techniques to appeal its target audience. Innovative and attractive social media posts, advertisements highlighted the key offrerings of Afterpay which helped in creating awareness among the customers. The development of user friendly Afterpay app helped in the rapid expansion of its services across multiple platforms and customers.

What does Afterpay offer to its customers?

Afterpay addresses all the needs of customers that other payment portals have overlooked. This uniqueness made it a major player in the fintech industry. Here are a few of the values that it delivers to its customers:

1. Payment without interest: Customers can easily buy their favorite items from partner stores and pay the final amount in installments without paying any interest on it.
2. Rewards: Afterpay rewards its customers for good payment history.
3. No credit check: Afterpay doesn’t report on late payments instead it blocks the defaulter’s account until the issue is resolved.
4. Gets easily integrated with online stores: E-commerce businesses can easily integrate afterpay in their online stores (Stripe, Shopify, etc) and use its services hassle-free.

Who are Afterpay’s key partners?

Now, let’s further explore the afterpay business model by stating the key partners involved in its business. Here are the two major partners involved through which the company generates its revenue model.

1. Partner merchants

Afterpay has developed partnerships with more than 50,000 merchant stores and it provides their customer a BNPL (Buy Now Pay Later) payment plan. The partner merchants can easily use their services by including the Afterpay payment option in their checkout. Many top brands have implemented Afterpay as one of their several payment options eg, Adidas, Kylie Skin, Fight Club, Ulta Beauty, etc.

2. Ecommerce & POS platforms

Afterpay has partnerships with many e-commerce and POS platforms too. Now, you might be wondering what are these POS platforms? Let’s understand this term first!

A point-of-sale (POS) system is a place where the customer makes a payment for products or services at your store. This POS software works far beyond credit card processing to help retailers and restaurants incorporate smartphone point-of-sale features, contactless payment options, eCommerce integration abilities, and much more.

Today, there are many certified eCommerce and point-of-sale platforms that allow seamless integration of merchant’s online as well as offline business with Afterpay. Magneto, Shopify, Neto are a few examples of leading e-commerce platforms that have a partnership with Afterpay.

Similarly, there are many POS platforms such as Cegid, Simple Salon, Retail express, and much more that have integrated Afterpay into their business models.

How Does Afterpay Work?

We hope that you have understood the afterpay business model. So, let’s move on to discussing the working model of after to answer- “How does Afterpay work?”. Keep reading it till the end in order to understand the afterpay operating model in detail.

Afterpay operates by providing the BNPL (Buy-now-pay-later) service to its customers with no interest, no credit checks, and no extra fees only if they make an on-time payment. This service is available through the Afterpay app. When a customer makes a payment through Afterpay, those payments are split into four installments. He/she will have to make an initial downtime payment against that purchase and then the customer has a six-week period to make the remaining payment.

To use this service, you will have to choose Afterpay as the payment method to checkout. You can create an Afterpay account instantly to make your first payment and complete the purchase. After making this purchase, the items that you ordered will be shipped to you by the retailer.

If you wish to use the Afterpay service in physical stores, you simply need to download the Afterpay app and create your account. After creating the account, tap on the “card” tab in the app. This will allow you to create a digital Afterpay card that can be added to Apple pay or Google pay. When you make a purchase through this method, you can easily log into the Afterpay app to see the date and amount of your next due payment. Payment to Afterpay can be done using a credit card or debit card or you can even set up automatic payments in the setting option.

As already mentioned above, Afterpay does not charge interest but it can charge a fee if you pay late. The late fee for US shoppers is capped at 25% of the order amount. Here are the simple steps to how to use Afterpay while shopping.

• Download the app to shop your favorite brands
• See your installments and choose Afterpay as your payment method while shopping seamlessly
• You can also shop in-store by setting up to Afterpay card- Login into your account, add your digital wallet and then tap to pay.
• Now, you can pay the first of the 4 installments right now and pay the rest of the money in over 6 weeks.

How Does Afterpay make money?

Afterpay makes most of the money through its active merchants. The company charges a $0.30 fixed transaction fee plus a commission between 4% to 6% on each sale made through afterpay. The company also generates revenue from its foreign subsidiaries, including Clearpay.

^{Merchant fees}

^{Afterpay does not charge any interest nor does it charge any additional fees to be able to pay via installments. The company charges its merchants 30% fees on every transaction. The value of actual fees depends on the value and volume a merchant is able to sell. The more a merchant sells, the lower is the fees. But first, let’s understand why a merchant would want to offer a BNPL option on their platform.}

^{Here are a few reasons for this:}

1. ^{Afterpay takes on the risk involved in payment default while conducting the payment collection process.}
2. ^{Afterpay company claims that its installment options lead to an increase in average order value of 10-20%.}
3. ^{Afterpay is a well-known solution that often leads to more customers and higher conversion rates.}

^{Late payment fees}

^{Earning made through the fees charged when the customer makes a late payment is the second source of Afterpay’s revenue. This due date is defined in the invoice that the customer receives while making the purchase through Afterpay. When the payment is not done on time, Afterpay will automatically deduct the installment from the customer’s debit or credit card. The initial late fee charged by it is $10. If still the payment is not done then it starts charging $7 whenever the invoice remains unpaid within the 7 days interval. However, $10 is charged only when the order is below $40. Every order above the $40 budget line can incur a fee of up to $60 in case of late payment. This revenue generation through payment fess has been declining in the past few years.}

^{Affiliate commission}

^{To add to the earning model, Afterpay offers a paid affiliate partnership with merchants. Whenever a customer uses its service to pay installments, Afterpay earns a percentage commission per transaction with the merchant.}

Who are Afterpay’s investors

Afterpay provides a payment-after-delivery service for e-commerce, m-commerce, and cross-channel post-payment services.

According to the data published by Tracxn, Afterpay has a total of 10 investors. Some of the names include Tencent, Plug and Play Tech Center, MUFG, Allectus Capital, and six others.

According to Crunchbase, Afterpay has raised a total amount of $375.5M in funding that too in just 2 rounds. The company has received its latest funding on March 4, 2020, from a Post IPO Equity round. Also, it must be noted that the company is registered under the ticker ASX: APT.

Who are the top competitors of Afterpay?

Here is the list of the top-most competitors of Afterpay existing today:

1. Sezzle: A publicly traded fintech company whose headquarter is in Minneapolis, US. It is operating in US and Canada. This company is a payment platform that allows customers to pay in 4 interest-free installments over 6 weeks.
2. Klarna: It is a Swedish fintech company that provides services like payments for online stores and direct payment option along with post purchase payments. It also allows customers to make payment in 4 interest free installments. Customers can make 1 payment in every 2 weeks.
3. Splitit: It is a company that allows merchants from all over the world to offer their customers interest-free monthly payment plans using their existing Visa and MasterCard credit and Debit cards.
4. PayPal Credit: The company offers proprietary payment methods on the websites of various merchants around the world it offers revolving credits through Synchrony Bank allowing payments to be made in the online mode without using any credit card. It was earlier named as bill me later (BML). Paypal Credit offers BNPL services at 0% rate of interest for 4 months on that particular purchase.
5. Affirm: Affirm is also a publicly traded financial technology company similar to Sezzle. It’s headquarter is in San Francisco, United States. It operated as a financial lender of installments loans for customers to use at the POS (point of sale) to finance a purchase. The unique feature of Affirm is that, it does not charge any sort of late fees to its customers. They earn through the commission received from businesses and shoppers pay interest on some items. They do not depend on shoppers who pay late but instead try to give them a great experience so that they come back and use their services next time.

Conclusion

Afterpay success lies in its ability to identify a need in the market and the marketing skills that made its customers trust this BNPL methodology. The company took advantage of every opportunity that came along the way. According to their business model, the topmost priority of Afterpay is not the price rather the customer’s convenience in making purchases. Customers can easily purchase their favorite item and pay in 4 installments which eases the financial budget and also provides flexibility in managing it.

It is said that the BNPL concept is expected to be rapidly growing globally in the coming future. Also, the COVID-19 pandemic has accelerated the adoption of already growing service. Consumers today prefer deferred payment on online purchases due to the affordability and convenience that this service offers. In Europe, BNPL is more popular in UK than in any other nation. In Canada, the consumers are moving away from credit card and debit card payment method owing to which retailers are offering BNPL services. According to fintech and payments research specialists Kaleido Intelligence, BNPL will alone witness $258 billion in eCommerce spending in the year 2025. This methodology has witnessed a significant growth in recent years with transaction value having grown by 292% between 2018 and 2020.

If you are looking to launch a BNPL (Buy Now Pay Later) service providing platform similar to Afterpay, Ncrypted Technologies has the right solutions made by our well equipped and experienced team who is capable of developing innovative and efficient solutions for you. We offer customized and innovative features as per you own requirements to let your launch a successful BNPL service providing platform similar to Afterpay.

How to Launch Your Own Business Similar to Afterpay?

If you’re willing to start your own afterpay platform similar – you should go with Afterpay Clone which has customized features to let you roll with your own fintech services platform business.

Here are some other informative articles explained by Ncrypted Technologies:

1. NCrypted Web & Apps launches eloquent B2B trading marketplace software – TradeMart
2. Analytical Guide: How does Robinhood Make Money?
3. 29 Startup Ideas to Look Forward to in 2020