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Buy Now Pay Later – biggest Australian opportunity since sliced bread… or something else?

Updated: Oct 19, 2019


Buy Now, Pay later.

Buy Now Pay Later has taken off in Australia and New Zealand led by Afterpay and Zip


Over the last five years there has been substantial interest in the Buy Now Pay Later (‘BNPL’) industry, pioneered in Australia by Zip Pay (launched in 2013) and Afterpay (launched in 2014). Whilst starting later, Afterpay has become the clear market leader in Australia with a market capitalisation of ~A$8 billion (as at 18 September 2019) and originating over A$4.3 billion of retail sales in Australia and New Zealand (“ANZ”) in FY19. Zip has a market capitalisation of over A$1.2 billion and originating over A$1.1 billion in Australia and NZ in FY19. To put the rapid growth of these companies into perspective, Bendigo and Adelaide Bank, Australia’s fifth largest retail bank has a market capitalisation of just over A$5.6 billion.


BNPL has a much stronger take up with online retail sales, with:

  • Afterpay stating that 82% of their sales volume are online, being A$3.537 billion; and

  • Zip Pay stating 68% of their transaction number are online, being ~A$767 million (assuming similar average transaction size for online and offline);


Resulting in total combined online volumes of ~A$4.31 billion, this represents approximately 14.7% of the ~A$29.3 billion of online retail sales (NAB online retail index – July 2019).

BNPL represents a much smaller percentage of instore retail spend with approximately 0.4% of the A$290 billion instore retail spend being provided by Afterpay and Zip Pay. Older style BNPL products have been provided in instore retail via providers like FlexiGroup’s Certegy product. We estimate that overall instore BNPL is approximately 0.7% of instore retail spend in FY19. Given the size of the total Instore retail sales, we believe the Instore will become a critical component of the total growth in BNPL transactions.


BNPL is here to stay


We can see that in a short period of time, BNPL has become a critical component of how consumers pay for retail purchases. A Venture Insights survey in April 2019 indicated that 34% of consumers have used a BNPL provider. The popularity and uptake of BNPL products has been primarily driven by millennials with 57% of surveyed Australians between 18-34 years of age indicating they have previously used either platform. Conversely, uptake by older Australians has been low with only 10% of surveyed Australians aged 55+ having used either of the payment platforms. We expect the take up of BNPL to continue to grow strongly as consumers get more used to this payment method.


Figure 1. Question: How often do you use Afterpay or ZipPay?

Source: Venture Insights


Given AfterPay and Zip Pay have originated over $5.4 billion in retail sales during FY19, what is the potential size of the BNPL industry in the future?


Given the ease of using BNPL for online retail sales, we expect that take up for online retail sales will be substantially greater than instore retail sales. According to the Australia Post 2019 eCommerce Industry Report, BNPL accounts for 48.3% of all online fashion purchases, strongly linked to the high level of online fashion purchases by the younger 18-34 year old demographic. Over time, we consider that BNPL has the potential to increase to 40% of all online retail spend by CY27. This level is in line with reports that Klarna’s BNPL services processes ~40% of all online purchases in its home market of Sweden.


BNPL payments for instore retail spend is currently very small, with providers only recently focusing on signing up physical stores. Given the wider range of smaller value products where it is unlikely the BNPL will be utilised, and larger transaction values above the limits available under BNPL product, we consider that BNPL penetration will be lower, and BNPL has the potential to increase to approximately 5% of all instore retail spend by CY27.


Online sales (~A$30b) currently represent approximately 9% of all retail spending in Australia (~A$320b). Over the next 10 years, an increasing proportion of retail sales will transition online. Assuming a 0.5% increase per annum in online retail spend over the next decade, we expect online retail purchases to represent 14% of all retail spending (which we expect to increase by approximately 1.5% per annum – reaching A$365b by FY27).


Combined with the above penetration levels of BNPL, and the increasing percentage of online sales, the next five years sees very strong growth in the Australian BNPL market from ~A$8 billion to over A$25 billion and showing CAGR in BNPL of almost 26% between CY19 and CY24. We acknowledge that this is a simple analysis, however should act as a guide to the magnitude of the upside in the market size.


Figure 2. Growth in BNPL market in Australia


Source: Venture Advisory analysis


It is very clear based on existing consumer take up, expected ongoing usage and additional take up from the later adopters that the growth in BNPL in coming years is going to be extraordinarily large. Who is going to win the race, and whether existing parties represent good value...? Well that is a topic for another article!


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