Wednesday's watershed announcement that budget airline Jetstar, wholly owned by the $10bn ASX listed Qantas, is partnering with Afterpay Touch (APT) to offer the Afterpay services to its customers, unequivocally validates Afterpay as a genuine player in the Australian payments space.
So what does Afterpay Touch do, and why the excitement?
Afterpay Touch offers a simple payment solution for customers and merchants. When a customer purchases an item, they pay 25% upfront and meet the remaining balance in three equal 25% installments every two weeks. The customer receives the goods immediately; Afterpay pays the merchant the full balance, taking the credit risk on the transaction; and the merchant pays (on average) a fee of around 4% to APT. The maximum transaction value is around $800.
Whilst the Afterpay system was initially offered only for online transactions to the fashion and beauty industry (such as Cotton On, Just Group, Country Road), the system has been subsequently rolled out to a wider range of merchants including recreation (Rebel Sport, Supercheap Auto); department stores (Myer, The Iconic); homewares and appliances (Adairs, Beacon Lighting, Optus); and toys and books (Toys r Us, Booktopia). Indeed the payments platform has been so successful that at 30 June 2017 APT enjoyed partnerships with over 7,200 Australian merchants.
Staggering growth in the platform
A year ago APT hosted just 600 merchants; in the past 12 months, customer numbers have grown from 140,000 to more than 1 million; gross transaction value (GTV- the value of good purchased through Afterpay) amounted to more than $500m. So fast is the growth that the annualized run-rate is currently in excess of $1bn p.a.
Importantly the Afterpay system is being aggressively rolled out instore, effectively making the old 'lay-buy' process redundant. This is likely to see a further step-change in the transaction volumes.
What about bad debts?
Of course, with any business facilitating consumer credit, bad debts are a major point of focus. Perhaps, against common expectations in such a high growth business, doubtful debts are trending at around 0.6%. Why?
We believe this is due to a number of unique factors related to the APT system including:
- The expedited payback period of just 6 weeks. APT has visibility in 2 weeks if a payment isn't made. At this time any further Afterpay transactions are barred for the customer.
- Loyalty in the system. Customers see real value in using Afterpay. It offers an attractive value proposition through interest-free payments and hence APT customer are likely to meet payments in order to keep using the system
- Low transaction value. Lower transaction value simply equates to lower financial risk.
- Credit Profiling and Data Analytics. Afterpay's partnership and subsequent merger with Touchcorp, which we discussed on Livewire here, means the company has a deep and ever-increasing understanding of consumer and customer spending profiles and capacities, thereby mitigating bad credit risks.
What next for Afterpay touch?
Afterpay Touch is a company the Cyan C3G Fund has been invested in since its IPO in May 2016 and that we've clearly been following closely. It's been an amazing ride to date with the performance of the business consistently and regularly exceeding market expectations.
Going forward, travel is likely to be yet another major step-change for the company. At the time of writing the stock has gained almost 10% today to trade at a record high. And it's easy to see why this announcement has been embraced.
The ability for Jetstar to shift 'Sale' tickets quickly by incorporating a partial upfront payment system should (like all other retailers) see a marked uplift in both sale numbers and basket size.
Afterpay has also flagged an intention to move offshore with an initial push into New Zealand with the dominant Trade Me site. Touchcorp's existing presence in Europe might also provide a springboard into the region.
In the meantime, investors can expect further significant revenue and customer gains within its existing geographies which should see the stock continue to push higher.
Dean has over 25 years experience in the funds management industry covering all major asset classes. He holds as Master of Applied Finance and is a Graduate of the Australian Institute of Company Directors.
great write up Dean, really interesting to follow the progress of this story.