Afterpay and Zip shares: are credit cards behind their rise?

Data rarely lies

In a brilliant Economic Insights piece released by Commsec today, the biggest of the big four revealed that credit card lending has fallen significantly since January 2017.

Specifically, Commsec wrote, ‘according to APRA, loans by deposit taking institutions to households via credit cards fell from $38.6 billion to a near 9-year low of $38.0 billion in August. Credit card lending is down by a record 5.7 per cent over the year (biggest fall in 14 years).’

The varying causes in view

Soon after this report was published, business reporter David Scutt tweeted an interesting interpretation, noting that:

‘Increased risk aversion and sluggish household spending are two factors’ that likely contributed to this fall in credit card lending.

Yet maybe the most interesting aspect was the second portion of Mr Scutt’s tweet; which noted:

'But one suspects that $APT ect [Afterpay, Zip and the like] are also behind this unwind.’

Mind you, this isn’t exactly the newest theory.

In a piece published by InsideRetail Australia earlier this year, the outlet cited the following comments from illion’s Chief Executive Simon Bligh:

‘Our society is in the early stages of moving towards a buy now pay later approach for many low-cost items, with this coming at the cost of a general decline in the usage of credit cards,’ Mr Bligh said.

A cultural shift in how people manage their money it seems, as much as concrete economic factors are potentially driving this move away from credit cards and towards buy now pay later solutions. Indeed, such was the point made by Afterpay’s brilliant founder Nick Molnar, who pointed out that:

‘We’ve found that millennials have been even more pronounced in their aversion to traditional credit products, largely because of student debt, and it’s just a different landscape.’

Afterpay has long contended that its payment solutions are used as much as budgeting tools, as they are for small-scale purchases.

Afterpay and Zip share prices in focus

Root causes aside; Afterpay, Zip, Sezzle, Splitit, and others in the space have all been benefactors of the recent buy now pay later boom.

Afterpay and Zip in particular built multi-billion dollar businesses on the back of an industry that didn’t really exist a few years ago.

Zip (ASX: Z1P) for example, touts a market capitalisation of A$1.65 billion and has seen its share price rise over 300% since January alone.

Afterpay, (ASX: APT) though has probably been the greatest benefactor of the buy now pay later boom. Since listing on the ASX – its share price has reached illusive Peter Lynch ten-bagger status – rising from just A$2.95 per share in June 2017 to over A$35 per share today.

Beyond that, the company now boasts a market capitalisation of A$9.24 billion, underlying sales (GMV) figures of A$5.2 billion and more than 5 million users on the its platform.

Finally, just last week, Goldman Sachs added Afterpay to its conviction list, raised its rating from neutral to buy, and put a lofty 12-month price target of A$42.90 on the company. The market reacted with the kind of bullish spirit that has become typical of Afterpay’s own announcements, as its share price soared around 14% in a single trading session.

The ASX went as far as to issue a price query to the young company following this share price spike, wondering exactly what was going on.

Final thoughts

Ultimately, the wild success of these companies has created two relatively interesting questions:

That is, was it a combination of brilliant marketing strategies, summed up with the kind of short appeals to ‘buy products now and pay for them later’, slick UX design and aggressive growth plans that drove people to reduce their usage/ reliance on credit cards?

Or did the inherent structure of credit cards themselves, replete with potentially sky-high fees; annual and other, cause people to abandon them? Ultimately, did credit cards themselves cause Afterpay and Zip to rise to dominance.

Likely, it was a combination of the two.

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