CBA faces uphill buy now, pay later battle, say analysts

CBA will face significant hurdles trying to lure customers away from nimbler competitors like Afterpay and Zip, analysts say.

Picture: Bianca De Marchi

CBA will face significant hurdles luring customers away from the likes of Afterpay and Zip with its new buy now pay later product, according to analysts, who say the bank may struggle to match its smaller, more nimble competitors when it comes to user experience and customer engagement.

The bank said on Wednesday it would offer BNPL from the middle of the year, through a new digital-only product in which customers can pay for goods of between $100 and $1000 through four fortnightly instalments.

Analysts are sceptical, however, that the bank will win over savvy Millennials, who often prioritise quick and seamless digital experiences.

Afterpay and Zip have built their customer bases – and their share prices – on simple, easy to use smartphone applications.

Citi analyst Siraj Ahmed said he does not see CBA’s offering as differentiated or new, and that it essentially replicates existing virtual-card based “Shop Anywhere” offerings.

“From Afterpay’s perspective, the concern is that the ability to use CBA’s BNPL at any merchant (using a virtual card) could potentially reduce Afterpay’s customer traction/purchase frequency (even though Afterpay has a large merchant base in Australia). However, we see the online user experience of CBA’s offering as inferior given a user would need to enter card details (unless using a mobile wallet) versus using an Afterpay checkout button,” he said.

He said given the costs to merchants, at 1.4 per cent, it is questionable whether Afterpay’s fees, which are as high as 4.6 per cent for small businesses, could be maintained.

“We see the consumer as key and, in our view, the durability of Afterpay’s fees will ultimately depend on the size of its consumer base and more importantly consumer engagement levels. We see Zip as less exposed from a merchant fee pressure perspective given it generates majority of its revenue from the consumer.”

Morgan Stanley maintained its “overweight” rating for Afterpay, giving it a price target of $159, with analysts declaring it had a number of factors in its favour including a globally known brand and that it handles purchases larger than $1000.

UBS maintained its price target for Afterpay of $36 – its share price is currently at $112 – and said that CBA’s foray into BNPL represented more evidence of competition, and highlighted risks around the sector’s “no-surcharge” rules.

“CBA’s foray into BNPL is yet further evidence of competition in the BNPL space. This is in line with our view that the lucrative economics of BNPL (particularly in Afterpay’s case), given its enormous success to date, will attract competition,” UBS analyst Tom Beadle said.

“With credit interchange being less than 1 per cent, the merchant fees and overall systemic cost of CBA’s offering are a fraction of Afterpay’s. However this highlights the impact that BNPL ‘no surcharge’ rules have on consumers’ payment choices.

“For example, as consumers perceive Afterpay’s service to be free, they are incentivised to use it, while merchants only have the right to surcharge CBA’s cheaper alternative, but not APT’s significantly more expensive option.

“The removal of ‘no surcharge’ rules would likely be more negative for Afterpay than for Zip, given Zip’s economics also rely on consumer fees and interest payments.

Zip said in a statement it welcomes the new competition.

“We think this is a great validation for our sector,” a spokesman said. “We welcome competition because that delivers better services and products to consumers, and that’s what Zip is about.”

Beforepay CEO and co-founder Tarek Ayoub said that CBA’s move was a result of consumers demanding greater flexibility and transparency over their money.

“It’s expected that more players, including incumbents and banks who have previously fallen short on consumer expectations, will continue to move into this space. As they do, they bring more validation to the sector and ultimately deliver more options to the benefit of consumers.”

Afterpay shares closed down 1.76 per cent at $111.00, while Zip was down 1.44 per cent at $8.47. CBA was down 1.56 per cent at $85.75.