Afterpay profits rise, but so do delinquencies

Afterpay parent Block’s resilient results underscore challenges confronting the sector, with more BNPL regulations on the way.

Block chief executive Jack Dorsey continues to value Afterpay’s contribution to its offerings. Picture: Jim Watson/AFP

Payments giant Block reported resilient results amid an economic slowdown, but flagged rising Afterpay delinquencies as the buy now, pay later (BNPL) sector faces potential new regulations.

In its fourth-quarter FY22 results, tech entrepreneur Jack Dorsey’s fintech company Block - formerly known as Square - posted a $US1.6bn ($2.4bn) gross profit – up 40 per cent year-on-year – and revenue of $US4.7bn, slightly below analyst consensus expectations of $US4.6bn.

Afterpay, which Block bought for $US29bn in the most expensive transaction in Australian business history, generated nearly $US100m in advertising revenue and contributed $US264m in revenue and $US196m gross profit in for the quarter - up from $US150m in the previous quarter.

Block, which is dual listed in the US and on the ASX, rose nearly 7 per cent in after-hours trading to $US79.25.

The company faces a potential looming issue, however, in the form of Afterpay’s delinquency rate.

Following its earnings announcement, Block published a memo revealing Afterpay delinquencies rose to a total amortised cost of $US2bn for the quarter, in statistics that hint that the BNPL provider may need to tighten credit to consumers. After acquiring Afterpay, Block changed the policy on delinquent accounts to write off bad BNPL loans after 180 days instead of 90.

Afterpay co-founders Nick Molnar and Anthony Eisen led Australia’s most expensive transaction when they sold the business for $US29bn.

The Australian government is currently consulting on further regulation for the BNPL sector, which falls outside credit laws and has been criticised for allowing customers to rack up purchases without the need for a credit check.

In Australia, Afterpay customers have an initial spending limit of $600 without needing a credit check, though the company does conduct credit checks in the US.

Some consumer groups have called for the likes of Afterpay to be regulated in the same way as credit card providers, while Afterpay itself says it supports stronger self-regulation for the sector.

Block grew its monthly active users of its Cash App to 51 million, meeting Wall Street expectations, and said that Afterpay was now a crucial element of the platform.

Cash App is a mobile payment application available in the US and the UK allowing users to transfer money to one another; it’s not yet available in Australia.

“Since launch, we have seen meaningful growth in the ad and affiliate offering of our BNPL platform,” Mr Dorsey said in a letter to shareholders.

“As we build out Cash App’s commerce platform, we intend to integrate this demand generation engine from the Afterpay app, and pair ad and affiliate offerings with Cash App’s powerful Boost rewards and incentives capabilities.”

The company also announced chief financial officer Amrita Ahuja would gain the role of chief operating officer as part of a leadership consolidation.

Ms Ahuja said Block would slow hiring and increase headcount by 10 per cent, compared to 46 per cent headcount growth in 2022.

Block CFO Amrita Ahuja.

The results come amid a period of pain for the BNPL sector that was once one of the strongest performers on the ASX, underscoring the successful timing of Afterpay’s sale to Block last year.

Zip this week announced it would walk away from 14 countries targeted in an international expansion, with analysts warning the company may be running out of time to turn its losses around.

BNPL provider Openpay earlier this month entered receivership, with McGrathNicol partners Barry Kogan, Jonathan Henry and Rob Smith now looking for a buyer.

The chief executive of Australian fintech Splitit Nandan Sheth said there would inevitably be more casualties across Australia’s BNPL sector, despite the sector and first-movers like Afterpay doing a good job early in their existence of creating demand for their products.

“I think we will see more consolidation in this space and we’re going to see buy now, pay later players focus on profitability,” Mr Sheth said recently.

“They have invented the interest free, pay-later economy. However I don’t think that much thought was given to the structural business models.

“So what occurred was many copycats created a buy now, pay later mousetrap that from a business model standpoint was exactly the same as the original players that really founded the industry.”

Meanwhile statistics from the Australian Finance Industry Association claim that about 6.3 million Australians are choosing to use BNPL, contributing some $18.4bn to Australia’s gross domestic product. BNPL only accounts for 0.7 per cent of all of Australia’s payment transactions, however.

“BNPL is low cost and low risk, the average BNPL transaction value is $136,” AFIA chief executive Diane Tate said.

“Consumers are able to save in interest and fee costs (relative to other financial products) and surcharge savings. Delaying payment allows for more effective budgeting.

“The finance sector is constantly evolving, looking for ways to deliver the best products and services while providing strong support for vulnerable Australians.”