How long can Afterpay defy the critics?

As Afterpay investors head to the AGM, there’s pressure on its founders to provide some answers.

Afterpay is now seen is some quarters as a proxy for the overheated technology market. Picture: AAP

Afterpay shareholders will walk into the buy-now-pay-later (BNPL) darling’s annual general meeting on Wednesday with plenty to smile about, but also a few questions.

The fintech might have changed the face of how consumers manage their discretionary spending, but with competitors breathing down its neck, there are doubts about how long the fintech can keep defying the critics.

Founded in 2014, Afterpay went public in May 2016, raising $25m in a blockbuster IPO that valued the company at $1.6bn. Hitting the market at $1 a share, Afterpay has since seen its stock hit a peak of $37.42 a share and its valuation soar to a mammoth $7.3bn.

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The meteoric rise is testament to how effectively Afterpay has tapped into credit card wary millennial shoppers and retailers desperate to move their wares. However, Afterpay’s success has also spawned a legion of competitors all spruiking the benefits of their technology.

Meanwhile, the inner workings of Afterpay, a mystery to retail investors and consumers until recently, is also coming into focus with the scrutiny making investors jittery.

Cyan Investment Management’s recent decision to jump off the Afterpay bandwagon is a good example of the current market sentiment.

As an early investor in Afterpay, Cyan made a killing through its exit last month at $33.50, with director Dean Fergie pointing out that while Afterpay’s strategy can’t be faulted, its product simply isn’t that unique.

“Afterpay is a very good company but we don’t think we are going to make a multiple in this stock from here,” he told clients in October.

“It’s been a key stock for us, it might have been around 5 per cent of the portfolio at one stage, and I still believe they are showing a strong business performance, but the valuations are extended now in this area.

With the all-important Christmas shopping season looming closer Afterpay is also facing regulatory hurdles.

“The consumer is now being flooded with alternatives in the buy-now-pay-later space, especially in Australia,” Mr Fergie added.

With the all-important Christmas shopping season looming closer Afterpay is also facing regulatory hurdles.

In June, Afterpay was ordered by financial intelligence agency Austrac to appoint an external auditor, at its expense, to review its anti-money laundering practices. It is also facing regulation in the US where it already has more than two million customers.

To help combat the latter threat in particular, Afterpay last month tapped former US treasury secretary and adviser to US president Barack Obama Larry Summers to join its advisory board.

Meanwhile, the Reserve Bank of Australia has raised concerns about the high fees charged by BNPL providers and the “no surcharge” policy they impose on merchants.

The company’s regulatory concerns have had a material impact on its share price, with UBS downgrading its broker rating to “sell” and warning that regulatory changes could see the likes of Afterpay labelled “credit providers”.

US tech analyst Scott Galloway also recently took aim at Afterpay, warning that the company remained exposed to competition.

According to Professor Galloway, BNPL disrupters have a distinct lack of economic “moats” that allow them to keep competitors at bay for an extended period of time, adding: “These (BNPL) disrupters have puddles rather than moats that credit card companies can likely breach and step over.”

Afterpay’s Anthony Eisen. Picture: Natalie Grono

So far, Afterpay has taken it all in its stride. Speaking at a fintech conference last month, company co-founder and CEO Anthony Eisen dismissed the concerns that BNPL providers were more risky than credit providers. He said millennials were just as savvy as any other consumer demographic.

“Customers want to be treated well. They want to engage in a trust relationship where your model is aligned with them, not against them … They’ve made a choice about trust, about simplicity,” Mr Eisen said.

“[ASIC] are progressively understanding our model and I think they’re progressively understanding our consumer as well … Regulation is a very good thing, we’re advocates for it.”

Afterpay co-founder Nick Molnar. Picture: David Geraghty

He added that Afterpay goes above and beyond the questionable behaviours often exhibited by credit card companies and banks.

“Do you ever see a traditional credit company do things like cut people off as soon as they miss a single payment? Do you ever see a traditional finance company that doesn’t let people kick the can down the road and keep paying fees?”

“Regulation has to be about doing the right thing. Full stop. If you don’t do the right thing either the customer’s not going to use you or some other power in the economy is going to stop you.”

Mr Eisen and fellow co-founder Nick Molnar have done remarkably well in using technology to give the old-fashioned lay-by a digital makeover, however, Afterpay is now seen is some quarters as a proxy for the overheated technology market.

It’s a sentiment that Afterpay’s management is increasingly becoming uncomfortable with and the AGM will offer a chance for them to clear the air and also perhaps vent some frustration.