Local heroes Zip, Afterpay conquer the BNPL world

The valuation of Australia’s buy now, pay later stocks may seem ludicrous, but they are still just getting started.

CEO of Afterpay Nick Molnar. Picture: John Feder for The Australian.

The valuation of Australia’s buy now, pay later stocks may seem ludicrous, but when compared to the world’s tech giants, and even local software success stories such as Atlassian and Canva, there’s reason to believe Afterpay co-founders Anthony Eisen and Nick Molnar when they declare they’re still just getting started.

It seems unbelievable that a tech outfit just a few years old may more valuable than established Australian companies such as Coles, Qantas and potentially in a few months even Telstra.

But to shrug off Zip or Afterpay because of their eye-watering numbers would be to shrug off two companies that are turning Australia into a world leader in their sector.

Afterpay is fast becoming a household name in the same way Google, Netflix or Skype did, and that’s in the streets of San Francisco and New York, not just Sydney.

Zip and Afterpay often are ridiculed for their losses. The fact they’re not making profits is by design. The companies are still in growth phase and Afterpay has bold ambitions to lead its sector globally. These companies require colossal amounts of capital to achieve their ambitions. For now, investors have shown they are happy to keep supporting that.

Amazon, the world’s third biggest corporation, to this day makes intentionally tiny profits, instead pouring its revenue back into the company. Salesforce has never made a profit across its entire 20-plus year history. That company is worth nearly $US250bn ($344.6bn) and spends its money swallowing up rivals and adjacent businesses, just as Zip is about to acquire QuadPay, and as Afterpay is picking up an Indonesian BNPL provider.

Another thing that makes BNPL providers stand apart from more traditional companies is the viral nature of their businesses. Afterpay doesn’t have to work to sell its product; its customers and merchants do the selling for it.

Like the best TikTok videos, Afterpay and Zip products go viral. Customers share them among their friends, merchants and partners such as eBay promote them, and there’s far less of a reliance on Afterpay or Zip to work for each sale. These companies are scaling globally and their impressive growth numbers on Thursday articulate just how successfully they’re doing it.

If there’s a reason for caution, it’s potential regulation. A Senate inquiry has called for tighter controls on BNPL products and the industry itself is a promoting a code of conduct. That scrutiny is warranted, and is important if these companies are to be treated like the mature finance providers they’re fast becoming. Still, users of BNPL products pay less interest than they would with a credit card, and examples of customers spiralling into pits of debt are the rare exception, not the norm. The conversation is a valid one, but to charge these companies with not taking their responsibilities seriously would be wrong.

Afterpay and Zip are, at their core, tech companies and are growing in valuation like Microsoft and Apple before them. These homegrown success stories are following the classic software playbook of aiming for market dominance through making big bets. Investors are on board for the ride, and they have every reason to be excited.