Afterpay Touch story could have regulatory epilogue

When I heard Afterpay Touch founder Nick Molnar speaking, I asked myself whether this millennial was the next Zuckerberg.

They say you don’t invest based on emotion, not successfully at any rate, but in my experience this is far from true, even for the hardest of professionals.

Why else would apocryphal stories emerge about the founding of tech giants Apple, Facebook, Google and Twitter? Some people probably still think Jesse Eisenberg (the actor in The Social Network movie) is Mark Zuckerberg (you know him).

When I heard the Afterpay Touch founder Nick Molnar speaking, I did ask myself whether this millennial was the next Zuckerberg. Back then the group’s market cap was $450 million; Today it is worth $1.3 billion. Molnar owns 11.64 per cent of Afterpay, so he’s becoming more Zuckerberg by the minute.

Now that Afterpay — a point-of-sale finance provider — is trading on a forward PE of 60 times, investors will want to believe that he’s Zuckerberg. But taking profits has meant crystallising gains from a momentum story. This company has never been through an entire credit cycle and when credit gets squeezed, watch out shareholders! The group’s delinquency rate of 1.6 per cent is unsustainable.

Plus, if it gets too successful, there’s nothing to stop the gorillas of the world like Visa and Mastercard introducing Afterpay-type products.

It’s Molnar’s backstory that first got me in. As a teenager he worked for his parents’ jewellery store. At Sydney University, which he attended on a rugby scholarship, he started selling excess stock from the shop’s suppliers online through eBay. He soon became the biggest Australian jewellery retailer on the site, moving about $1.6m of stock. He moved on to create his own site, Ice.com, and would often be packing jewellery in the early hours. This caused his then neighbour, the then GPG banker Anthony Eisen, to ask what he was up to.

Eisen became a co-founder in Molnar’s next venture, Afterpay, and the group was last year merged with Eisen’s payment software provider Touchcorp to create Afterpay Touch.

If you didn’t come across Afterpay when you were shopping for that special gift on Valentine’s Day last month, you were probably born before 1980, which means you are not a millennial aged between 25 and 37. Apparently these people crave instant gratification, but have a huge fear of debt, having seen the carnage of the financial crisis.

WEB Business Afterpay share price

Afterpay allows a person to receive an item upon purchase, pay off 25 per cent on the spot and then make three more payments, typically over 60 days.

The company makes money by charging merchants commission and customers late fees. While the commissions are higher than what merchants pay for credit card transactions, merchants see value in higher turnover by accessing new customers. Merchants also have no credit risk as this risk rests with Afterpay.

The key positives the company’s backers bring up are the low average purchase price of $150 and the average payment ­period of 28 days. This allows the company to “recycle” capital at least 12 times a year. When you combine its equity and its $350m loan facility with National Australia Bank, Afterpay could fin­ance sales of $4bn, double its current amount.

Technically, Afterpay and its rival Zip Money do not provide credit, as they do not charge interest, so consumer credit laws do not apply to them. But there are growing risks of increasing regulation as the sector is scrutinised by the corporate watchdog, ASIC.

There are looming changes to the National Consumer Credit Protection Act for payday loans that will come into effect in April and that limit the repayments of these loans to 10 per cent of a person’s net income; and caps the cost of consumer leases to the base price plus 4 per cent per month for a maximum of 48 months. These changes are a key reason Money 3 is exiting payday lending. Regulatory focus is becoming intense. Recently Cash Converters had an enforceable undertaking from ASIC to refund $10.8m advanced to 55,000 borrowers considered vulnerable.

The end result on new players like Afterpay and Zip could see the levels of commissions and late fees regulated along with higher disclosure and compliance requirements.

Back to the financials and what we know is that 25 per cent of $50m in revenues for the six months to December 31 came from late fees. It’s this figure we’ll be keeping an eye on because it could be the canary in the coalmine as an indicator of the quality of the underlying book.

Richard Hemming (r.hemming@ undertheradarreport.com.au) is an independent analyst who edits www.undertheradarreport.com.au