Good afternoon,

Apologies for the tardy note, I was travelling back from Perth yesterday. ASX200 had a flat week, down 0.15% (Tuesday to Tuesday), though it is up 4% over the past 4 weeks. Big news today will be the RBA announcement this afternoon, do they cut again? Probably.

Looking at the sectors, large caps continue to outperform small, internationally exposed over local and growth over value.


Visa, Afterpay & Zip
As you could probably guess, I’ve been inundated with calls about Visa supposed move into “buy now, pay later”.

OK so Visa Next (which is what their platform is called) won’t have “merchant agreements” like Zip or Afterpay, it will exist as a platform that customers can use to manage their payments and provide additional flexibility over and above a credit card. Essentially, its a digital wallet that’s already hooked up to the banks. It’s Visa, who traditionally have only had relationships with banks, enabling banks to offer a greater suite of flexible payment terms, including, part-payments. Yes, the merchant pays the interchange fee, but that’s to facilitate a payment to the bank, not for credit to the customer.

Differentiate that from Zip or Afterpay who have relationships with businesses and charge the merchant so they can offer the customer credit for free.

Rather than all the other commentators waxing on about why or why this is/isn’t a threat lets just take a practical approach from the perspective of a customer/consumer who we will assume is making a purchase online.

Currently, they select from a range of payment options at the checkout – Zip, Afterpay, Visa, Mastercard or Paypal. Merchants want sales so most merchants want to offer as many options to pay as possible.

Roll back 4 years when there is only one “buy now, pay later” option, and the customer wants to buy now, pay later, they sign up to the only service offered by that merchant. This is why Zip and Afterpay have been able to capture market share – free customer acquisition (CAC is negative) whilst clipping a merchant fee because there was no alternative.

If Visa becomes another “option” for customers at checkout, they will steal as much market share as their product deserves. They already have 100% coverage of all the customers (which bank doesn’t offer Visa?) Given I haven’t actually seen the product/its still in testing phase, it’s hard judge – but like most categories, brand recognition, technology & a lower cost of capital/more money win. Visa is better in every single one of these categories by a country mile.

Some say its unlikely the banks (via Visa) will be able to charge merchants, or that split payments would eat into the banks interest revenue… look, I kind of agree, but I’m not so sure. You need to understand this is not a startup business, this is a company that has a US$ market cap of $380bn. In 2019, I think anything is possible and we’ve seen companies like Adobe (ADBE) take huge revenue hits to ‘reinvent’ themselves with smaller, reoccuring, higher quality revenue. I think assuming at this point is dangerous.

The counter-argument is Visa Next isn’t actually a competitor – you can’t compare a free product to a paid service and the banks and the customers aren’t interested in paying. I’d be careful with this argument too, we are willing to pay for lots of things provided they are good, and I’d bet, that this sort of product will get good really quickly – open API, 2 motivated, cashed up competitors (Mastercard will follow quickly).

In short, I don’t think the growth of Zip or Afterpay will slow near term. I think they continue to sign merchants and win customers whilst their product is expanding across the consumer universe. In terms of share price multiple or valuation, I think this ‘competition’ issue won’t go away and you won’t see such exuberance again (doesn’t mean share prices can’t make new highs)

I think Afterpay has a big problem with AUSTRAC because blind freddy can see they’ve breached for at least 18 months and I think once you look under the hood there, you’ll see a lot of skeletons – a lack of governance, poor customer checking and assessment, shotty practices… It reeks of a fast growing, sales focused business without adequate system.

Zip probably will probably need to get there skates on an roll out their digital wallet offering (Pocketbook) or abandon it. I don’t see it competing with Visa successfully… better to just integrate and focus on ensuring Zip customers can use the Visa digital wallet/its benefits and features.

All players in this space will have to aggressively add features, benefits and functionality to retain customers. I’d be watching out for a loyalty program link up – frequent flyer points style…. this could be the next iteration.

All in all though, its a race to the bottom with high volume merchants with access to lots of customers holding all the bargaining chips. I like that Zip has extra capabilty beyond splitting payments of relatively small purchases – the old Zip Money business is actually the jewel in the crown in my view, coupled with their credit decision engine which is the best in the business. I think with those kind of assets, a credit license and a AAA+ management team, I think Zip is also a much more likely acquisition target than Afterpay/any other “players” (and I use that term loosely!) in the sector.


Movers & Shakers

Pact got upgraded by Macquarie and Goldman after refinancing $50m worth of debt on their troubled balance sheet. Non-bank financials had a good week (probably on market strength, falling rates) whilst Corporate Travel (CTD) caught a bid… I smell a takeover/merger… something is going to happen in travel (Webjet, Flight Centre, CTD, HLO etc.)

Bavura missed out on GBST, whilst HUB and APT got whacked (shorts).


Have a good week,
LL