Antares Equities Ex-20 SMA Model Portfolio Investment Manager John Guadagnuolo discusses the investment case for payment solution business Afterpay Touch (ASX:APT).
Jessica Amir: Hello, Jessica Amir for the Finance News Network, with Antares Equities' Ex-20 SMA Model Portfolio Investment Manager, John Guadagnuolo. John, thanks for having us.
John Guadagnuolo: Thank you, Jessica.
Jessica Amir: So first up, we've seen the massive explosion of online retail. What opportunity is there for mum and dad investors to really take advantage of this massive trend?
John Guadagnuolo: Well, obviously there are online retailers, but what we have found interesting is that that space is increasingly understood and the growth rates are understood. What's interesting, we think, is the change in preferences around payment systems for people who use online retail, and we think there are some distinct trends, and we think that there are some real growth opportunities in that space.
Jessica Amir: You previously spoke about a company called Afterpay (ASX:APT), maybe you can tell us what they actually do, and how it works.
John Guadagnuolo: So Afterpay Touch Group (ASX: APT) is a company that offers consumers a way of Laybuying effectively, goods that they purchase, historically online. It evolved as a transaction tool for people seeking to purchase goods online. These days, that's evolved further. The company's developed an app for your phone, and so you can still apply for the same types of services that they offer.
The way that it works is that you go into a shop or online and you purchase whatever it is that you're looking for. Let's say it costs $200. When you get to the checkout, be it in the physical store, or be it online, you then engage Afterpay. You select Afterpay as your payment system, and therefore you have to complete the application for that particular purchase. If you haven't been approved before, there'll be a series of questions that set you up. If you have been approved before, then you take a different path.
What happens then, if you are approved, and bear in mind that 30 per cent of applications are not approved. There's a bit of technology involved about who gets screened in and who gets screened out. If you are approved, then Afterpay will advance $200 to the retailer on your behalf and you will therefore have to make a series of transactions with Afterpay, of equal installment. In the $200 case, it'll be four installments of $50 each, and they'll be staged fortnightly.
Afterpay is paid, you pay nothing for this. Afterpay receives their money as a merchant fee from the retailer. In the same way that today, if you purchase with a American Express or Visa, the retailer pays a merchant fee away to those payment providers, Afterpay receive a merchant fee. Theirs is a little bit higher than a traditional card, but that's because you, as the consumer, are not paying any interest on your card and you're not paying for a transaction cost.
With Afterpay, you need to have each transaction assessed, and if at any point in time you fail to comply with what you've agreed to in a previous transaction with Afterpay and have not put your account back into order, you can't use the system anymore. So there's no ongoing rolling line of credit. That also makes it quite different to other emerging forms of payment, like ZipMoney (ASX:Z1P), who do offer a line of credit in that regard.
Jessica Amir: What advantages does it really offer the consumer and the merchant, above a credit card or a debit card?
John Guadagnuolo: It helps the consumer budget. As a consumer also, it allows you to purchase something perhaps a little bit outside the normal size of things that you buy. Most recently, Jetstar's been added into the system, so if you wanted to go traveling or what have you, you don't have to have that money right there and then, and you don't have to have a credit card.
Afterpay is particularly popular with the millennial generation. The average age of the consumer of Afterpay is 32, and they're predominantly female. This is interesting information because we're seeing a different pattern of purchasing and payments from a whole new generation of people. What's also interesting is that they are very loyal to their payment system. There's research around that suggests that millennial generation prefers the payment system and goes looking for that payment system when they decide what they want to buy. What's interesting is that behind Google, Afterpay is the second highest, or second most popular search engine for apparel in Australia.
For the merchant, the merchant fee is higher. It's 4 per cent, whereas a normal credit card, that's the average, some merchants will pay more and some will pay less, the average credit card merchant fee is just over the 1 per cent mark, so clearly, this is a higher fee.
It also provides a higher basket size, retailers have found. People who purchase things on Afterpay generally have a higher transaction value. And the final thing that it does for merchants is that it gives them access to the millennial generation. It gives them that sale that they wouldn't otherwise have got.
Jessica Amir: What are the risks and opportunities?
John Guadagnuolo: The average transaction size is a bit over $100. You're not dealing with large transactions. There's a whole lot of small transactions, so there's a huge level of diversification. We also know that the people who use Afterpay have on average, very low levels of debt. This company's only four years old and it already has 1.8 million customers and 14,000 merchants. We see that as a real opportunity. They're also going to the United States. There are 13 times the number of millennials in the United States.
However, like most companies that go overseas, there are a lot of risks involved in that, and what works in Australia doesn't necessarily work in another country. So large market size opportunity in the United States, but obviously different preferences at a micro level that can't always be seen when you make a decision, back in a boardroom in Melbourne or Sydney. So we are aware of that, but we're comforted by the fact that they have a joint venture partner there, who is a well-known venture capital firm, and will hopefully shepherd them through some of those more micro risks.
Jessica Amir: Wonderful. John Guadagnuolo, thank you so much for the update.
John Guadagnuolo: Thanks, Jess.