Australia is known for many things, ranging from the magnificent Great Barrier Reef to the spectacular Sydney harbor and the ancient raintree forest in Queensland. The continent/country was romanticized a decade ago by Men at Work, where Down Under made a Vegemite sandwich sound like it came from Katz’s Deli in NY’s SoHo. (believe me, it does not taste like a Pastrami sandwich)
More importantly, Australia is known for its progressive banking system. After being established as a penal colony in 1788, the country progressed from its status as a British possession to its current constitutionalized Commonwealth position. The country is now the 13th most powerful economy globally, outpacing Spain, Mexico, Saudi Arabia, and 100 other countries.
From a banking perspective, the well-respected Reserve Bank of Australia (RBA) has the power over banking and currency in that country. RBA takes an active role in creating efficiencies and fostering competition, ranging from high-value real-time gross settlement to ATM withdrawals by consumers. This link provides an in-depth view.
RBA took a pivotal role in payments in 2000, when it introduced cost accounting to payments. The strategy was to challenge the level of interchange assessed to merchants using the payments network. The action even caught the eye of American regulators in the design of Dodd-Frank. Using cost accounting, the RBA drove down interchange from almost 2% to a standard rate of 0.21%, based on Visa’s current Australian rate tables. Ironically, in a study done after the change, it appeared that the downward pressure on interchange failed in its role to reduce prices. It seems that merchants benefitted, but consumers did not see a pricing decrease.
Australia is the global epicenter of Buy Now Pay Later lending. The process was not invented there. Professionally, I’d argue that the concept dates back to Household Finance (now Capital One) or GECC (now Synchrony); though modernists would more likely say that Klarna was the trigger point. Either way, Australia is the home of many top players, such as Afterpay, Openpay, Sezzle, Splitit, and Zip, the market capitalization of Australian BNPL companies exceeded $50 billion as of February 2021.
$50 billion in market cap is enough to make four Australian pilar banks twitch. Commonwealth Bank, the largest bank in the land, has a market cap of $68 billion. ANZ, based in Melbourne, is at $22.5 billion, while National Australian Bank values at $10.5 billion, and Westpac has a $20 billion market cap.
Today’s read talks about how AU banks address the lowly regulated BNPL industry, as Commonwealth’s CEO recently addressed the Australian House Economics Committee, calling for a level playing field. As the Australian Financial Review noted:
- Commonwealth Bank CEO Matt Comyn has launched a fiery attack on Afterpay and the rest of the buy now, pay later sector, arguing it is now too big to avoid regulation and users of the popular payment apps are riskier than non-users.
- With CBA estimating $10 billion is spent a year using buy now, pay later apps, Mr. Comyn told the house economics committee that policy settings require a “comprehensive review” and were currently skewed too far towards innovation, creating an unfair playing field.
It boils down to two factors, according to Comyn:
- He said it was time Afterpay and other large players were subjected to the comprehensive credit reporting regime, which would require them to report into credit bureaus, so the total amount of debt held with different buy now, pay later providers could be seen to allow banks to properly assess customer risk.
- He also said the consumer data right should be extended to payments providers. He urged the Reserve Bank of Australia to step in and prevent buy now and pay later players from stopping merchants passing on their costs to customers.
Most of all, the merchant cost savings appear overstated, and delinquencies are off the charts.
- That prohibition meant that those who do not use buy now, pay later are currently subsidising those who do use the services, which are about four times more expensive than accepting a credit card, he said.
- Because Afterpay does not report customer positions into credit agencies (nor does it use credit files to assess customer risk), Mr. Comyn said it was hard for other lenders to see the extent of buy now, pay later debt.
- But CBA’s analysis suggests that users of the popular payment apps are riskier. He said hardship rates are double that of non-BNPL users, and buy now, pay later users have higher arrear rates on credit facilities.
- “We see roughly buy now, pay later users having twice as much credit on their credit facilities, and typically on their credit cards [and] they have more credit products,” he said. “That is what we can see. But a number of buy now, pay later providers don’t contribute to ‘comprehensive credit reporting.
BNPL lending has disrupted several consumer markets with low credit standards and a “cool” positioning.
- CBA and Afterpay have been boxing for many months, as Afterpay tries to lure young customers and attacks banks’ once-profitable credit card books. Afterpay’s entry into banking has heightened the drama through a deal with Westpac, which forced CBA to launch its own BNPL product in March, undercutting Afterpay on merchant fees in an attempt to retain customers seeking to pay instalments.
Our view is that innovation is a good thing. Mercator sees BNPL shifting from where the transaction originates, from an empowered consumer to a finance-capable merchant. Few BNPL lenders have yet to realize a profit, though they are the darlings of Wall Street, High Street, Yonge Street, and George Street.
But the big deal is that in 3 years, the surviving companies will not be the one-trick ponies who offer POS financing. The winners will be those lenders who broaden their scope and provide a full range of financial service products. Call them banks or non-banks, but they will be the winners. For more insights, watch Mercator Advisory Group’s recorded webinar.
Overview Provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
