News the Commonwealth Bank of Australia will compete with Afterpay shows just how much of a threat fintechs has become to the major banks.
CBA, owner of ASB, said last week it would launch buy now, pay later services later this year in a bid to capture more of the market for this emerging pay method.
The service will compete with providers such as Zip, Latitude, Brighte and, in particular, Afterpay, which all allow consumers to buy products and then pay for them in instalments without having to pay any interest.
CBA will allow the bank's customers to split payments between A$100 and A$1000 into four instalments for online or physical transactions.
Afterpay has been a shining star of Australia's share market in the past couple of years. It floated at A$1 per share in 2016 and climbed as high as A$158 earlier this year. CBA's move could clip its wings.
The buy now, pay later sector is actually only a small sector of the Australian payments market. Shoppers put about A$9 billion worth of goods on the Afterpay tab last year, a tiny fraction of the total retail payments of A$1.3 trillion.
While there is an element of CBA wanting to protect its existing credit card business, its motivation for entering the market is broader.
In particular, the bank is concerned about Afterpay's plans to extend its offer to other banking services, such as everyday transaction accounts. It will launch an Afterpay Money app in the next year or so and offer its own banking and credit products, powered by the Westpac transaction services.
This is what really concerns CBA. It doesn't want millennial customers to start using Afterpay instead of a traditional bank and losing a customer who, in time, will get a credit card, a home loan or an investment loan – all profitable products for banks.
Thus, it wants to keep customers in its own ecosystem rather than see them leeched over time to an upstart fintech.
CBA has promised to include credit checks on customers as part of its BNPL offering. This is a very smart move that will could put pressure on Afterpay.
BNPL providers argue that they aren't providing credit because, technically, they don't charge interest. Instead, they charge merchants a fee for their services and require the consumer to pay back only the purchase price.
It means Afterpay doesn't have to do credit checks on its customers or adhere to responsible lending obligations. But regulators are concerned this may be inducing consumers to incur risky debts.
With CBA's commitment to conduct credit checks on its BNPL customers, comes pressure on regulators to force other BNPL providers to follow suit. This would be bad news for Afterpay and others because it would make the frictionless experience of signing up for an account more complicated for the consumer and more expensive for Afterpay.
Existing CBA customers might just decide to stick with the big bank, which already has all their details and credit history rather than go through the hassle of switching to a separate service like Afterpay.
The banks may also be a more appealing proposition to retailers too. Afterpay charges retailers between 4 and 6 per cent of the purchase price of the goods they sell. CBA plans to charge them the same as it charges for credit cards – about 1.4 per cent. This won't make any difference to consumers, as they don't pay either fees, but could make it more attractive for retailers to push CBA's product over Afterpay's.
Additionally, Afterpay currently forbids retailers from recouping the commission by adding a surcharge to the price consumers pay. But the Reserve Bank of Australia is looking to change this, which would make CBA's offering a more attractive proposition.
All of Afterpay's revenue comes from charging merchant fees, so if competitive pressures force them to cut fees their currently modest profits in Australia will be severely eroded.
None of this is to say that CBA will have an easy time in wrestling back customers from the BNPL providers, as it is late to the party and has already ceded significant market share.
Afterpay has 3.4 million active customers in Australia and New Zealand, who make an average of 15 purchases a year on the platform. It has captured young customers who are wary of racking up credit card bills and like engaging with an easy-to-use app for their purchases.
And will CBA be able to wrest back any of these customers? Many are wary of the big banks and like dealing with a small and independent start-up – even if its share market capitalisation of A$31 billion is bigger than either Westfield shopping centre owner Scentre Group and Xero.
Regardless of how well CBA's BNPL offering performs and how it affects Afterpay, CBA's move is an acknowledgement that the fintechs are now a major threat to the banks' business models and profits.