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CBA’s BNPL: threat to Afterpay or just another credit card?

Lex Hall  |  17 Mar 2021Text size  Decrease  Increase  |  
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If it charges fees like a credit card and requires a credit check like a credit card, then it probably is a credit card.

That pretty much sums up how Morningstar equity analyst Nathan Zaia sees the Commonwealth Bank’s (ASX: CBA) move to offer its own buy now, pay later service to customers from mid-year in a move to challenge BNPL pioneer Afterpay (ASX: APT).

Under the CBA’s new service, customers can use their debit and credit cards to access the service for purchases between $100 and $1000 and pay in four fortnightly instalments.

'Sounds like a credit card to me'

Zaia said the move was a surprise given the bank’s sizeable investment in Swedish BNPL provider Klarna, which is also available to non-CBA customers.

“Commonwealth Bank’s BNPL offering came as a bit of a surprise to us,” Zaia said. “We thought its investment and agreement with Klarna, plus the neo-interest free card, would be the extent of the bank’s strategy for now.

“Look, CBA BNPL: is it different to a credit card? Not really. It requires a credit check, charges merchants a credit card use fee, is issued by a bank, is available in a digital wallet, and can be used anywhere MasterCard is accepted. Sounds like a credit card to me.

“So the key difference, you can split payments for purchases. Will that be enough to stop growth in non-bank BNPL providers? Probably not. 

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“Customers will only be eligible for CBA BNPL where they can show evidence of a regular salary deposited in a bank account to cover repayments. And of course pass a credit check. Its BNPL peers in most cases are not putting customers through such a robust approval process.

“I think the bottom line is, even if all the major banks had a ‘BNPL’ credit offering, non-bank providers such as Afterpay will still have a place in the market and have an edge in terms of customer onboarding.”

Buy now, pay later services have proven popular with young people as they do not charge interest but instead levy late fees for missed payments.

Yet providers such as Afterpay make most of their money from the fees charged to businesses in each sale.

CBA said providers charged about 4 per cent, which cost businesses hundreds of millions of dollars each year.

Businesses would not pay an additional fee using its service.

Individual CBA customers must apply to use the service and will be assessed before approval.

Shares in wide-moat CBA were lower by 0.50 per cent to $86.74 at 3.30pm Sydney time.

a detail of escalators in a shopping mall

CBA says providers charged about 4 per cent, which cost businesses hundreds of millions of dollars each year. Businesses would not pay an additional fee using its service. Individual CBA customers must apply to use the service and will be assessed before approval

More pressure on BNPL players?

As for the effect on Afterpay, Morningstar analyst Shaun Ler said CBA’s latest foray was an example of tightening competition, and that Afterpay would face increasing pressure to reinvest.

"Today's development is consistent with our views that competition will render existing high merchant margins unsustainable,” Ler said.

“While we don't see this putting pure-play BNPL firms out of business, it speaks to the increasing importance to continuously reinvest and add to their product, as a plain BNPL offering is very much replicable.

“We believe compressing merchant margins and the need for ongoing investment spend is something the market has been oblivious to, which explains today's significant valuations for BNPL firms, in general."

Afterpay was up 1.16 per cent in late trade at $113. It is overvalued by about 180 per cent, according to Ler’s fair value estimate of $40.

Smaller rival Zip Co (ASX: Z1P) was down 1.83 per cent at $8.59—a 65 per cent premium to Ler’s fair value estimate of $5.30.

Morningstar's Global Best Ideas list is out now. Morningstar Premium subscribers can view the list here.

See also Morningstar Guide to International Investing.

is senior editor for Morningstar Australia

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