Daily Consumer #4 - Buy Now Pay Later (BNPL) is Killing the Credit Card
Plus more same-day delivery companies keep raising money and activewear brands are being acquired.
My Work
(But Not Actually My Work). Re-sharing Ben Thompson’s Excellent Post That Unpacks the Rationale Behind Square Acquiring Afterpay
The announcement that Square will acquire Afterpay dominated ecommerce headlines this week. The best commentary on the acquisition that I read was from Ben Thompson, so I thought I’d share his write-up. Link to his original post here.
One of the interesting things about credit cards is that it overstates the importance of credit: most of the money in the credit card ecosystem is made from fees charged to merchants; many consumers get the benefit of a short-term loan for free. Of course there is always the option to carry a balance for longer, and that is where the money-making aspect of credit comes in, with high interest rates that punish those who only ever pay the minimum amount due. Still, that’s a lot different than something like a personal loan, where all of the money-to-be-made is in the interest.
Buy-now-pay-later (BNPL) companies are on the opposite side of the spectrum from personal loans: with this model merchants bear all of the costs, paying around 6% of a transaction price (plus $0.30), while customers don’t pay anything as long as they make regular payments (four bi-weekly installments in the case of Afterpay; all of the companies have slightly different approaches, but I’m going to focus on Afterpay). If they miss payments they are charged late fees, up to 25% of the overall purchase price, and they can make payments with credit cards (the fees of which are then paid by Afterpay). Most don’t use credit cards, though: in the case of Afterpay around 85% of customers make payments via their debit cards.
If all of this sounds very strange to you, well, that’s because you’re old like me. BNPL companies are particularly popular amongst younger millenial and Generation Z consumers who came of age amidst the Great Recession and have a generally dubious view of credit; having dedicated payments for individual purchases, as opposed to one big slush pot, is a feature, not a bug, and the six week payment period, conveniently aligned to a direct deposit schedule, is more generous than a credit card’s monthly cycle (it’s also technically not a loan in most U.S. states, which means less regulatory oversight).
This popularity, meanwhile, is why merchants are on board with those higher fees (which net out to about 3%, since the merchant no longer has to pay credit card fees); the extra sales make up for it, and those sales multiplied during the pandemic. The Wall Street Journal reported at the end of 2020 that the Australian-based Afterpay’s U.S. customer base had reached 13 million and made purchases worth $770 million, triple 2019’s total.
This increase in customer usage feeds back into more sales for merchants in a classic network effect: the more merchants that offer BNPL, the more consumers there are who become aware of and interested in the offering; the more consumers who are familiar with the offering, the more likely they are to complete a transaction with nothing more than a username and password.
Network Effects
This network effect certainly sounds a lot like that of credit cards, which I illustrated in Visa, Plaid, Networks, and Jobs:
Credit cards are perhaps the best possible example of the power of a multi-sided network; Visa sits in the middle of banks, consumers, and merchants:
Everyone benefits from each other…Visa and Mastercard, the other major credit card network, sit in the middle of each of these relationships, across billions of customers, millions of merchants, and thousands of banks, collecting a network fee — on top of the interchange fee paid to banks — on every purchase (about 0.05%).
BNPL companies, though, don’t have quite as strong of a network effect, because they don’t have direct relationships with banks; they are creating two-sided networks, not three-sided ones, that look something like this:
This is where Square is an intriguing match. The company’s original line-of-business is focused on Square Sellers; this is a product business at its core, with minimal network effects.
Still, it’s a great product, which is why Square has millions of merchants able to accept card-based payments from anywhere.
Square’s second product, the Cash App, is a great product in its own right; it’s very easy-to-use, particularly if you want to buy Bitcoin, and it also has network effects: you can use the Cash App to send money to your friends.
There is also a tiny bit of a network effect with the Seller side of Square’s business, as you can pay Square merchants with the balance in your Cash App. That’s pretty great for Square, since they don’t have to pay off the credit card companies, but it’s a very small sliver of overall volume. The Cash App and Square Seller business are really two separate entities under one roof. At least they were a week ago.
What is so intriguing about the Afterpay acquisition by Square specifically is the potential for 1+1+1 to equal far more than 3. Start with the obvious synergies: Square’s merchant base will automatically have access to Afterpay, and and Afterpay’s merchant base will have access to Square (helping Square expand in Australia in particular). What is even more compelling, though, are the transformative effect this acquisition could have on Square’s network effects.
First, recall that Afterpay has created a network effect between consumers and merchants; Square is going to insert the Cash App directly into this relationship. The company even created mock-ups in the slide presentation explaining the deal:
This will not only drive adoption of the Cash App by consumers who wish to BNPL, it also increases the frequency with which consumers might use the Cash App for purchases in general. This deepens the moat for both Afterpay and the Cash App and improves Square’s margins.
Second, the most obvious way to make your Afterpay payments will be with the Cash App, not your debit or credit card. Payments made from your Cash App balance will be very high margin for Square (which it can potentially pass on to merchants), and the obvious fallback will be the bank account already linked to the Cash App account, which should further reduce Afterpay’s credit card fee exposure. The end result is a multi-part network that is not quite as impentrable as Visa’s, but it’s much more compelling than what Square had previously:
This isn’t some grand insight by me, to be clear; this was the cover slide for Square’s investor presentation:
Square had a consumer business and a merchant business and it bought a network effect between them.
News
Advertising. Youtube’s head of product discusses their investment in Shorts, which is essentially their take at TikTok. Youtube was always about UGC content and a powerful personalization engine and was admittedly the source of inspiration for Bytedance’s founder to create TikTok. But Youtube incentivized long-form content - the longer the video, the more ad revenue you could generate. TikTok went the other direction and encouraged short-form. Now Youtube is trying to catch up.
Advertising. While Youtube goes after TikTok, TikTok begins to go after Instagram and Snapchat with a beta test of Stories.
Advertising. Publicis Groupe will be TikTok’s first agency partner for ecommerce. Will provide clients exclusive access to new shopping features on TikTok as well as additional research from the platform.
Advertising. Victoria Tran, the community director at Among Us (the mobile game that became popular during covid), shares her playbook on how to build an active following on TikTok. Took Among Us from 0 -> 2.1M followers.
Apple Ecommerce. Apple’s online store has a new design on web. Includes a carousel of product categories and quick links for shopping with specialists or locating nearby Apple stores. See it here.
AR Shopping. Vogue explores AR shopping and how it can cross the chasm.
BNPL. Petco is partnering with Klarna to offer the company’s “pay in 4” solution across Petco's nearly 1.5K stores nationwide. Claim that “the average order values of Klarna’s brand partners increase by 20-80% and conversions can climb by 20% or more.”
Cloud Kitchens. Kroger partners with Kitchen United to build cloud kitchens in its stores. Will allow customers to order freshly prepared, on-demand restaurant food for pickup while they shop for groceries or for delivery.
Ecommerce Demand. The economy is re-opening. Is commerce shifting back offline? “UPS saw a 2.9% decline in domestic package volume during Q2, with ground deliveries, comprising chiefly electronic commerce deliveries, falling 4%, compared to 2020.”
Fashion. Consumer laziness is sparking new fashion trends. In this case, ear cuffs are taking off, which are basically earrings that don’t require piercings. “During the pandemic, you weren't spending on lots of things, like travel or eating out. But you could spend on jewelry.”
Food and Beverage. The FDA is noticing more people buy food online and is exploring the challenges of regulating safety. Will host a 3-day virtual event in October on the topic.
Grocery Delivery. New Instacart Fidji Simo is wasting no time in hiring former Facebook colleagues. FB ad chief Carolyn Everson joins Instacart to presumably ramp the advertising business which is supposedly the true lever grow profitability for the company.
Live Shopping. Bloomberg hosts Dan Dan Li, the founder and CEO of Popshop, on video to discuss the live shopping trend.
Live Shopping. BusinessInsider profiles a seller who is succeeding in selling collectibles via live streaming app WhatNot. “In one night hosting live-streamed auctions, Rivera can make between $1,000 to $4,000 depending on the pieces, selling an average of 94 pops (individual products) a show. According to documents reviewed by Insider, since his first auction in December, sales have totaled $40,648.”
Logistics. UPS expects package volume to exceed 5M per day during peak season in 2021. To meet demand, UPS is adding capacity including 2M square feet of additional sorting space and more cargo aircraft.
Loyalty. Tanay Jaipuria shares some thoughtful writing around how to turn customers into owners, literally. The next trend in loyalty?
Omnichannel. Alibaba is scaling up its Costco-inspired store network called Store X. Is a membership-based retail experience that allows consumers to buy at wholesale prices. One notable difference? Consumers add products to their cart while browsing and can elect to have everything delivered to their home.
Payments. PayPal is transforming its product into a “super app” by adding 25 new capabilities. New features will include high-yield savings, budgeting tools, improved bill pay, early access to direct deposit funds, BNPL functionality, and messaging functionality outside of peer-to-peer payments. It also said it would integrate commerce thanks to its acquisition of Honey.
Privacy. The Luxembourg National Commission for Data Protection fines Amazon $887M for supposed GDPR breaches. Amazon claims no wrongdoing and plans to appeal.
Resale. Poshmark expands into India which is becoming a battleground for social commerce.
Restaurants. Restaurant Brands, owner of Burger King, Tim Hortons, and Popeye’s, reported earnings and disclosed that digital sales grew 60% YoY. Restaurants are quickly becoming ecommerce businesses.
RFID Tags. Prada wants to add microchips to all of their products. Will allow products to be traceable and for a digital link to be created to a physical product. Many potential implications on resale as well as ecommerce originating from real-world discovery.
Same Day Delivery. Uber Eats releases a financial comparison to Doordash. (The Information subscription needed).
Same Day Delivery. Amazon expands same-day Prime delivery to 6 more cities - Baltimore, Chicago, Detroit, Tampa, Charlotte and Houston. The service continues to be free, with no additional charges on orders over $35 that qualify for same-day delivery. The battle is on to lease small-format warehouse space in cities.
Same Day Delivery. Sacra shares an in-depth report on the state of on-demand delivery.
Subscription. eMarketer unpacks the growing subscription commerce trend. Estimates the subscription ecommerce will account for $28B of spend, up from $16B two years ago. “34% of millennials (up by 16 percentage points) said they are likely to continue this shopping behavior.”
Subscription. Beauty brand Vinter’s Daughter rolls out a subscription offering that intersects with loyalty.
Funding and Exits
Brands
Activewear. Wolverine Worldwide acquires women’s activewear brand Sweaty Betty for $410M. “Sweaty Betty aligns perfectly with our strategic growth plan for Wolverine Worldwide, as we focus on growing digital channels, expanding our international footprint, and building our brand portfolio beyond footwear.”
Activewear. Levi Strauss acquires Beyond Yoga, a women’s activewear brand. “The company expects the acquisition will add more than $100 million to its net revenue next fiscal year.” Likely an acquisition made given that we’re spending more time than ever before at home and working out.
Food and Beverage. OffLimits raises $2M from Science Inc., Crosslink, and others for its plant-based cereal brand.
Food and Beverage. Planted raises $21M from Vorwerk Ventures, Movendo Capital, and others to scale up production for its plant-based schnitzel product.
Multi-Category. Brandless, a multi-category brand, raises $118M in debt and equity. Will use the capital to acquire mission-driven, like-minded brands and invest in their social commerce platform.
Personal Care. Manscaped is rumored to go public via SPAC at a potential valuation of $1.4B. Is expected to do >$275M revenue in 2021. For what it’s worth, I’m a customer of theirs.
Marketplaces
Beauty. Nykaa, an India-based omni-channel beauty retailer competing with Sephora, files for IPO. Has 43M cumulative app downloads and 73 physical stores in India. More info on their strategy here.
Brand Rollup. Suma Brands raises $150M in debt and equity from Pace Capital and Material. Started by a former Amazon exec, the former CEO of Blue Apron, and the former CFO of Dolls Kill. Will look to acquire promising brands that sell their goods on Amazon.
Grocery Delivery. Merqueo raises $50M from IDC Ventures, Digital Bridge and IDB Invest. Will use the capital to scale up its on-demand grocery delivery service in Latin America. Currently operates in more than 25 cities in Colombia, Mexico and Brazil and has over 600K users.
International Retail. Trendyol, the Amazon of Turkey is rumored to be raising $1.5B from investors like General Atlantic at a $16.5B valuation. “Trendyol’s gross merchandise value, a measure of the products it sells on its platform, has grown by about 20 times in the past three years and is on track to hit $10B this year.”
NFTs. MakersPlace raises $30M from Pantera Capital and Bessemer Venture Partners. The marketplace has facilitated over $100M in transactions. NFTs are essentially digital assets that have verifiable ownership and scarcity of ownership. Popular forms of NFTs are collectible sports cards, digital art, and even digital sneakers.
Same Day Delivery. Doordash is rumored to be exploring an investment in European 15-minute grocery delivery company Gorillas.
Same Day Delivery. Bolt raises $713M from Sequoia Capital at a $4.75B valuation. Will use the capital to expand from ride-sharing into grocery delivery. Promises to deliver groceries in 15 minutes and is launching in 10 European countries over the next few months, including in Sweden, Portugal, Croatia and Romania.
Same Day Delivery. Loship raises $12M from Bace Capital at a $100M valuation. Offers one-hour deliveries in Vietnam for a large range of products and services, including food, ride-hailing, medicine and B2B supplies. Has more than 70K drivers, 200K merchants, and 2M customers.
Used Cars. InstaCarro raises $23M from J Ventures, FJ Labs and Rise Capital. Operates a marketplace that connects used car sellers to dealers in Brazil.
Used Phones. Refurbed raises $54M from Evli Growth Partners and Almaz Capital for its marketplaces for refurbished electronics. Grew by 3x and reached more than $100 million in GMV in 2020.
Wholesale. Creoate raises $5M from Fuel Ventures for it's B2B marketplace that lets independent retailers buy sustainable products from brands and wholesalers. Claims to have 25K retailers across the UK, France, and Netherlands.
Wholesale. Infra.Market raises $125M from Tiger Global at a $2.5B valuation. Allows construction companies in India to procure two materials (concrete and fly ash) from their network of suppliers.
Software
Affiliate. Wildfire raises $15M from TVV Capital and QED Investors. Their app, Wildlink, allows users who like a product or service to send a link to their friends. If someone opens the link and buys, the app delivers cashback to the person making the referral. Will use the capital to build a white-label version of its software platform that can be embedded into e-commerce stores.
Customer Support. Hootsuite acquired Heyday AI for $48M. Heyday AI offers an automated chatbot that can respond to common customer inquiries. Automated chatbots are catching on with companies like Ada Support also thriving in the space.
Customer Support. Yellow AI raises $78M from WestBridge Capital. Is similar to Heyday AI above - allows merchants to automatically resolve queries in over 100 languages and across more than 35 text and voice channels.
Ecommerce Platform. Nuvemshop is rumored to raise capital at a $2B valuation from Tiger Global. Provides an ecommerce platform, similar to Shopify, to SMB brands in Brazil. Is able to distinguish itself from Shopify due to its geo-specific payments and logistics capabilities.
Retention Marketing. Bluecore raises $125M from Georgian at a $1B valuation for its cross-channel marketing automation platform.
Shipping. Outvio raises $3M from Change Ventures. Provides a white-label SaaS fulfillment solution for medium-sized and large online retailers in Spain and Estonia. Shares some similarities to Narvar in the US.
Storefront Themes. WeCommerce acquires Archetype Themes, a Canadian designer of Shopify storefront themes, for $20M upfront and additional earn-outs of up to $12M.
Fintech
BNPL. Square acquires Afterpay for $29B in Square stock (31% premium to Afterpay’s last closing price). Afterpay is a leading BNPL provider globally (competing with Affirm and Klarna) and will be integrated into Square’s Seller and Cash App businesses.
BNPL. Tabby raises $50M from Global Founders Capital and STV at a $300M valuation. Offers BNPL capabilities to merchants in the Middle East. Claims 400K consumers and 2K merchants use the platform.
Lending. Octane raises $52M from Progressive at a $900M valuation. Offers “instant” financing for the purchases of recreational vehicles (ATVs, boats, RVs, etc.). Expects to originate more than $1B in loans in the next 12 months.
Product of the Week
Lettuce Grow is a connected stand that allows you to grow vegetables at your home. It’s a magical product that makes it easy to become a proud plant parent. The product takes all the pain of growing away by auto-watering the plants and by shipping you seedlings that you pop into it. I have one and it saves me quite a few trips to the produce aisle in the grocery store. Buy it here.