What Square’s Afterpay Acquisition Signals for the Future of Retail

Financial services and digital payment company Square announced last week it would acquire Australian financial technology (fintech) company Afterpay in an all-stock deal valued at $29 billion. The deal serves as a well-timed reminder of how the pandemic transformed the financial and retail industries as payment services like buy now, pay later (BNPL) pick up steam — just in time for the holiday season. 

Square will acquire Afterpay, helping to integrate merchant and consumer-facing services to help position Square as the go-to financial app. By betting on popular features such as BNPL, Square hopes to boost the company’s popularity and lead to more partnerships with enterprise merchants. 

Buy now, pay later has exploded in popularity — growing a remarkable 215 percent YOY during the first two months of 2021 — as popular retailers partner with fintech solutions for BNPL financing.

BNPL and other digital payment offerings are likely to serve as a competitive advantage as some households continue to feel the financial impact of the pandemic heading into the holiday season.

Trends Driving the News

 In recent months, buy now, pay later has grown an incredible 215 percent YOY during the first two months of 2021, with retailers like Dillards, Sephora, and Petsmart partnering with fintech solutions Affirm, Afterpay, and Klarna to offer BNPL as short-term financing and point-of-sale installment loans for in-store and online customers. Often advertised as an alternative to credit cards, BNPL options allow shoppers to offset the cost of big-ticket items or everyday purchases via a series of fixed payments. In a recent study, Ascent found that more than half of U.S. consumers have utilized BNPL payments at one time or another, with the majority of shoppers using the service to purchase something not in their budget or avoid paying credit card interest. 

Visit the website of any number of retailers, and you’ll likely find Affirm, Klarna, or PayPal payment options during the checkout experience, but with Square’s acquisition of Afterpay, we’re beginning to see what the future holds as fintech plays a more substantial role in the retail customer journey. As the technology required for BNPL financing becomes more widely available, analysts note that Affirm, which “overwhelmingly dominated the market as recently as 2018,” has largely lost its market lead. For instance, Afterpay and Klarna made up a combined 60 percent of all U.S. downloads for the top BNPL apps in Q1 2021, a significant increase from their collective 19 percent market share in Q4 2018. 

Chart showing the top six BNPL apps, by download via 2PM

According to Business Insider, BNPL currently accounts for two percent of all transactions in the U.S., with market share expected to grow to five percent by 2024. Morning Consult reports that BNPL is particularly popular among younger shoppers than older generations, with Gen Z usage increasing 87 percent between April 2020 and July 2021. 

Launched in 2009, Square has quickly grown to become one of the most integrated and popular financial services and digital payments companies globally, with countless coffee shops, salons and spas, and other small businesses using Square’s point-of-sale technologies. The company also provides a portfolio of products and digital services for small businesses, including payments processing, online checkout technology, payroll management, as well as Cash App, a digital payment mobile app and platform, which boasts more than 70 million customers globally and rivals Venmo and Zelle.

PayPal remains one of Square’s top competitors and a global leader in the digital payments space, as the PayPal checkout button can be found on the websites of over 80 percent of the top 100 U.S. retailers. PayPal launched its own BNPL payment option last October, and already nearly seven million consumers have used the service. As the Cash App remains a “key point of growth” for Square, the Afterpay acquisition will offer the company many fintech capabilities to help Square better compete against PayPal for consumers and merchants. 

Afterpay is an Australian financial technology company that provides short-term financing by splitting payments for big-ticket items or everyday purchases into four installments. The company currently works with more than 16 million consumers and nearly 100,000 merchants in markets including Australia, Canada, U.S., UK (where it is called Clearpay), and New Zealand. Afterpay is one of the most popular BNPL solutions, recently signing an exclusive BNPL partnership with Gap Inc., including Banana Republic and Old Navy. Earlier this summer, Afterpay announced it can now be used at Amazon, CVS, Kroger, Macy’s, Nordstrom, and Target if users shop via the Afterpay online store directory – Another proof point of how popular BNPL financing has become for any number of purchases. Afterpay rivals Affirm, Klarna, and others to offer buy now, pay later financing to consumers, touting their own partnerships with top retailers like Microsoft, Saks Fifth Avenue, and Under Armour. 

Chart showing the share of e-commerce payment methods via WSJ and Worldpay from FIX

Acquiring Afterpay positions Square as an all-in-one fintech solution for both consumers and merchants while helping the San Francisco-based company expand into new markets beyond the U.S. and connect with a new demographic of consumers. In an interview with CNBC, Square CFO Amrita Ahuja said that the company sees the acquisition of Afterpay as an opportunity to develop a more “powerful ecommerce platform” that appeals to consumer demand for more accessible payment options and offers merchants new ways to serve their customers. Once the deal is approved by regulators, acquiring Afterpay will help Square become a one-stop-shop for supporting merchants — big and small — as well as enticing customers who are more likely to prefer digital-first payment options or are actively seeking the flexibility of short-term financing for many of their purchases. 

“For years, offering buy now, pay later was considered a competitive advantage for many retail brands, but with the hyper-growth of ecommerce shopping in the past 15 months, offering these financing options has quickly become table stakes for brands seeking to attract a younger generation of shoppers,” said Tim Lardner, Client Partner at PMG. “In the years to come, we anticipate Millennials and Gen Z shoppers will continue to buy now, pay later as their buying power increases over time and digital payment methods proliferate. It will only grow in popularity as a preferred payment method for a growing share of online and in-store shoppers in the United States, just as it has in many markets around the world.”

Looking Ahead

The BNPL market will only continue to heat up, and we can expect news of more acquisitions, consolidation, and exclusive partnerships in the months to come. Combined, these moves contribute to a transformed financial sector and retail landscape amid rapidly changing consumer trends and post-pandemic economic recovery. While payment flexibility was around long before the pandemic began, several new financial and partnerships models are being tried and tested across markets in an attempt to understand if consumers latch on to one approach or another. 

In recent months:

It was announced that Citi would launch Spot, a BNPL card in Australia through a partnership with Diners Club, according to PYMNTS. 

Petsmart signed a new deal with Klarna to let pet parents split their Petsmart purchases into BNPL’s standard of four interest-free installments, to be paid off over six weeks. 

Affirm recently partnered with Shopify to become the exclusive digital payment option provider for Shop Pay installments.

Klarna acquired Apprl, a performance-based influencer marketing service that connects content creators with retailers. 

When Macy’s agreed to offer BNPL via Klarna last October, Macy’s CEO Jeff Gennette told The Wall Street Journal that the risks were “offset by the new, younger customers that buy now, pay later attracts.” Gennette cited that 40 percent of Macy’s shoppers using Klarna were new to the brand, with 45 percent under 40 years old. (In contrast, “slightly more than a quarter of Macy’s existing customers are under 40.”)

Some companies are even building their own BNPL payment programs without the help of partnering with a fintech provider. For example, Apple is said to be working on a new service that “will let consumers pay for any Apple Pay purchase in installments over time” to rival BNPL services offered by Affirm, PayPal, and others. Internally known as Apple Pay Later, the upcoming service will reportedly use Goldman Sachs as “the lender for the loans needed for the installment offerings,” according to Bloomberg. 

As competition in the BNPL and digital payments sector heats up, fintech companies are eagerly expanding beyond their core services to include retail banking, digital payments, merchant relations technology, and more — all to disrupt the eight trillion dollar payment card business and become the global fintech and payments leader for both merchants and consumers. PayPal, for instance, has set its sights on expanding consumer touchpoints with recent acquisitions, including Honey, the online coupon platform, in 2019, and Happy Returns, the ecommerce returns management solution, in early 2021. With the acquisition of Afterpay, Square appears to be complementing its world-class seller support with financial services and payment offerings that are becoming seemingly more popular by the day with consumers around the world.