Afterpay's move to open to major U.S. merchants will boost margins, analysts say

Afterpay’s move to expand its buy now, pay later service to major U.S. merchants it has not directly partnered with will boost sales and margins, analysts said on Thursday, as the Australian company’s shares rose nearly 8%.

The company will allow all users in the United States to shop at major 13 retailers, including Amazon, by this fall, just ahead of the crucial holiday shopping season, intensifying competition in the sector’s biggest market.

“This functionality will be materially incremental to volume and frequency over time in the U.S.,” said Tim Piper, an analyst at RBC Capital Markets.

Analysts also said that Afterpay’s revenue and margins would get a boost from the move, with fees and interchange revenue likely to reach 7% of the transaction, compared with the 4% fee it charges merchants currently.

“Further, given the non-network merchants can only be accessed through the app, it increases consumers’ engagement with the Afterpay app which in our view could unlock further monetisatiion opportunities in the future,” Citi analysts wrote in a note.

The company’s shares were trading around A$132.4 on Thursday, outperforming their peers.

Competition, however, is tight in the United States where BNPL firms, including Sweden’s Klarna, Zip Co Ltd’s Quadpa, and Afterpay, are squaring off against larger financial firms such as PayPal Holdings.
Quadpay will likely bear the brunt of Afterpay’s move as customer retention improves, Citi said.