Five years ago, a tiny company from Canada, Shopify (NYSE:SHOP), went public on the American markets. It's been an amazing stock and a Fool favorite since then, running up in value 3,700%. History might be repeating itself with a fintech superstar from Australia, Afterpay (OTC:AFTP.F). It went public on the Australian exchanges in 2017, and the stock has soared almost 3,000% in three years.

Afterpay offers consumers a new way to shop without signing up for a credit card. Say you want some boots from Jimmy Choo. A pair will run you about $1,000. But maybe you don't want to or aren't able to pay the retail price all upfront. This company allows you to afterpay your purchase. With the service, you just pay $250 at checkout. Afterpay pays the rest (minus a fee for the retailer). Then you owe Afterpay $750, which you pay back in three installments over the next six weeks.

For consumers, it's the equivalent of an interest-free loan. As Cosmopolitan put it in a recent article, "Your credit card just might be replaced." It's no surprise that Visa (NYSE:V) wants to enter this market. And now Shopify wants to compete in it as well. Does that mean the party is over for Afterpay? 

Buy Now Pay Later written on post-it notes

Image source: Getty Images.

First, let's run some numbers

Afterpay just reported that shoppers after-paid 11 billion Australian dollars' worth of stuff over its last fiscal year. That's up from AUD$5.2 billion in the 2019 fiscal year. The company has almost 10 million active customers around the world, and 55,000 retailers participating in its network.

In the U.S., the growth has been even more dramatic. Afterpay now has more shoppers there (5 million) than in Australia (3 million-plus). In the U.S., underlying sales on the Afterpay platform are growing 330% from the previous year.

Of course, this fantastic growth has spawned numerous copycats, including a company called Affirm, a "buy now, pay later" start-up run by Max Levchin, the co-founder of PayPal (NASDAQ:PYPL). Affirm has recently signed a collaboration agreement with Shopify. Might this partnership damage Afterpay? Or does it actually validate the business model?

Afterpay vs. Affirm

At first glance, Affirm's deal with Shopify makes the outfit seem like a pure copycat of Afterpay's business model. From the press release: "At checkout, approved Shop Pay customers will be able to split their total purchase amount into four equal, bi-weekly, interest-free payments." As Motley Fool Australia put it, "This is identical to the Afterpay model."

On closer inspection, however, there is an important distinction between the two companies. Afterpay does not run a credit check on customers and promotes itself as an alternative to credit cards. Affirm always runs credit checks. And if you are using Affirm at a retailer that is outside the Shopify network, your loan is no longer interest-free and you might be paying 15% interest. Right now Affirm seems more like a virtual credit card company that is morphing into an Afterpay clone in order to gain access to Shopify's network. 

How does Afterpay avoid the risks of default, if it runs no credit check? When a shopper selects the Afterpay option at checkout, the company's software performs an internal fraud and repayment capability check. Every Afterpay shopper has account limits that start low and build when your repayment history is positive. Afterpay only approves one order at a time, and if a repayment is not made on time, customers are not able to use Afterpay until the repayment is made (with a late fee payment). This is why Afterpay's net transaction loss due to non-payment is only 0.6%.  

Afterpay is rocking in the real world

Right now all of Afterpay's business in the U.S. comes from internet commerce. That's changing, as the company is now collaborating with Apple (NASDAQ:AAPL) to allow shoppers to afterpay purchases in stores, using Apple Pay. It's also working with Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) to provide afterpay capabilities with Google Pay. This move into mobile payment options gives Afterpay a huge advantage over its online competitors. 

In Australia, 40,000 shops use Afterpay to facilitate purchases. Roughly one-fourth of the company's sales come from brick-and-mortar retail. It would seem that Afterpay's incredible growth in the U.S. is set to continue, as the fintech company expands its non-credit offerings from internet commerce into real-world shopping. 

It's still very early in the company's journey. But it's possible that Afterpay might actually win this war on credit cards. And so far, anyway, investors have been winning right along with it.