The "buy now, pay later" (BNPL) craze hit fever pitch this week with payments giant Square (SQ -1.57%) making a $29 billion play for the global leader in the space, Afterpay. The company's innovative twist on microlending is incredibly popular with young shoppers, making it prime real estate for companies that want to capture a slice of the future.
The deal shines a light on other potential opportunities in the industry. E-commerce giant Shopify (SHOP 3.40%) has been working with BNPL provider Affirm Holdings (AFRM -2.87%) for the last year, and it owns 7.6% of the company's stock. They recently took their partnership to the next level after Shopify integrated Affirm's technology into its online merchant checkout process, allowing customers to directly finance their purchases.
Let's consider three reasons for Shopify to take Affirm fully under its wing.
1. Stronger together
Over 5.4 million consumers are actively using Affirm across 12,000 integrated merchants. When shoppers check out with Affirm, their purchase is financed at an annual percentage rate of 0% to 30% depending on their credit, with the option to repay the money in three, six, or 12 months.
Affirm's customer base is a drop in the bucket when you consider Shopify powers an estimated 1.75 million online stores, which are the primary focus of the partnership between the two companies.
But focusing on the merchant side might be too one-dimensional. Affirm recently announced it will be launching the Affirm Card, a consumer-focused product that will allow shoppers to take advantage of BNPL anywhere they wish. It separates the Affirm experience from the shackles of its merchant system, and sets consumers free to take advantage of the same benefits at stores more suited to their needs.
Shopify currently has 118 million registered users across its Shop virtual assistant platform and Shop Pay payments product, which is a substantial pool of consumers who might be enticed by the offer of a new-age replacement for their credit card. Square is already planning key Afterpay integrations with both its Seller platform (merchants) and its 70 million CashApp-using consumers, and this is a move Shopify could learn from.
2. Buy now, pay later drives sales
It probably comes as no surprise that financing consumer purchases with no fees and little interest encourages people to spend. But it might surprise you just how much.
Shopify is in the process of pitching its BNPL solution (powered by Affirm) to its merchants, and it has provided a series of selling points. The company claims it will increase conversion by 50%, reduce cart abandonment by 28%, and enable larger cart sizes because consumers have the flexibility to buy more.
Half of Affirm's customers are either millennials or from Gen Z, and the company notes that 79% of this cohort shop using a smartphone. Its BNPL product is driving engagement, with 64% of transactions in fiscal 2020 made by repeat customers who spend $2,200 annually on average.
If Shopify absorbed Affirm, it would have the opportunity to unleash this across its ecosystem of over 100 million users, providing incredible benefits to its merchant base.
3. They're already partners
In July 2020, Affirm announced that it would partner with Shopify to power its new Shop Pay Installments feature, an attempt by Shopify to introduce BNPL to its merchants and customers.
Affirm was still a private company at the time, and as part of the deal it handed over warrants that entitled Shopify to purchase up to 20.3 million shares in the company -- equivalent to about 7.6% -- for just $0.01 each. Affirm proceeded to list on the stock exchange in January this year, and Shopify maintains its stake worth about $1.3 billion today.
Since the two companies have been working on product integrations for the last 12 months, the merger into one company could be almost seamless. Shopify's merchants are already familiar with the new features powered by Affirm, so if Shopify views BNPL as a big part of its future, then absorbing Affirm feels like the smart way to go.
Shopify has a market capitalization of over $190 billion compared to Affirm's $17 billion, so an all-stock deal similar to the way Square acquired Afterpay would result in minimal dilution for shareholders, especially considering it already owns 7.6%. Shopify also has $7.7 billion in cash on its balance sheet, and although using it wouldn't be ideal, it puts some options on the table (like a part-cash, part-debt deal, or a part-cash, part-stock agreement).
But the most important thing is that BNPL represents an opportunity to capture highly engaged young shoppers, and the company's merchants and shareholders alike stand to benefit greatly from that.