Finance / Legal
Finance / Legal
How did Afterpay, which began as an experiment on a struggling jewelry business back in 2014 become a $29 billion global juggernaut that was acquired by Square in 2021?
To wrap our heads around the success that Afterpay has achieved, we need not look further than its off the charts results, including:
How did Afterpay exponentially grow over time? What’s behind its success?
Let’s get right to the unique and interesting story of Afterpay’s journey to find the answers.
The year is 2012. Anthony Eisen, the then-Chief Financial Officer of Guinness Peat Group, is working a late-night shift restructuring the assets of the company.
A momentary distraction lets Eisen’s eyes travel to his neighbor’s windows where a night owl is also working late hours just like him. Eisen and his night owl neighbor had more things in common than their street address.
A few days later, Eisen ran into his mysterious industrious neighbor, Nick Molnar. As the duo exchanged greetings and their tales, Molnar revealed his jewelry business on eBay, which kept him up all night. While Molnar’s business had impressive site visits, only 1 in 100 visits would convert into a purchase which frustrated Molnar and kept his profits low.
However, this frustration was not unguided. Eisen and Molnar set their minds to the task and wondered what explains this lack of conversion.
While customers liked the jewelry they saw, they were unable to make the purchase. A change was needed to help the customers. Molnar experimented with the layaway method, which proved successful.
The small spark that Molnar ignited soon took its complete form.
Why not let customers make a purchase on their own terms and at their own time?
The practice of layaway payments is an old one. It requires submitting an initial deposit of a certain amount to “layaway” the purchased item for a particular customer or paying for an item in several installments.
The original layaway was developed during the Great Depression of 1930s and helped keep millions afloat; Afterpay is a continuation of the same effort to help shoppers.
It is a modern twist to the centuries-old practice of layaway. By making itself accessible to millions of people, Afterpay creates an economic model that benefits all.
To make its idea a success, Afterpay forms long-term holistic partnerships with vendors and merchants. In exchange for a nominal service charge, merchants get access to Afterpay’s clientele.
Since its inception, Afterpay embodied a vision to encourage financial freedom.
Unlike traditional banks and financial institutes’ fintech services, Afterpay’s founders decided to make it completely free for its users. Additionally, they contended there should not be any hidden or explicit interest charges on payment schedules.
Numerous financial gurus claimed these features would potentially reduce Afterpay’s ability to generate healthy cash flows.
Afterpay was motivated by a desire to help its customers do well and do good. Since user acquisition was their primary goal, their reputation grew amongst customers leading to an active community of 14.6 million customers and 85.8 thousand active customers.
What started off as trying to increase eBay jewelry sales, has become a force to be reckoned with that’s valued at a price of $28 billion.
Normally, banks require a good credit history to offer a credit card to their customers. Ultimately, people who possess financial independence can get an additional tool in the form of credit payments.
While it generates profits for the bank and ease for existing customers, it does little to address those who do not have a high credit score. From the early days, Afterpay had wanted to be different – a tool that empowers those who need it the most. While the battle was uphill, Afterpay continued its efforts.
Molner had taken note of the eroding purchasing power of millennials. Thus, to disrupt the market, Afterpay did what was unimagined: it employed a model that only charged the vendors, making it freely accessible to retail customers.
There are different business models that generate revenues in different forms. Afterpay’s business model was based on value offerings, where they offer a chance to customers to make a big purchase with minimal cash outflow at any given time.
Both founders had experience in investments and were directing Afterpay towards becoming a global solution for all.
But they needed a team that could help them reach their goals. Anthony Eisen and Nick Molnar understood the financial independence they were offering to customers must be extended to its own people as well.
Thus, the co-founder's hand picked their team. The criteria was simple. They chose those who had a proven track record of helping companies get investment, were innovatively driven and had expansion experience.
Non-executive directors who make Afterpay what it includes Gary Briggs, a veteran in the field of marketing with successful tenures at Pepsi, eBay, Facebook, and Google; Elana Rubin, who has over two decades of experience as a director for several companies’ boards.
Other people that make Afterpay a hope for tomorrow’s technological advancements include independent non-executive directors, Pat O’Sullivan, Sharon Rothstein, and Dana Stalder.
Everyone who was a part of Afterpay’s early journey was given the freedom to innovate and make decisions for the company’s success.
Afterpay was founded on one idea: increased purchasing power.
With a strong purpose and an empowered team, Afterpay officially laid the foundation in 2015 in Australia. Armed with an innovative idea and perfect timing, Afterpay was primed for success.
Australia was a market where credit card debt was increasing at a rapid rate, and the interest charges were as high as 17-20%. Consequently, the country was the most natural choice to kickstart a journey that would usher in a subtle fintech revolution.
This outlines how the right idea must be executed at the right time. If consumers did not face high interest charges or eroding purchasing power, Afterpay would not have enjoyed its quick growth. A year passed. Afterpay debuted on the Australian public market in 2016. The decision to go public in 2016 proved to be a strategic masterstroke as Afterpay soon became a top 20 ASX company.
2017 arrived with bigger opportunities and newer markets as Afterpay brought financial freedom to the shoppers in New Zealand.
2018 was the year that brought Afterpay to America. Afterpay’s expansion and promise for financial freedom reached the United Kingdom in 2019, where it was launched under the name, Clearpay.
From its inception, Afterpay was a brand that wanted to solve a pressing problem. Want to make a purchase but don’t have the cash right now? Don’t worry. Buy Now, Pay Later. Have a low credit score and banks won’t offer you a credit card or loan? Just opt for Afterpay.
With this approach, the company had a product that people needed and wanted, so it basically only had to capitalize on the demand that was already there. Such a solution-based approach is exactly what allows startups to make their way through the crowd and establish a connection with their customers.
Afterpay was born out of an innovative idea set to cause a paradigm shift in E-commerce and Fintech industries. However, ideas do not start off in their final form. Afterpay required a structure that could offer a firm foundation that guarantees Afterpay to stay operational and profitable over the long term.
Serendipity stroked earlier than expected; Afterpay formed a crucial key partnership with Touchcorp – a payments firm. Touchcorp complemented Afterpay by offering a back-end payment system, helping Afterpay reach millions.
Afterpay did not only have an idea that could spur drastic changes, but also possessed an ability to become a market leader in their industry. Aware of Afterpay’s untapped potential, Touchcorp became an early investor that accelerated Afterpay’s growth.
The investor-investee relationship morphed in an unexpected way; Afterpay outgrew its investor and ultimately led to a merger between the two companies. In the end, Afterpay Touch was born because of a fruitful relationship between the two. The merger paved the way for Afterpay Touch to set a milestone by becoming the fastest growing public company in Australia’s history.
Afterpay was ready to take on the world. Only one thing remained: an app that allows customers to access Afterpay’s services with the touch of a screen. It could not be just another app. It had to be functional as well as aesthetic.
To bring Afterpay’s services to life with rich colors, a vibrant personality, and eye-catching outlook, Dovetail was called onto, and thus began a visual tale of a partnership between Afterpay and Dovetail. Countless mood boards, a handshake, and 16 weeks later, Dovetail delivered Afterpay’s first mobile app.
Afterpay’s exponential success had surpassed all predictive indicators, financial and technological gurus, and even the founders themselves. It was only a matter of time before Afterpay’s initial web platform had millions of users.
Unprecedented traffic levels required it to scale-up and revamp it’s infrastructure. The caveat was a lack of time. Afterpay could not afford to go off the radar for maintenance while Dovetail needed time to develop a web platform capable of handling millions of site visits daily.
Every start-up experiences a stage that determines and affects its present and future. It is a make or break situation. In such a scenario, start-ups are required to work even harder and accomplish milestones sooner than later.
While Dovetail worked on the mobile application, they also worked on the web platform and came through. Within 72 hours, Afterpay’s web platform was restructured and ready to go live.
Perseverance and commitment that establish a start-up are also required at critical moments like these to put a company on a successful trajectory. So far, Afterpay had been playing all the right moves.
Afterpay’s partnerships with Touchcorp and Dovetail were a result of shared interests where the primary motivation was to bring financial prosperity and the freedom to shop to millions of customers.
Afterpay had great ideas to bolster its platform and provide customers with a flexible spending option. But it needed to establish an infrastructure that would support it. Afterpay partnered with Touchcorp to develop a backend payment system and then with Dovetail to create an all-inclusive application.
Thus, by collaborating with other firms and leveraging their strengths, Afterpay was able to scale faster resulting in increased growth. This act of utilizing a strategic partnership to scale set the foundation for Afterpay .
On the surface, one might assume it is easy to market an idea. After all, ideas are the powerhouses behind successful startups.
However, to rally support for an idea is an uphill battle as it requires removing uncertainties, encouraging hope towards the idea, and finally convincing buyers and sellers to trust you with their product and money.
Afterpay had to do the following:
1) Build an irresistible brand
2) Inform users about Afterpay’s functionality and purpose
3) Address concerns related to data breaches and debit card fraud
4) Influence customers and merchants to come on board and conduct their business using Afterpay
As a result, Afterpay focused on informing the customers about its services by using informational visuals. Having achieved the first few tasks successfully, Afterpay strived for its next target, branding. Selling an idea to a few people is easy.
However, selling the same idea to a general audience is difficult. At this stage, companies must realize that they cannot sell to everyone, and they must make clusters of people whom they could make their target audience.
Afterpay targeted the younger audiences and was quite good at it. It curated a message according to the archetype of being a young, exciting, and wholesome brand.
After getting the consumer side onboard, Afterpay diverted its attention towards the retailers. To market themselves to merchants, Afterpay introduced and focused on shop directory features on their mobile application.
Whenever a user visited the shop directory, they could see all the sellers that have partnered with Afterpay. Given an active community of millions of users, it was an offer vendors cannot refuse. To capitalize on the first movers’ advantage by benefitting from premium lead traffic, thousands of vendors joined Afterpay.
Having successfully reached the target audiences, Afterpay focused its efforts on its main unique selling proposition (USP) that was flexibility over the purchase choices.
The App was made even easier to use to offer a seamless experience across multiple touchpoints both online and offline. Hence, Afterpay was thorough and spot-on with determining that customers value independence and convenience more than prices.
Afterpay had reached its target audience. However, it still had to continue to expand its reach.
Afterpay embraced the television and digital screens with their advertisement featuring Rebel Wilson – Australian celebrity and an actor. The ad was titled “Pay better with Afterpay” and debuted during the Billboard Music Awards and The Bachelorette.
Most of Afterpay’s marketing message involves the use of humor to inform and influence customers. What is different about Afterpay is the use of traditional advertising by a digital brand. Afterpay’s advertising also included Out of Home (OOH) activations across 17 major markets worldwide.
Marketing strategy became an overnight success as Afterpay reported an increase of 112% in sales.
The way Afterpay advertised itself is a lesson in marketing on how to align your brand’s image to your marketing messages. Both have to go together and converge to one theme.
Head hunting for high executives often comes with a manual; a good incentive invites the best of talents to any company.
Afterpay was a new kid on the block and bootstrapped compared to other Goliaths. Afterpay’s executives knew their start-up would be as strong as the collective sum of all its employees.
Afterpay eliminated bureaucratic and expensive middlemen and intermediaries. It adopted an open and transparent approach to hiring where the selection process was known to applicants and the only criteria was merit and high motivation.
First cohorts at Afterpay were presented a full view of what Afterpay stands for and where it is headed in the future. Moreover, a practice that continues to this day, Afterpay encouraged self-development amongst its employees, as shared by Nick Molnar,
“It’s about them wanting to understand their purpose, what their objectives are. If it’s going to add value, how they are going to develop as a person, and how they will develop as a staff member.”
Afterpay knew that its product had immense potential for its target audience, millennials. It just needed to find a way to connect with them. They let the customers know exactly whom they were catering to, establishing Afterpay as a brand for the youth.
Simultaneously, the company brought on Rebel Wilson, added humor to its advertisements, and chose digital mediums for marketing - all creating a particular image of the brand that understood its audience, engaged with them, and catered to them.
Any company that sees such a rapid rise is bound to see questions being raised on its methods, sanctions, regulation compliance, or a general negative public image being curated about it.
Afterpay faced all these different oppositions but never did the situation come where they would succumb to the pressure.
Of course, the company tries to maintain its image in various ways and keep its customers’ confidence, but it has also been very successful in projecting itself as an innovative brand that offers modernistic solutions.
Remember that Rebel Wilson ad? It contained a line that "if credit cards and cash had a baby, you could pay it over time without ever paying interest." For certain groups, it didn’t sit too well, with some even calling for it to be taken off air for promoting unconstrained spending amongst financially vulnerable people.
These reactions are something Nick Molnar and Anthony Eisen are no strangers to. They’ve had to sit in front of multiple inquiries and explain how their product has a safety check that presses the pause button on a customer’s spending after they reach a certain limit. This prevents customers from going over the board and spending beyond means.
Hence, Afterpay’s answer to criticism of it encouraging credit spending is that they are a much safer medium than credit cards.
However, most times in the real world, such clarification does little to shake the opposition or pave a friendly way forward; the true solution lies in a well-crafted strategy that can convince all stakeholders and responsible parties of the overall value added to the society.
That’s why it's just as important to gain the trust of the government as of customers.
Whether it be Australia or other countries around the globe where it is making its mark, Afterpay continued to recruit advisors with extremely useful connections.
For instance, in 2019, the company brought on board Larry Summers to guide their expansion in the US. Not only has he served as the World Bank’s chief economist, he’s also been a key figure in President Barack Obama's economic plans.
How did they manage to convince such an influential personality to join their ranks?
Simple. By having Andrew Charlton, former economic adviser to the Australian prime minister Kevin Rudd, do the recruiting.
Other key players associated with Afterpay in recent years include Sharon McCrohan and Damian Kassabgi, former members of Kevin Rudd and Julia Gillard’s staff, and David Gazard, former advisor and currently, a close confidant to the now, prime minister, Scott Morrison.
Naturally, such an expansive team of top-notch advisors paves the way for Afterpay to promote growth without overbearing restrictions.
Buy now, pay later platforms, such as Afterpay have recently been kept a close eye on. But any notion to bring them under the same regulatory control as credit cards gets regularly shut down.
Even though reviews into the activities of such platforms pointed out concerns similar to consumer groups, they revealed that the benefits, opportunities, and choices far outweighed the harm.
For example, retailers could not impose a surcharge when consumers availed the services of Afterpay. On the other hand, there is no control from credit card providers on any such activities by retailers.
Resultantly, Senator Andrew Bragg, who headed a recent committee into possible regulations on these fintech firms said,
“The committee felt that it was important to value innovation and that the big four [banks] were not able to quash consumer choice.”
Undoubtedly, the superior offerings, consumer-friendliness, and innovative approach of Afterpay have a lot to do with its goodwill.
Afterpay founders realized early on that they didn’t just have to please customers; they also had to prove themselves as a viable financial and technology company to regulators.
By hiring key personnel, Afterpay’s immense value as a growing company for both customers and the Fintech world at large was portrayed to regulators.
Their advisors helped facilitate their journey upwards, leveraging the firm’s strategic image as a modernized financial tool.
Afterpay offered a unique service; however, uniqueness is often subjective and competitive. What if there exists a competitor with the same or even better service?
Let us analyze how Afterpay has managed to stay ahead of the competition.
There are two types of credit cards: one that charges interest and another that comes with 0% interest rate but requires an account fee.
Both fall short of providing a free of charge service – a feature that Afterpay realized it could count on to give Afterpay a competitive advantage in the market.
Credit cards also charge a minimum of $20 as late payment while Afterpay charges $10 in the first week and $7 for the second week which also works out in Afterpay’s favor.
PayPal works a lot like normal credit cards do. For instance, PayPal Credit requires customers to use their social security number to be able to use PayPal’s Credit service. Afterpay does not require any number that can potentially affect customer’s right to privacy or limits their ability to buy on credit.
Klarna and Afterpay are the most similar to each other than any other app or service, in this area of Fintech.
Despite the similar offerings, Afterpay again gave a smoother and better purchase experience to customers which resulted in Afterpay getting more users, as highlighted by the number of sites each company had an influence over.
Klarna does not require strict checks, but it does enforce soft checks and a soft inquiry which makes it less desirable than Afterpay, which does not conduct any inquiry that reduces the chances of customers getting a flexible payment schedule.
Additionally, Afterpay offers more coverage and has partnered with the highest number of merchants that allows Afterpay to be preferred over apps like Sezzle.
Thus, owing to other companies’ limitations, less coverage, and trust, Afterpay, with its superior offering and a more open financial ecosystem, stays ahead of the pack.
The Buy Now, Pay Later concept wasn’t completely unheard of, and buying things on credit was certainly not a new idea. This meant that Afterpay was always going to face intense competition. The key was realizing and working on what gave Afterpay its edge - a better, more customer-oriented experience.
Focusing its efforts to enhance services for the customers and delight them put the company in the driver’s seat, allowing it to comfortably surpass market leaders Visa and PayPal and a giant platform Klarna.
Afterpay’s short journey has been rewarding, to say the least, but not without a few hiccups and some blessed strokes of luck.
When the COVID-19 pandemic hit, Afterpay was going through a slump. Its share prices had hit $8.90 at the end of March. Most businesses during this time had to dig deep to survive, but for this fintech firm, lockdowns proved to be an opportunity like never before.
Afterpay had already successfully created a target market of Millennials by becoming available at trendy fashion stores such as Urban Outfitters and Forever 21. Now, those stuck at home with a bit of extra cash from subsidies found it the perfect time to shop, and Afterpay became their payment choice.
While consumer spending was up, the company was further boosted when Chinese technology giant Tencent acquired a 5% equity stake for $300 million in June. At this point, the share price was up to $75. The next month, Afterpay announced they were aiming to raise $1 billion in capital by leveraging $250 million in sales.
In early 2021, this continuous hike meant their share price was valued at a whopping $160.
The potential for Afterpay is huge, and unsurprisingly, big players in the financial services market have always been on the lookout for an opportunity to add it to their subsidiaries.
Early in 2021, a Fintech company in the US, Square, finalized a deal worth $29 billion to acquire Afterpay. Interestingly, instead of paying in cash, Square bought out the company’s shares. That means that the 16 million shareholders of Afterpay automatically become owners of Square’s stocks.
This merger has opened up numerous avenues for the Afterpay model. Firstly, Square is much more than a Buy Now, Pay Later company. The takeover also enables it to become a dominant force in the US with clear advantages over credit cards and PayPal.
Initially, the plan is to integrate Afterpay services to Square's Seller and Cash App where customers can avail of added features, such as stock and bitcoin purchases and Cash Boost.
However, as Square tries to penetrate markets in the US with Afterpay, it’s not necessary that Australian existing shareholders share the same trust in them. Thus, many may sell out their shares which will lead to fluctuations and uncertainty.
Nevertheless, Square projects online transactions are expected to go up to $US10 trillion by 2024. Will they be able to sustain such growth, or will the change in markets undo the success of Afterpay?
Only time will tell.
COVID-19 heavily disrupted businesses, Afterpay however, not only survived but thrived. The futuristic approach and convenience the company provided to customers enabled the company to succeed in an uncertain environment.
Customers could get what they want from their homes without having to pay upfront in difficult times, and with thousands of vendors on Afterpay’s contract, they had multiple options. Afterpay was primed for success.
With over 14.6 million active shoppers on its platform, Afterpay was soon commanding 1.7% of market share.
While the number might seem disproportionately smaller, it is a share that puts Afterpay in the top-league with Amazon Pay (market share of 3.89%), Square Payments (1.91%), Klarna (1.10%), and Authorize.net (1.51%).
It is a classic textbook example of how to acquire a large share in the market. Afterpay did not focus on making profits or competing against other well-established fintech and e-commerce unicorns. They chose their own destiny, innovation, and offered technology that made spending easier.
Bringing back an age-old financial tradition of layaway and turning it into a modernistic, convenient application; few would have predicted that Afterpay would reach the heights that it did.
AUD $925 million
AUD $142 million
Countries Operating In
The success of any brand lies in solving a problem for people. This helps the company have a clear idea of its target market and instantly tap into the demand for its idea. The Buy Now, Pay Later model enabled customers to pay for their products later without getting entangled in credit card and interest rate issues.
At the same time, it empowered the youth and enabled millennials to spend on their own terms. Now, they didn’t have to approach traditional borrowing channels for shopping as their financial problems were catered to.
In its early years, Afterpay founders knew that if they wanted to take their products to the next level, they couldn’t do everything on their own. That’s why they were quick to team up with first Touchcorp and Dovetail in a bid to expand their services and come up with unique solutions for their products.
Touchcorp provided them with an efficient payment backend while Dovetail helped design a superior interface to suit customers and vendors. Together, the company experienced exponential growth and was able to focus and put its time and energy into things that really mattered.
From the onset, Afterpay had a very clear idea of the market it wanted to target - the millennials - and the brand image it wanted to present - one that promotes financial freedom.
Thus, Afterpay’s marketing approach was tailored to interact and engage with younger audiences through its catchy slogan, digital marketing, and hiring of Rebel Wilson to project a fun and youthful image of the brand, among other things. The central goal was to financially empower the youth, and Afterpay left no stone unturned in making sure its target audience knows that.
Banks and credit cards are well-established and well-trusted, but they simply don’t offer the convenience of Afterpay. What Afterpay offers in terms of customer-centric products and services is unique and enticing.
Whether it be Paypal or Klarna, Afterpay identified where it had the edge over its competitors and strengthened its offerings in the same field without overcomplicating its products. The idea was simple: keep the customer happy with superior service and easy options; they didn’t need to get stuck in credit card regulations or procedures.
Unsurprisingly, Afterpay’s competitors couldn’t offer this.
A business can’t succeed without winning over customers. But it also has to gain the approval of governments and regulatory bodies to be able to operate freely. Innovations in technology can be met with criticism and go under scrutiny, especially Fintechs. Afterpay encountered a number of these challenges with regulators.
The way out, which Afterpay cleverly established, was through a team of well-connected advisors that helped them develop an identity of an innovative, customer-oriented company. They were able to comply with policymakers and show that what they offered was much more beneficial to customers than the harms that were being called out.
The downright ruthless way the pandemic struck, not many businesses were able to survive. However, Afterpay managed to increase its share price that tanked at $8.90 in March, 2020 to close to $160 less than a year after that.
The reason behind it was that they offered enhanced customers’ options during the lockdown when the world was forced to go digital. With the boom in technology and uncertainty, Buy Now, Pay Later became the go-to choice of customers – especially millennials who were much more comfortable with the idea.