Originally published on Forbes and written by Jeff Kauflin on 3 July 2018
Layaway is a decades-old, much-maligned way to finance something you can't immediately afford, since it often leads to exorbitant interest rates. Now a young Australian entrepreneur has taken a Millennial twist on the practice and built a booming business.
Afterpay, a consumer lending company based in Sydney, Australia, has reached a market value of $1.5 billion less than four years after its launch. Cofounder and CEO Nick Molnar, 28, has become stunningly wealthy, with a net worth of almost $200 million. After a fast rise in Australia, he’s trying to replicate his success in the U.S.
Molnar grew up in Sydney, and while still a college student, he started selling jewelry on eBay as part of his family business. He got so good at marketing and sales that he became the number-one seller of jewelry in Australia on eBay. He eventually convinced U.S.-based jewelry site Ice.com to let him launch iceonline.com.au, an Australian outpost that he grew to $2 million in annual revenue.
In 2014, he joined forces with his then-neighbor, Anthony Eisen, the former chief investment officer at Australian holding company Guinness Peat Group, to pursue a consumer lending startup. Molnar’s theory: "Millennials have a total aversion to credit [cards]," because they can lead to compounding debt. He built Afterpay as a way for consumers to pay for items in four interest-free installments.
With Afterpay, a shopper can buy a $100 dress by paying $25 upfront and $25 every two weeks thereafter, until the $100 is paid off. If she misses a payment, she’ll pay an initial late fee of $8, followed by $8 weekly charges if no payments are made. But the late fees are capped at 25% of the total item price. The bulk of Afterpay's revenue comes from another source—it charges retailers 4-6% of every transaction to offer this service. Consumers can buy up to $1,000 worth of goods with Afterpay.
Molnar launched the business in October 2014, and less than two years later, he had a stroke of marketing genius. As the company gained traction, he encouraged consumers to contact their favorite retailers and request that they offer Afterpay. The social media campaign went viral.
Afterpay struck a chord with young shoppers because Molnar’s theory about credit-aversion proved right. In a 2016 Bankrate.com survey, only one in three adults aged 18 to 29 owned a credit card. “The financial crisis scarred a generation into not doing stupid things with their finances,” says Matt Harris, a well-known fintech investor and managing director at Bain Capital Ventures. “They’re kind of scared with credit.” Today in Australia, Afterpay’s average customer is 33 years old. Eight of ten are women.
Many retailers joined Afterpay because, when they started offering the service, they saw customer order sizes jump meaningfully, from 20 to 50%, Molnar says. Some retailers quickly saw one-quarter of their online orders processed through the pay-later service shortly after turning it on. Afterpay has nearly 15,000 retailers signed on and two million customers.
The company handles credit checks by looking at hundreds of data points, Molnar says, and the underwriting model is product-focused. For example, if there’s strong consumer demand for a luxury item, like a high-end purse, Afterpay is more likely to reject the transaction, for fear of fraudsters turning around, flipping that purchase for cash at a lower price and skipping out on their next three Afterpay payments. The company also uses a consumer’s Afterpay payment history to determine creditworthiness, and it rejects about 20% of transactions. Last year it had to write off less than 1% of sales due to customers not paying their loans.
Molnar took Afterpay public in 2016 and raised $25 million. "There is no venture capital market in Australia," he says. In its 2017 fiscal year, Afterpay processed $561 million in retail sales, leading to $23 million in revenue and a $10 million net loss. This year, Afterpay is on track to process $2 billion in sales and take in $80 million in revenue. With Afterpay trading at a $1.5 billion valuation, investors are valuing it at 19 times sales, a stunning valuation that’s almost 10 times as high as other new-age lenders like OnDeck and Lending Club.
Since 2017, Afterpay’s sales growth in Australia has leveled off—it’s adding about 3,000 to 5,000 customers a day this year, the same number as last year. That’s a result of having already brought on the largest retailers in the country, Molnar says.
Now he's is trying to accelerate growth by bringing Afterpay to the U.S. Urban Outfitters recently announced that it offers Afterpay. But the road to continued expansion might be harder than it was a few years ago in Australia. Affirm, the San Francisco company started in 2012 by PayPal founder Max Levchin, offers low-interest loans for consumers and has “single-digit millions of customers,” Levchin recently said. “Afterpay has had great growth in Australia, and it’s hoping that lighting strikes twice in the U.S.,” says Elizabeth Allin, an Affirm spokesperson. “We know how long it takes to grow and sustain a consumer brand.”
Stockholm-based Klarna, another consumer finance provider founded in 2005, reached $524 million in revenue last year. It’s strong in Europe, but its progress in the U.K. and the U.S. has reportedly been slow. “Klarna is a company that takes a long-term view and that is critical in a market like the US,” a Klarna spokesperson said in an email. “Markets are very different landscapes and we take the time to understand consumer behaviour, merchant needs, identify what we are trying to solve and then we adapt our product accordingly.”
Molnar thinks consumers will view Afterpay differently from its competitors, because it charges no interest. “No one wants to take out a loan to buy a dress,” he says, adding that Millennials only want to spend the money they already have. “There has been a shift in how people spend money, and that’s what we’re focused on solving.”