Why do SMEs still accept cash (and is there an alternative in sight)?

Commonwealth Bank’s move to protect its retail franchise and customer data by launching a buy-now-pay-later platform in Australia stacks up, a leading banking analyst said yesterday.  

Two years after investing in BNPL company Klarna in 2019, Australia’s largest bank is about to launch its own product reflecting the market view that that the banks will be forced to partner with BNPL operators which are fast snapping up the lucrative millennials. 

Morgan Stanley analyst Richard Wiles confirmed that CBA is moving to protect its market share with younger customers. “We note that CBA has about 45 per cent market share with 18-24-year-olds, which is also a key market for BNPL,” he said. “Offering its own BNPL will help CBA to engage this cohort.” 

Wiles explained that protecting the bank’s customer spending data from being shared with other financial providers is a further benefit of a BNPL platform,  

“Further, CBA expects its BNPL product to appeal to SME merchants rather than larger merchants, so this could enhance its SME relationships and data,” he added. 

However, unlike Afterpay, he went on to say, CBA is a pure payment service and doesn’t have individual marketing agreements with merchants. 

Afterpay to list in the US 

So, does CBA's BNPL product stack up financially? 

BNPL operators are paid a fee by the retailers. The banking analyst said CBA's merchant fee is well below Afterpay's fee but that it should have lower credit and payment processing costs. As a result, while CBA’s merchant fees and net transaction margin (NTM) will be much lower than Afterpay’s margin, it should be above credit card transactors. 

 “We estimate that CBA's BNPL product will have an NTM of about 55 basis points. This is below Afterpay’s Australian NTM of around 225 basis points, but we think it's above CBA's NTM on credit card transactors - those who don't pay any interest.” 

CBA’s product will be offered only to eligible CBA consumers, but it can be used anywhere where Mastercard is accepted. 

Meanwhile, rival Afterpay said it is exploring a listing in the US, its largest market.  

The company's latest trading result showed that underlying sales for the March quarter more than doubled to A$5.2 billion year-on-year. Active global customer numbers were up 75 per cent to 14.6 million. Importantly, sales in the US jumped 167 per cent to A$2.6 billion. 

However, UBS analyst Tom Beadle called the result mixed. “We highlight that while the US business is now the largest contributor in terms of volumes, it is currently loss-making and has structurally lower margins due to high interchange fees.” 

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