Splitit has been trying to get a slice of the explosive growth in buy now, pay later providers (Credit: Splitit)

The buy now pay later segment of the market has been on a roller coaster recently, with positive updates from Zip (ASX: ZIP) and Afterpay (ASX: APT) driving the sector up. Splitit (ASX: SPT) has been trying to get a share of the action, pitching their model as offering a unique value proposition separate to Afterpay. They rallied strongly on the IPO as investors priced them on multiples which suggested that they had a big chance of being the next Afterpay. As investor expectations moderated, the company sold off from $2 to 42c, much closer to their IPO price.

The firm touts their high approval rates and opportunity to split purchases into 36 interest-free monthly payments (compared for four quarterly payments with APT) as differentiating factors for the platform. They also offer a 90-day trial period with products purchased on the platform, before payments commence, to attract consumers.

Bears would however argue that the difference between the business models of Splitit and Afterpay make the product much harder to monetise. Charging merchants a fee of 6% is a great business model if your initial capital is returned over 5 weeks (the average of four fortnightly instalments), since the return on capital is 80%p.a. assuming minimal friction and no defaults from the client. While both of these are big asks, an average repayment period of 18 months reduces the return on capital from Splitit’s 36-month repayment plan to 4%p.a. Any customer defaults and friction between payments reduce this return even further.

Another larger competitor Splitit will have to contend with is Klarna. Klarna offers the opportunity to repay a purchase in four equal instalments, a model used successfully by Afterpay to turbocharge customer growth. The company is the most valuable fintech start-up in the EU and is pushing for growth in the US and Australia, markets that Afterpay is trying to dominate. The firm’s recent equity raise will give them greater ammunition to compete with Afterpay, setting the two companies on a race to dominate the rapidly growing US buy now pay later market. While some investors claim that Afterpay’s AI based credit models and data build-up create a network effect that allows the firm to reduce pricing over the long term, other firms may be able to do the same while the market is in its infancy.

Splitit is one of the smallest companies in the ASX buy now, pay later space, so bulls argue that the business has the most room to grow. While this is true, many new industries have come to be dominated by a few players, particularly if network effects are important. Investors in the sector need to balance up both of these factors before deciding whether Splitit or one of the incumbents have more potential.

 

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August 29, 2019