Afterpay Business Model – How Does Afterpay Make Money?

Key Takeaways:

Afterpay is an Australian-based platform that enables its customers to buy various items and products through installments instead of pay one go system. The platform can be accessed through the desktop website and the mobile app.

The business provides its services in Australia, Canada, New Zealand, United States, and the United Kingdom.  The primary sources for the business’s revenue are merchant fees and late fees.

As of 2020, the net worth of Afterpay is reported to be $42 billion, which had increased by a large margin, as the company valued $1 billion only when it went public. The revenue for the year 2020 was recorded to be $519.2 million, with a 97% increase in the profit from the previous year.

Company Profile:

Company NameAfterpay Limited
Websiteafterpay.com
Founded In:2014
Developer:Touchcorp
Headquarters:Sydney, Australia
FounderNick Molnar and Anthony Eisen
Key people:Elana Rubin (Chairman, Independent Non-Executive Director), Barry Odes (Executive Adviser), Anthony Eisen (Co-founder, CEO, and Managing Director), Nick Molnar (Co-Founder and U.S. CEO/0, Melissa Davis (Chief Revenue Officer), Gary Brigg’s (Independent Non-Executive Director)
Business ModelThe home market, Online platform, Buy Now Pay Later.
Product/ServicesHeadphones, jewelry, iPhone app, Buying retail products through installments
SubsidiariesAfterpay Holdings Pty Ltd Afterpay US, Inc. Afterpay Australia Pty Ltd Touchcorp Limited Clearpay Finance Limited Afterpay Canada Limited
RevenueEstimated to be about $ 519.2 billion as of 2020
CompetitorsAffirm, Laybuy, Zip (formerly known as ZipMoney),  Splitit, Klarna, Seezle, and Openpay

What is Afterpay?

Afterpay is a buy now, pay a later based business that aims to provide its customers to buy products throughout four installments in the next two weeks without charging any interest. Suppose you have chosen to purchase an item worth $200.

You can pay the total price by paying $50 per installment over the next two weeks. In the case of delaying the installment, Afterpay will charge you a late fee that can be automatically deducted from your debit card.

The platform can be accessed through the desktop website and the mobile app. As of 2020, the business provides its services in Australia, Canada, New Zealand, United States, and the United Kingdom.

A Short History Of Afterpay:

Afterpay was founded in 2014 2014 by Nick Molnar and Anthony Eisen. It is an Australian company, with its headquarter located in Sydney. Before delving into the business’s history, let’s understand what motivated the founders to start the platform.

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Nick Molnar had an exciting childhood from a business perspective. He was charismatic and had the uncanny ability to persuade people to his side. Case in point, when he went on a trip to the U.S. with his father, he had a meeting with a jewelry shop supplier in which he convinced the man to enter a partnership with him.

He proceeded to sell that through his eBay account. A brilliant idea proved highly profitable because, by the end of his second year in university, he was selling $1.6 million worth of jewelry. He also worked in his parent’s jewelry store “St. Michel International,” based in Sydney.

He had a very successful business when he was studying at the University of Sydney. But this wasn’t the first time he tried his hand at entrepreneurship. His early attempts included selling importing headphones online.

This project was not as successful as his later ones, but the experience he got from the whole situation proved to be more valuable than money.

His interest was roused in the field of investment banking, so after graduation, he got a job at a private equity and venture capital firm called M. H. Carnegie & Co as an investment analyst.

The problem was that the firm’s managing director Carnegie was not happy with his decision, thinking it’s a waste of his abilities and tried to persuade him to launch his own business. He promised that the position will always be available for Molnar if he failed.

That was all the encouragement Molnar needed. He shifted his focus towards his online business as soon made a deal with Ice.com, an online North American jewelry retailer. This enabled him to launch an Australian version of the company by the name of Australian Ice.

Meanwhile, Anthony Eisen, the Chief Investment Officer of Guinness Peat Group, noticed Molnar working day and night through his office windows across the front building.

Impressed by his work ethic, Eisen approached the younger man and started a conversation about his work. This was the start of a beautiful friendship.

Eventually, when he saw Molnar walking over the street, he simply approached him to find out what he was working on. That little conversation first influenced a friendship between the two and would ultimately be the catalyst for launching Afterpay. With their entrepreneur knowledge, they started to create a concept for a potential future company.

Not everyone can afford to buy retail products at once. Many businessmen took note of this, and hence ‘Buy Now, Pay Later’ business sprung up. Many companies in America were raking in profits. But there was no such platform in Australia that could provide the same services.

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The founding pair were aware of this fact. They had the advantage of having no competitors in the national market and a partner already lined up to their partner, Ice online, Molnar’s own company.

Armed with their experience and advantages, they finalized their plans and launched Afterpay in 2014. Initially, they worked with a tech company called Touchcorp Limited to develop a system for processing transactions and weed out frauds.

In return, Aterpay allowed them to have a stake of 33%. Eventually, the platform merged with Touchcorp in 2017. But at that time, they were more worried about building their merchant base.

To increase that, Molnar struck again with his charisma and persuasion skills. They were also helped by the fact that Aferpay was the only business of its time in the country. The business proliferated, which made it more surprising when the company made its intention known that they will go public, which happened in May 2016.

A year later, Afterpay went through a merger with Touchcorp, which was its largest shareholder in 2017. The combination of sophisticated Touchcorp technology and Afterpay’s extensive client base made it the leading organization in the buy now pay later market.

After that, the business started to spread out. In 2017, it expanded in New Zealand and then the U.S. in 2018 by acquiring an American buy now, pay later service called ClearPay Finance. By now, with all the resources and clout at its disposal, Afterpay was gobbling up its competitors left and right.

The launch of its official IOS app made it more famous. Its fame reached new heights when Kylie Jenner and other celebrities started tweeting about the platform.

The pandemic brought more fame and traffic to the organization. The company acquired Pagantis; a Spanish buy now pay later service for $82 million. This has been one of the acquisitions of the business. In 2017, the company celebrated the milestone of having one million customers.

Not all was daisies and sunshine, though. There were some setbacks the company faced in later years. Molnar got demoted temporarily to the Chief Revenue Officer position but later became the CEO of the North American branch.  In August 2020, PayPal released a statement that they would start their own similar services, which increased Afterpay’s competition.

Earlier in 2019, the business was accused of breaching anti-money laundering laws. The reason for the complaint was the platform’s inability to perform proper identity checks. This actually caused the business to spend a large amount of money to correct the error.

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Many customer rights groups were also accusing Afterpay were exploiting buyers by encouraging them into debt. But even with all these hurdles, the platform has not stopped moving ahead in the market with its continued success.

Right now, Afterpay has employed 1,000 people, 11 million customers from all over the world, around 55,000 merchants working in tandem, and seven global offices in operation.

What is the Business Model of Afterpay?

The Afterpay Limited is based on the “Buy now, pay later” model that allows the customers to buy retail products over a series of installments.

This model has been in trend for the last decade and has been very popular with university students and millennials. The upside of using Afterpay is that you are not entering a loan or have to pay any interest or fee to the platform.

How Does Afterpay Make Money?

Before understanding the revenue model of Afterpay, remember that the platform buys everything from the merchant before selling it off to shoppers. Another thing worth remembering is that the customers do not have to pay any interest on the installments.

Now, let’s break down the revenue sources and discuss them one by one.

  • Merchant Fee:

As we have mentioned above, the platform does not ask its customers to pay any interest on top of the item’s original price. The merchants who are selling their products through Afterpay have to pay a variable amount of fee that gets bigger and smaller depending upon how much the business has managed to sell. Plus, on every sale, a fee of $0.30 is charged on the merchant’s side.

The merchants have two advantages in this system. The first one is obvious; an increase in the sale of products and the default payment that Afterpay has to risk. This is the primary revenue generator of the company.

  • Late Fee:

Remember that we said that Afterpay buys the products before selling them to customers? That comes in handy for the platform, as they demand a late fee for any installment the buyer hasn’t been able to pay in time. You have to pay $10 per installment you have delayed. Another $7 can be charged in case of an unpaid invoice.

However, there is a limit on how much late fees can be charged. For items worth more than $40, the limit is $68, and for items worth below $40 is $10. The fee can be automatically deducted from the customer’s debit card.

This source of revenue has been decreasing in recent years.

Afterpay possesses international subsidiaries that work on the same principle.

Afterpay Funding, Valuation & Revenue:

The most notable investors of Afterpay are Coatue, Tencent, and Mitsubishi. The most significant stakeholder was Touchcorp which later merged with the business. Throughout three funding rounds, the platform has raised $448.7 million, plus $25 million in June 2017, during its stock market debut.

As of 2020, the net worth of Afterpay is reported to be $42 billion, which had increased by a large margin, as the company valued $1 billion only when it went public. The revenue for the year 2020 was recorded to be $519.2 million, with a 97% increase in the profit from the previous year.

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