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Jay Jacobs, SVP and Head of Research & Strategy at Global X ETFs, joined Yahoo Finance to discuss Square’s acquisition of Afterpay.
- Let's talk more about this Square deal, because it's a $29 billion all-stock deal, and there's a lot here to understand and digest. Let's bring in Jay Jacob, senior vice president and head of research and strategy at Global X ETFs. It's good to have you here, Jay. And with Afterpay, you pay up front, you get the-- you make the deal, you get whatever it is you're buying, and then you get to make four installments over time to pay off what you owe without interest. So how does Afterpay make money? Because clearly, Square-- and they had over $600 million in revenue, but Square sees potential here that is enormous.
JAY JACOBS: Exactly. This is really pushing some of that interest rate credit risk to the merchants. Ultimately, they're funding the bill to make it easier for consumers to buy their things. So if you wanted to buy a couch, and that's a $1,000 couch, and you don't have $1,000 sitting in a bank account, you can pay $250 bucks in even four square payments, and that's going to be covered by the cash manufacturer or whatever site you bought that on.
So it provides basically a disruptive version of credit cards to consumers, but it's very-- it's basically free interest. It accelerates consumption, and it links in really nicely with a platform that already has debit payments and connections to your bank account. So this is a really nice kind of bolt-on service for Square that already has the infrastructure to handle all of this.
- But at the end of the day, how does Afterpay make money? Like with American Express, it was 4% they would charge the retailer. Are they charging the retailer in this case [INAUDIBLE] Because you're asking the retailer to take the risk and pay. That seems a little bit-- that could come back to bite you.
JAY JACOBS: Well, so they're going to charge basically a transaction fee to the merchant, as well as a small fee based off of the amount that is being effectively lent out by Afterpay. So they want to do this as much as possible. They want volume. They want people to buy more things, just like the credit card space.
The difference is, instead of paying 15% APR, the consumer is effectively paying 0, as long as they make their payments on time. So it does add credit risk to the Square portfolio, because Afterpay is taking that credit risk. But it's the merchants that are funding those transaction fees and loan-based fees as well.
- Jay, you have a big Square position in a couple of your funds. I guess, just broadly speaking, what do you think of this deal? Does it make sense for Square?
JAY JACOBS: Well, I guess there's a big question about whether buy now, pay later-- which is one of the fastest growing areas of fintech right now-- whether it's a product or if it's a platform. Square is a platform. It is connected to end consumers. It's connected to merchants. But by now pay later firms-- a firm like Afterpay, like Klarna-- I think, in many cases, are a product, meaning they offer one service, but aren't a platform unto themselves.
So I think plugging in this product to the Square platform makes it incredibly powerful. We've seen PayPal build out a similar platform, and we're seeing a firm really rise today-- and share price as well-- probably because people think there's a better chance that a firm gets acquired now. So I think buy now, pay later is going to be squarely in the sights of these leading fintech firms going forward.
- Does buy now, pay later potentially, for the consumer, mean prices go up? Again, because if the retailer is now absorbing not only the transaction cost, but the credit risk, why not raise prices to protect yourself?
JAY JACOBS: It's possible. And frankly, if you're going to get free credit extended by the merchant, you can take that, and that can be pretty good for the consumer-- especially if interest rates ever rise from here. So we'll see what happens. I think, right now, merchants are kind of testing this out. Uptick is growing very quickly, but it still remains a very small portion of overall transaction volume.
So I think this is really an interesting development in the fintech space. The people who should be squared are-- the people who should be scared-- not squared-- are Visa and Mastercard. Clearly, their business models can be very disrupted here, if they can collect as many credit card transactions anymore, because people are using buy, now pay later.
- Well, Jay, and when you mention the attractiveness of the space-- the fact that a firm is soaring today-- look at shares up 15% right now, with less than an hour to go, pointing to the fact that we could see some more consolidation in this space-- I guess, who do you think will be a potential buyer of a firm?
JAY JACOBS: Well, I would have said Visa or Mastercard, but they've already had some issues with other acquisitions. Remember, Visa tried to buy Plaid, and that didn't work out when there was questions over antitrust. So PayPal has built their own buy now, pay later system that's been fairly successful already, but if they wanted to accelerate that, they could buy in a firm.
It could be a dark horse candidate, another fintech firm, like an Intuit that has a lot of different areas within fintech already on the software side. Maybe they want to get more into the consumer lending space. So I think there's a lot of large fintech players that could be very acquisitive right now.
- I keep harping on the risk and the credit potential here, and I'm curious, with Afterpay, do we know the metrics of the-- is there a percentage of people who go into these kinds of deals who wind up missing a payment, and then having to incur a fee because of that?
JAY JACOBS: It does, just like a credit card. Credit card-- they're pricing in that risk. so that's clearly there for Afterpay. So far, the credit risk hasn't really materialized as any wildly disruptive event, even during the pandemic, when there was certainly some challenges on the consumer credit side. But they are taking on that credit risk. This is definitely a credit play for Square, but they've already been in this space. Remember, they've been giving out business loans for several years now to their merchants, so now they're getting into basically the consumer loan space.
- All right, we appreciate your being here and for the update, because this is a space in which we will all be working, whether it's-- [INAUDIBLE] buy now, pay later-- BNPL-- or whether we're going to be doing in the future through fintech. I use Apple Pay for myself, but-- we appreciate your being here. Jay Jacobs, all the best to you-- he is the senior vice president and head of research and strategy at Global X ETFs.