The ‘buy now, pay later’ firm Afterpay is being taken over by Square, the digital payment platform owned by Twitter founder Jack Dorsey. It will be Australia’s biggest-ever buyout with a price tag of A$39billion (£21billion).

The takeover ‘brings together two of the fastest growing global fintech companies to advance a shared mission of economic empowerment and financial inclusion’, Square said in a statement.

‘Square and Afterpay have a shared purpose. We built our business to make the financial system more fair, accessible, and inclusive, and Afterpay has built a trusted brand aligned with those principles.

The transaction is expected to be completed in the first quarter of 2022 and jokes are already being cracked about whether Jack Dorsey will be paying in 1 sum or 4 monthly instalments.

A more connected ecosystem

Afterpay allows users to spread the cost of a purchase out over 4 interest-free payments, making them an incredibly simple and attractive options for shoppers and retailers alike. Combine this with Square – an incredibly user friendly point of sale system – and you’re onto a winner. The only surprise about this pairing is that it is only happening now.

‘Together, we can better connect our Cash App and Seller ecosystems to deliver even more compelling products and services for merchants and consumers, putting the power back in their hands.’

Connected ecosystems like this streamline the shopping experience. If you’ve ever purchased something on finance in store you’ve likely witnessed a shop assistant juggling different platforms (and perhaps even different devices) as they set up the contract and take your first payment or deposit. You may even have been that member of staff and know those old frustrating and complex systems really are.

Once Square and Afterpay are working together under the same umbrella it will be so much easier to process each transaction, making everyone’s lives easier.

There are a vast number of people who use BNPL services and it is estimated ‘that the global number of BNPL users will exceed 1.5 billion transactions in 2026, from 340 million in 2021.’ 

Buy now, pay later

Square announced the deal on Sunday, saying it planned to pay in an all-stock transaction; Afterpay shares promptly ‘jumped 20% on the Australian market, and the company’s American depositary receipts soared 35% to $95 in early U.S. trading’. Interestingly, stock prices also rose for some of Afterpay’s competitors. Affirm saw prices rise as investors speculated it may be the next in line for acquisition.

The ‘buy now, pay later’ (BNPL) model is an incredibly lucrative market:

Klarna ‘increased its valuation by 50 per cent in three months to $45.6bn, after receiving investment from SoftBank’s Vision Fund 2 in June. PayPal offers its own service, Pay in 4, while it was reported last month that Apple was looking to partner with Goldman Sachs to offer buy now, pay later facilities to Apple Pay users.’

Companies like Klarna have seen huge returns and have become even more favoured during the pandemic as consumers have been slightly lower on cash. Some retailers even offer 3 year 0% interest options through Klarna for large purchases, making BNPL services an incredibly attractive option. Credit cards on the other hand are falling out of favour due to their large fees.

Shop now, stress later

An alternative name for BNPL, ‘Shop Now, Stress Later’ succinctly highlights the major flaw in this payment model.

Companies in the BNPL sphere may have profited from the pandemic, but what does this mean for the people using their services? Well, quite simply, it means they’ve found themselves out of pocket. If shoppers are late on payments the words ‘interest-free’ quickly evaporate from their deals and they find themselves paying back high interest rates. Credit agreements by their very nature profit from people being unable to make their payments on time.

It’s so easy to opt into BNPL options, especially when their button is right beside the normal checkout button – even for a £2 pack of socks. Stacking up a basket and focusing on the monthly cost instead of the total makes it all too easy to buy more than you would outright. It’s important to remember that no matter how small the payment is a debt is still a debt and they will add up. You may think that £2 is surely too small a sum to offer credit on, but the BNPL market remains largely unregulated.

The Woolard Review of the unsecured credit market earlier this year cited ‘an urgent need to regulate BNPL products’. Offerings from innovative companies like Klarna, Affirm and Afterpay are rapidly changing and moving faster than regulators like the Financial Conduct Authority (FCA). Only a few days ago it came to light that the FCA is investigating the digital bank Monzo for not sufficiently implementing anti-money laundering rules. Financial regulators are catching up to the world of fintech, but it’s slow going.

Final thoughts

This eye-wateringly high deal has proven the BNPL market is not likely to slow down any time soon. Square and Afterpay will make a strong team and make payments easier than ever before for both parties. Customers and retailers alike will benefit from smoother transactions, but this in turn makes it even easier for customers to get themselves into debt without taking the time to consider the potential risks of taking out credit agreements.