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Afterpay Touch Group Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P), the top two high-flying buy now pay later stocks, are set to see increased competition following CBA’s foray into the industry. The Aussie banking giant announced a US$100m investment into Klarna, a Swiss-based rival with 60m customers globally. Klarna is not publicly listed and has a post-money VC valuation of $5.5bn, making CBA a small investor on the register. With CBA owning 2% of the company, one can expect the bank to be wary of supporting Klarna in any initiative that threatens to cannibalise a portion of their existing revenue.
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 fin-tech 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.
Markets have, for the most part, shrugged off the CBA association, given the deal is more reflective of an intention to gain investment exposure to the industry as opposed to a decision to enter it. This comes in contrast with Visa’s decision to enter the buy now pay later market, that saw Afterpay’s share price sell-off 10%. Zip Money and Afterpay are both up over 2% in morning trade today, a strong sign that investors do not regard this development as a major threat to the business.
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