U.S. fashion market offers runway to Australian payments firm

A fintech that has grabbed a sizable chunk of the Australian digital payments market has made some quick merchant scores for its American launch.

Called Afterpay, the company debuted in the U.S. about a week ago with 50 retailers in various stages of implementation of its point of sale consumer finance product. The retailers include Urban Outfitters, Lorna Jane, Cotton On, Princess Polly and Zanerobe.

The Australian company is targeting general retailers, but has found a niche in Australia among fashion brands where the size of purchases and consumer mix is a good match for its model, which allows consumers to split larger purchases into multiple no-interest payments.

Adam Glanzman/Bloomberg

"The average value is about $130, so it's nothing you would take out a loan for," said Nick Molnar, CEO and founder of Afterpay. "And the model allows consumers to pay with their own money without taking on credit card debt."

Afterpay is publicly traded in Australia, and reports a 25% share of the Australian fashion/beauty market and 10% of the entire online payments market, enough to make it one of the fastest growing fintechs in the Australia/New Zealand market.

Urban Outfitters is the major coup for its launch in the U.S. It's one of the few major retail chains that's performing relatively well, and its total in-store and online yearly sales of $3 billion is about the same as the entire e-commerce fashion market in Australia.

Urban Outfitters would not provide an executive for comment. Another retailer, Lorna Jane, reports it had a successful deployment with Afterpay in Australia and hopes to replicate that in the U.S.

The Brisbane-based Lorna Jane, which sells women's activewear, has more than 140 stores in Australia and about 40 in the U.S. It releases about 70 new designs each month, and as a corporate philosophy does not carry debt, which makes the credit card alternative a natural fit.

"The short settlement time and reduction in payment risk is advantageous and a clear differentiator," said Scott De'Cent, CFO at Lorna Jane.

Afterpay will face a tough market in the U.S., filled with competitors that have been trying to build a base of merchants and consumers for years with a pace that's typically been slower than in other countries.

Splitit just expanded its debit options, though with some restrictions that analysts say will pose challenges. PayPal has long offered installment payments, though it's trying to sell its consumer receivables business to Synchrony Financial in a deal that's still awaiting regulatory approval. Affirm late last year launched a virtual credit card, and Klarna this spring signed a partnership deal with e-commerce platform Magento to improve users' experience.

Afterpay's strategy is to serve three general trends. Contrary to the cliche, younger consumers like traditional retailers, and this is mostly good news for a struggling part of the economy. But the demographic doesn't like credit cards, so Afterpay is seeking a middle ground by offering installment payments that are marketed to younger users.

"It's a consumer that's using a debit card but that wants flexibility to divide the payments," Molnar said, adding that the service is launching for online payments only, but an in-store feature will soon follow. Afterpay charges a fee to the retailers, but is free for the consumers who pay on time.

Afterpay assumes all of the risk. It pays the retailers then collects from the consumer. Like most fintechs that serve millennials, it does not rely on credit scores but its own risk system that tracks payments for recurring customers and an algorithm that uses payment and default records from similar consumers.

"We see an opportunity to tap into a new wave of paying," Molnar said. He said people want payment options to be their best fit for experience and financial health. "There is a generation that came up during the [2008] financial crisis that wants to spend the money the have instead of [accrue] debt."