Square Agrees to Acquire Afterpay in a $29 Billion Deal, Was this the Right Move?

This fascinating deal could open doors for both Square and Afterpay, but is the price too steep?

(Image credit: sourcingjournal.com)

Square has agreed to acquire Australian BNPL Startup Afterpay in a deal worth around $29 billion, illustrating the need for Square’s expansion into the Australian market. This deal comes as fintech companies begin to seek scale to challenge traditional and neo banks for bigger slices of the payments industry. This segment of the fintech industry is currently extremely saturated with players like Paypal, Affirm, Klarna, and Apple, among many others, hungry for bigger market shares. However, this is not stopping companies from diving into the market as the returns are boundless.

Afterpay is Australia’s leading BNPL performer that allows users to pay for goods in four interest-free installments and receive instantaneous access to the product. Customers pay a fee only if they miss an automated payment, a transgression that also locks their account until the balance is repaid. This can limit bad debt, an issue that often occurs with other BNPL providers.

“Square and Afterpay have a shared purpose,” said Jack Dorsey, Square’s chief executive. “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.”

Consumers flocked to BNPL services like Afterpay during the pandemic; however, credit cards appear to be coming back in favor. According to credit-reporting firm Equifax, demand for credit cards rose sharply in April compared with the same period last year. This trend is continuing throughout the summer, causing many fintech companies to either rethink their strategies or attempt to acquire other startups to dive into the industry like the Afterpay deal.

This Afterpay deal is Square’s biggest ever in an attempt to bring its Cash App and seller ecosystems more closely together and also expand into the growing Australian market. Square plans to add Afterpay as a financing option through the smaller merchants it serves. Afterpay customers will be able to make payments on their installment loans through Cash App, Square’s digital payment service. Cash App customers will be able to use the app to find merchants that offer Afterpay’s buy-now-pay-later financing, thus completing the merger between the two technologies.

Square’s Chief Financial Officer Amrita Ahuja forecasts the online payment volumes to hit $10 trillion by 2024, with buy-now-pay-later installments taking an increasing share. Square’s Cash App is currently one of those startups leading the pack reaching 40 million monthly active customers. With a gross profit of $546 million in the second quarter, the company achieved a 94% increase over the second quarter of 2020. Although Cash App is growing rapidly, a BNPL system in place could vastly increase its customer base by providing them with a BNPL option when making purchases, as well as adding an entirely new market, Australia, as potential customers. At $29 Billion, this deal is costly but necessary in order to keep up with the other fintech players in the market, especially those operating in the BNPL space.