Two financial technology giants that are taking on the traditional banking industry are joining forces to build their alternative to credit cards.
Square said on Sunday that it planned to acquire the Australian “buy now, pay later” company Afterpay in an all-stock deal that values Afterpay at about $29 billion.
The deal introduces Afterpay’s service, which allows users to stagger the cost of their purchases over interest-free installments, to U.S. consumers and the millions of small businesses that process their credit card transactions on the Square app. It will also help the San Francisco-based Square further expand in Australia, its second-biggest market after the United States.
Square’s Cash App, a payment platform with more than 70 million customers, has been a key point of growth for the company, particularly during the pandemic as customers have sought out cash-free options. The company has been looking to integrate that app and its “Seller App” platform for smaller businesses.
Afterpay works with more than 16 million consumers and nearly 100,000 merchants globally. As part of the deal, its founders, Anthony Eisen and Nick Molnar, will join Square. Square will also appoint one Afterpay director to its board once the deal closes.
Both companies have positioned themselves as rivals to the traditional banking stalwarts.
“There’s a lot of growth occurring in this shift away from credit to debit, and it’s due to the fact that we’ve flipped the model on its head,” Mr. Molnar said in an interview. The banks’ credit model “doesn’t work,” he said. “The incentive is the opposite of how we built our product, which is to charge the retailer a small fee instead of making our money from the consumer.”
In a statement, Square’s chief executive, Jack Dorsey, said, “Square and Afterpay have a shared purpose,” adding, “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.”
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Square earlier this year announced it was acquiring a majority stake in Jay-Z’s streaming service Tidal for $297 million.
“The overarching umbrella is to build a company that serves our customers and furthers our purpose of economic empowerment,” Square’s chief financial officer, Amrita Ahuja, said in an interview.
“We look to accelerate our long-term strategy,” she said, “and we feel that we have the flexibility to do that across our various levers and our balance sheet.”
Square joins a number of its technology company peers in using stock to pay for a sizable acquisition, taking advantage of effervescent valuations. Shares of Square are up 83 percent over the past year, giving it a market capitalization of $112 billion. Square also reported its second-quarter earnings on Sunday and said it had $4.68 billion in total revenue in the quarter, a 143 percent jump over same three months last year.
The deal still needs shareholder and regulatory approval. The Justice Department has scrutinized deals in the financial technology industry recently, suing to block Visa’s planned $5.3 billion deal to acquire the upstart firm Plaid. The two ultimately called off the transaction.
When asked about potential antitrust concerns, Ms. Ahuja said that the “buy now, pay later” industry is still “highly competitive,” with plenty of room for growth.
The industry has been a beneficiary of pandemic-fueled online shopping — and could grow as much as 15 times its current size, according to some estimates. As a result, the competition has heated up among players including QuadPay, Sezzle, Affirm and Klarna. But consumer advocates have said that with the industry still in its early stages, its potential risks are not yet fully understood.
Installment plans were traditionally for low-income people. But the latest iteration is aiming in part at online shoppers who may simply have a generational distrust of credit, a remnant of the 2008 financial crisis.