How Afterpay Gave Millennials What They Want

Afterpay is not 28-year-old YPO member Nick Molnar’s first business success. Before he made it big with a payment service specifically designed for millennials, Molnar gained another entrepreneurial distinction: being the man who had sold the most jewelry ever on eBay.

It was while running his online accessory empire from his bedroom in Sydney, Australia, that Molnar started chatting with his neighbor Anthony Eisen about a potential collaboration. “Anthony and I lived across the road from each other,” recalls Molnar. “He was running one of the largest investment funds in Australia. The launch of Afterpay was the coming together of his finance background with my retail background.”

Afterpay was founded on a key insight: Millennials want the benefits of being able to pay for items in installments but are deeply wary of being led into debt by traditional credit cards.

“If you look at the United States as an example, two out of every three people between 18 and 30 don’t have a credit card,” says Molnar. He believes the generation that came of age during the financial crisis has an aversion to credit hardwired into them. “After the 2008 recession, there was just a huge swing among millennials toward spending money on debit cards, not credit cards,” he says. “They’re into budgeting and being responsible with their spending, but they also still want that instant gratification in retail.”

Molnar has built a whole financial ecosystem around the millennial attitude toward spending. When retailers install the Afterpay button on their online checkout, it allows customers to purchase items immediately and pay for them in four equal, interest-free installments over the following two months. If they make the installments on time, then they won’t get charged a penny more than the price tag. Millennials love it. “It’s a product that says, ‘I understand you’ to them,” says Molnar. “And I think that is very unique and important.”

Shortly after the company’s launch, early adopters started pressuring online retailers to add the option to their checkouts, prompting an extraordinary acceleration in take-up. “We raised our first round of money in August 2015 with 10 retailers and a couple thousand customers,” says Molnar. “We took the company public nine months later.” Now, Afterpay’s market cap is USD2.79 billion, with more than 17,000 retailers and 10 percent of the Australian population on the platform.

Afterpay is one of those rare examples of a genuine win-win business. The customers buy products in a way that works for them and they feel real gratitude toward the company (a Facebook group entitled “We love Afterpay” has an extraordinary 123,892 members). The retailers pass the risk of non-payment on to Afterpay and see significant spikes in sales when they adopt the new payment option. Meanwhile, Afterpay generates significant revenue from charging fees to retailers to use its service.

Before the business was able to kick into top gear, Molnar and Eisen had to get past one major stumbling block — the fact that Australians don’t have easily-accessible credit ratings. The pair’s solution? To build a custom-made credit rating algorithm, which uses a series of readily available online data points to draw a picture of an applicant’s creditworthiness. “We’ve built a proprietary system which looks at hundreds of behavioral attributes that indicate someone’s propensity and willingness to pay you back,” says Molnar. “We then use this to approve or decline the transaction, and we decline between 20 and 30 percent of transactions. We can now do it with a high degree of accuracy — net transaction loss after late fees that were paid to us are factored in is less than 1 percent.”

The system allows people to increase the amount they can spend with Afterpay over time, up to USD1,000. “We’re building a relationship with our customers” says Molnar. “We start with small order values, an average of a couple hundred dollars, and then as users show their ability to pay back, we build trust which sees them gain more flexibility to make larger transactions. We don’t say ‘Here’s an USD2,000 credit payment, go and spend it,’ we’re assessing each customer each time they buy.”

Some customers do request longer payment periods, but Molnar thinks he’s found the sweet spot. “It’s always the same criteria, it’s always four payments and it doesn’t cost the customer anything extra if they pay on time. I think it’s the right product, the right time period and right price point,” he says.

Another key element that separates Afterpay from other products is that it unlike traditional providers it doesn’t profit from revolving debts — the kind in which customers can end up paying interest for a long time without ever paying off the debt itself. The product’s incentives have been aligned so that the it works best for the company, retailers and consumers when people pay on time.

Over the course of the past three years, Afterpay has grown from just Molnar and Eisen to a staff of 250 people around the world. In May 2018, they launched in the United States with retailers including Anthropologie, Cotton On and Lorna Jane on board.

Molnar is sanguine about his company’s meteoric ascent. “I’m reminded every day through little things that happen that this is a once-in-a-lifetime opportunity,” he says. “We’re just really grateful for what we’ve managed to achieve together in a short period. There’s lots of learning to be done, but the reality is that I’ve got Anthony beside me who has been in the public markets a long time. If you surround yourself with the right people, I think the daunting nature of what you’re doing is definitely reduced.”

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