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The Real Reason Why Square is Acquiring Afterpay

It’s easy to still think of Square as just another payments company --- in reality, Square has been slowly edging towards bank-like features. A transition that will be accelerated by its new, whopping $29 billion acquisition of Afterpay. It is certainly worth noting that Square finally got conditional approval for a banking license.

In essence, Square will now compete with dominant players such as Klarna, and giant firms like Apple, PayPal, and Visa that have been drawn more recently to the market.

The growth of BNPL has not slowed down in 2021

So yes, $29 billion for a Buy Now Pay Later platform is an extremely high price. But it turns out that this deal is not just about jumping on the Buy Now Pay Later bandwagon after all. And in this blog, we’ll tell you why!

Let’s start by stating the obvious, Buy Now Pay Later is taking the fintech world by a storm. There's not a day that goes by without us seeing buy now pay later in the headlines, and it has only been accelerating in 2021. 

The idea of incorporating a BNPL service into Square’s services is appealing, but did Square really need to spend $29 billion to deploy buy now, pay later services?

Well, we know that Square isn’t really making a dent in it’s liquidity, since this is an all stock deal.  What the deal is really about is bringing AfterPay’s merchant relationships into Square’s seller ecosystem, and converting AfterPay’s existing customer base into Square’s Cash App users.

3 Potential motives behind Square’s Afterpay acquisition

1- Access to a huge user database

From our perspective, the first reason behind this move is that Square will indirectly gain access to Afterpay’s 16 million user database, enabling them to use level 3 consumer data for future offerings.

2- Targeting high-income consumers

On top of that, research revealed that only 13% of Square’s Cash App users earn more than $100,000 a year. In contrast, 31% of BNPL users (who are predominantly Gen Zers and Millennials) have high incomes. Square most likely needs those higher income consumers in order to keep attracting new merchants to the platform.

income of square cash app users vs buy now pay later users
Income of Square Cashapp users vs. buy now pay later users. Source: Cornerstone, 2021

3-Issuing credit cards

Another plausible theory is that Square plans on following Klarna’s footsteps in issuing either virtual or physical credit cards to its consumers. Further playing into their moves resembling a bank-like proposition.

Regardless of the main reason behind this acquisition, it is clear that this move is highly strategic and well-timed, especially coming at a time where BNPL popularity is going through the roof! Best of luck to Square and how this acquisition will leave a footprint on the industry in the coming years.

Do you think that $29 billion is a fair price for this deal? 

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