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Tencent just snapped up a $250 million stake in Afterpay. Now, the two are gearing up to bring buy now, pay later to China's massive e-commerce market.

FILE PHOTO: People visit Tencent's booth at the World 5G Exhibition in Beijing, China, Nov. 22, 2019. REUTERS/Jason Lee

  • Chinese tech conglomerate Tencent bought a 5% stake in Australian buy now, pay later company Afterpay.
  • The shareholding will lead to partnership between Tencent and Afterpay, Nick Molnar, co-founder and CEO of Afterpay told Business Insider.
  • Tencent's portfolio of investments, which includes popular Chinese payment app WeChat Pay, could help Afterpay expand to the Chinese market.
  • First launched in Australia, Afterpay is growing fast in markets like the US and UK.
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Chinese conglomerate Tencent has bought a 5% stake in Australian buy now, pay later company Afterpay, and it could offer a path into the world's second-largest economy.

Tencent, run by one of China's wealthiest businessmen, Pony Ma, is the world's largest video game company. It invests in startups and fintechs around the world, and also owns leading communications platforms like WeChat and QQ.

Tencent's holding in Afterpay is worth about $250 million, an Afterpay spokesperson confirmed. Afterpay's shares surged almost 36% to $25.34 on the Australian Securities Exchange on Monday following the news of Tencent's investment on Friday.

"I think the shareholding is a testament to Tencent's commitment to the partnership," Nick Molnar, co-founder and CEO of Afterpay, told Business Insider.

"The opportunity to introduce more payment methods that are specific to consumers where Tencent is so prominent is really interesting," Molnar said.

Afterpay lets consumers buy now, pay later at its partner merchants through four interest-free installments. Afterpay is one of several startups in the buy now, pay later space, which has grown in popularity among consumers and merchants alike. Since it launched in the US in 2018, it's inked partnerships with retailers like Birkenstock, DSW, and the Urban Outfitters group that includes Anthropologie and Free People.

Tencent partnership could help Afterpay access markets like China

Tencent's investment will lead to strategic partnership between the two companies, Molnar said.

Only 21% of online payments in China happen with credit or debit cards, according to JPMorgan. And as a mobile-first market, most Chinese internet users' first device was a mobile phone.

In China, almost 50% of consumers use mobile payments, and that number increases to 81% among smartphone users, according to eMarketer. Tencent's WeChat Pay is one of the leading platforms, alongside Alipay which is run by Ant Financial, an affiliate of Alibaba.

"In many ways China's at the forefront of that because everyone paying with WeChat is essentially very similar to how Afterpay uses predominantly debit card transactions to process payments," Molnar said. "So there are just a lot of parallels."

Integrating mobile payments like WeChat Pay as a payment option through Afterpay could be a way to introduce buy now, pay later to Chinese consumers.

Part of Afterpay's focus, Molnar said, is to enable retailers to grow internationally and keep up with the new ways consumers want to pay.

Beyond mobile payments, Afterpay and Tencent will work on partnering across Tencent's portfolio, Molnar said.

"Tencent partners with some of the best fintechs around the world, so to be able to work out where opportunities exist that potentially didn't exist yesterday, there's a lot of pragmatism on both sides," Molnar said.

Tencent has invested in startups like Chinese ridesharing company Didi Chuxing and Brazil's leading challenger bank Nubank, as well as Tesla and Snap.

Afterpay is growing fast

Founded in Australia 2014 by Anthony Eisen and Nick Molnar, it went public on the Australian Securities Exchange in 2016.

It now has 4.4 million customers and partners with over 9,000 merchants in the US. And globally, Afterpay has grown fast. It issued over $5 billion in loans in its 2019 financial year and has 8.4 million users globally as of the end of March.

And while much of Afterpay's US business is focused on traditional retail, in Australia, it's used across several verticals including travel and airlines. 

And Afterpay's growth in Australia will inform its ambitions in the US market, Molnar said. 

"What we've been able to achieve in Australia is a blueprint of what we can achieve in other markets that are slightly newer, like the US and the UK," Molnar said.

For consumers, buy now, pay later options can give more flexibility to pay over time, as opposed to monthly credit card billion periods.

And for merchants, it can help drive sales and increase average purchase amounts. Like most buy now pay later players, Afterpay charges merchants a percentage of each transaction (between 4 and 6%).

Afterpay partners see a 22% increase in conversion and a 20% to 30% increase in average order value, according to its website. 

SEE ALSO: Buy now, pay later startups are 'having a moment' — here's why retailers like Walmart and Target are betting on installment payments to keep consumers spending

SEE ALSO: 4 startups are changing the way millennials pay for brands like Casper and Warby Parker and have attracted investors including Andreessen Horowitz and Snoop Dogg

SEE ALSO: Retail will need to be reinvented after the pandemic. PayPal cofounder Max Levchin lays out the future of brick-and-mortar, and the 'software fight' that will go on behind the scenes

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