Afterpay vs. Zip Pay

Afterpay and Zip Pay are two of the most widely used BNPL services on the market right now. Afterpay has more than 3.4 million customers in Australia and New Zealand alone, while more than 2 million people across the two countries currently have a Zip Pay orZip Moneyaccount.

If you choose to make a purchase using Afterpay, you will typically have to pay it back in four equal fortnightly instalments, starting with the first one at the time of purchase.

Afterpay doesn't charge account-keeping fees or any interests, however there are late and dishonour fees if you miss a repayment.

Zip Pay is offered by Zip Co and works similarly to Afterpay in some ways, although there are some key differences between the two BNPL services. Like Afterpay, Zip Pay is free to sign up to, but if you miss a payment you could face additional fees. The service also has some similarities to a credit card or line of credit, in that depending on the size of your purchase, you may not necessarily have to pay it all back within a set timeframe. Zip requires a minimum repayment amount of $40 a month, unless the outstanding balance on your account is less than this.

Zip Pay does not charge interest. Zip Pay charges a $6 monthly account-keeping fee, however this is waived if you pay back your Zip Pay balance in full before the end of the month. If you fail to pay the minimum payment each month (which starts at $40 per month, depending on your credit limit and outstanding balance), you will be charged a $5 late fee. If you miss a payment, Zip says it will attempt to process the transaction again the next business day. If a payment is rejected by your bank, a $15 dishonour fee will be applied to your account.

A friend of you knows that you are doing financial management this semester and has come to you for advice as which BNPL services she should use. Due to the penalties for missing payments, it is hard to compare Afterpay or Zipay offers. However, your friend is certain that no missing payment will happen with her as she will make sure to avoid any penalties. In addition, she believes that she can capture the best value out of either Afterpay or Zipay products.

Assume that your friend's opportunity cost of capital is 12% APR with monthly compounding and she is planning to make a purchase of $1000. Is After pay or Zipay a better option for her? Please lay out your analysis and show all your supporting calculations clearly.

Q2 Notes:

1. I would expect you to present your solution logically and clearly.
2. You need to explain your solution method (e.g. annuity, perpetuity, time-line etc ), the input parameters and how you did the calculation (e.g. the Excel functions you use).