It must certainly be "mind boggling" for a retail veteran whose shops offer 12 months interest-free terms. Afterpay, the buy now, pay later leader, offers eight weeks. Its business plan could not be simpler: Four fortnightly payments, you get the goods upfront, and the buyer does not pay a cent for the service as long as they pay on time. It is the retailer that pays for the service by handing Afterpay 4 to 6 per cent of the sales proceeds. Afterpay co-founders Anthony Eisen and Nick Molnar at the ASX float in May 2017. Credit: "Customers understand the rules are very simple, transparent and they do not change,” says Afterpay co-founder and executive chairman Anthony Eisen. The service is essentially a digital version of the traditional "layby" sale with one key difference for Millennials - the instant gratification of receiving the goods immediately.

For Afterpay's founders and investors, its success reflects a nuance that is easy to miss, and it has made the payment provider a juggernaut in the retail sector. 'Millenials are wary of debt' It started with two neighbours in Sydney's harbourside suburb of Rose Bay six years ago, discussing how the financial crisis had changed a young generation's attitude to debt. “Nick is a Millennial, I am not," says Eisen of his co-founder and former neighbour Nick Molnar. The difference in perspective was stark with regard to their respective attitudes towards money and finance.

"Meeting Nick was about unlearning and re-learning a whole lot of things, about the way people like to live, the way they like to pay, use their own money, use credit," says Eisen. They noted this generational shift among Millennials after the global financial crisis, which struck in 2008. The idea that Afterpay is worth more than Harvey Norman is "mindboggling" says retail billionaire Gerry Harvey. Credit:AAP "They took a very different view towards debt, and unlike me they start life with a lot of debt," says Eisen and they are cautious of perceived "debt traps" like credit cards. Understanding this change "was really the genesis of where Afterpay started,” he says.

The business idea was to focus on a budgeting tool for relatively modest lifestyle purchases, but without having to pay for it. Eisen highlighted the importance of trust when it comes to understanding why this generation has embraced Afterpay so quickly and enthusiastically. “What was the real litmus test for us was seeing customers experience it for the first time and then immediately want to re-use the service, and it quite literally went viral," says Eisen. And it is not just a local phenomenon as shown by Kim Kardashian's embrace of Afterpay late last year ahead of the all important Black Friday sales. As the service boomed last year, its critics pointed to the dark side of what was seen as a quasi-credit product with none of the regulatory oversight that ensured users have an ability to pay what they owe.

"I don't have a lot of spare money each fortnight so pay later lets me buy things I can't really afford," said one woman interviewed by the Australian Securities and Investments Commission (ASIC) for its review of the buy now, pay later (BNPL) sector last year which offered a relatively benign view of the sector. Loading But there was still the suspicion that Afterpay operated through a loophole in the regulations covering consumer finance, and the question remained: What happens to a service based on instant gratification - and instant decisions on funding potential customers' purchases - if the regulators force them to conduct time-consuming credit checks? This is the reason for Afterpay's stunning share price performance on Monday when the stock soared 20 per cent to near-record territory after a Senate inquiry decided the payments provider and its brethren in the BNPL sector would not be regulated under the same onerous regime as credit providers. The message from the market could not have been clearer: Afterpay had dodged a bullet.

To Afterpay's many fans, though, the real message was in the company's results which came out on Tuesday detailing its continuing success. Retails sales on the Afterpay platform totalled $2.3 billion, with more than $2 billion coming from its home markets in Australia and New Zealand from its 2.3 million active customers. More than 10 per cent of online sales in Australia are now funded through Afterpay and it claims to have attracted one in every four Millennials to its platform. It is the latter statistic that is grabbing the attention of retailers. "If you look at Millennials as a demographic, they’re the most important demographic in the world today, and very soon they will represent half of all disposable income globally,” says Eisen.

The message from Afterpay investors is that the train has left the station and it will take more than a few regulatory issues to stop it. "The horse has bolted," says Dean Fergie, a portfolio manager at Afterpay investor Cyan Investment Management. Like many people, he slowly woke up to how pervasive the payment system has become through hearing of friends and family using the platform. The wife of a business colleague started to use it in her shoe store when customers started asking about it. Christmas retail Credit:Louie Douvis "I've got to have it otherwise my customers won't buy a $400 pair shoes" was her refrain.

Russell Zimmerman, head of the Australian Retailers Association (ARA), says it has quickly become a mainstay of the retail sector. Last week at an ARA board meeting, a board member who Zimmerman declined to name said BNPL “has become a must-have product within your store, like Visa and Mastercard". “It’s because it is driving sales and people are now asking for it, and expecting it,” says Zimmerman. Afterpay is not just a force in retail payments, it is actually reshaping retail itself, according to analysts. In December, a UBS report attributed a boost in retail sales last year to the BNPL players like Afterpay and rival Zip.

"We believe these models may have fuelled sales that otherwise may not have occurred in a part of the market that previously did not have access to credit,” says UBS. The broker fretted that it could lead to a sales slump this year as retailers like Kathmandu, Wesfarmers, Myer and Premier Investments cycle through this "one-off" boost to sales. The BNPL sector still has its detractors, especially Afterpay, with its controversial late payment fees, which at one stage accounted for in one in every four dollars of revenue it generated. Late fees have now been capped at $68 or 25 per cent of the purchase price, whichever is lower. The company reduced this to 17 per cent of its revenue for the December half as it cut its non-payment fees. It also emphasised the point that late fees are bad for business. The Afterpay business model means it funds customer purchases upfront and is on the hook if they fail to pay.

Its customers are also prevented from conducting any further business with the company until they make the outstanding payments. "We would much rather be dealing with customers who pay on time, always have their accounts up-to-date, and use the service frequently because that’s where we make money,” says Eisen. ASIC also noted the size of the merchant fees that Afterpay and its rivals charge, and questioned how sustainable this was in the long term. "Consumers do not currently pay more for using a buy now, pay later arrangement compared to other payment methods such as cash, a debit card or credit card," said the ASIC report.

"Given existing surcharges for some credit card transactions, merchants may in the future seek to introduce surcharges for buy now, pay later arrangements. The implications of this would need to be considered." Forager Funds management senior analyst Gareth Brown went a step further this week pondering whether the rest of us should ask for a discount for using less costly forms of payment. Brown says that "In the old world, someone who didn’t have funds available for a medium-sized purchase either went without or went into debt ... it was a customer-pays funding model." Buy now, pay later has changed that. It is now the retailer that pays.

"This is a hefty burden for the retailer versus the transaction costs associated with a more conventional sale, typically in the range of 1-1.5 per cent whether by credit/debit card or cash." Like ASIC, his point is that retailers would surely try and absorb this cost elsewhere, like increasing the general level of prices to pay for this cost burden. "Those of us with the ability and desire to pay upfront are subsidising the funding of those using the more expensive buy now, pay later approach," he says. Eisen argues that Afterpay provides a valuable service that goes beyond that of a traditional payments platform. He says the level of activity and engagement retailers get with Afterpay customers "absolutely justifies our fee".

"We’ve seen through our own research that the value we’re adding to retailers and our share of checkout has been consistent or growing over time,” he says. This was backed up this week by one of the company's US merchants, Millennial-focused shoe brand Steve Madden. "Afterpay is doing very well for us," said the company's executive chairman Edward Rosenfeld at its results briefing this week. He said it was providing a significant percentage of its sales, "higher than we originally anticipated. And the nice thing is that on those transactions, we're seeing a nice increase in the average order value".

Rivals out there There is more to the buy now, pay later sector than Afterpay, of course. Zip Co is the other big rival vying for market share in the BNPL sector. Freshly ASX-listed startup Splitit has also made a name in the markets having quadrupled its share price since listing in January with a business model based on using people's credit cards as the platform for instalment payments. And this week, consumer finance operator Flexigroup received a $25 million injection from investment banker John Wylie and announced details of its strategic review that will include putting its own BNPL products under a new brand called humm. Flexigroup chief executive Rebecca James. Credit:Arsineh Houspian “We actually invented the product in Australia, we were the first company to have a BNPL finance product at the point of sale, and we did that about 20 years ago,” said Flexigroup chief executive Rebecca James.

She pointed out that the new Flexigroup business actually has a larger loan book than Afterpay, it has one million customers and it is profitable. This business was described as the "jewel in the crown" when Flexigroup announced its half-year results this week. According to James, Flexigroup has a real point of difference by being able to offer a payment range from $1 to $30,000 "unregulated". “And that’s where we do see a point of difference. This is not a me-too product, it is a product that can serve retail verticals that are currently underserved in BNPL from other providers in the market.” This includes health, retail furniture, domestic appliances, computing, electrical, plumbing - areas which will have a higher funding limit than Afterpay which tops out at $500. But Afterpay already has bigger fish to fry as its US expansion shows.

The company expects to have 1 million US customers by the end of the month barely six months after its operations began in earnest. And UK expansion is already on the horizon. The opportunity is huge. “The opportunity in the US and UK is immense. Combined online spending in the US and the UK is 25 times that of Australia,” said Tobias Yao, a portfolio manager at Afterpay investor Wilson Asset Management. Not that Afterpay is finished with Australia yet. Speaking of the company's aspirational goal to target $20 billion in sales by the end of the 2022 financial year, it won't just be coming from the US and UK, according to Eisen.

"We should not give the impression that Australia is post-growth, in fact we think it is the opposite. We see a lot more opportunity particularly from in-store.” That's right, the online juggernaut sees its future growth in bricks and mortar. "Obviously online is still growing very quickly and we are going to be part of that journey, but if you look at physical retailers it is still seven to eight times larger in terms of addressable market," says Eisen. It is the sort of blue sky that is needed to justify a share price that is valued at 818 times expected earnings for the current year, and the only real risk to the stock, according to Cyan's Fergie. “The risk with this stock at the moment is that they might not achieve the success that has been priced in,” he says.