Sunday was a significant day in fintech. Afterpay agreed to merge with Square. This merger will put two of the most respected financial technology companies in history on a path towards becoming one.Afterpay and Square are poised to create one of the most important payment networks in the world. Square has established a significant merchant payment network and, via Cash App a high-growth consumer payment system. These two business lines have not been integrated in the past. Square and Afterpay can combine all these services into one seamless experience.Afterpay and Cash App have millions of users, while Squares' seller ecosystem and Afterpays merchant networks both see double-digit billions in annual payment volume. Square and Afterpay tell the complete story of next generation economic empowerment, from the offline register to the online checkout flow to the ability to send money with just a few clicks.Afterpays is the only institutional venture investor. I want to give you a perspective on how we got there and what this merger means in the future for consumer finance.Afterpay and Square are poised to create one of the most important payment networks in the world.Fintech innovation:Each five to ten years, the global payment industry experiences a crucial innovation cycle that determines who wins and who loses over the next few decades. In 2015, I wrote about the last major shift: NFC-based mobile payment. Apple and Google, the two major mobile OS vendors, have consolidated their position in global payments by seamlessly bridging the needs for the networks (Visa/Mastercard, etc.). Consumers and businesses by the use of mobile devices in their pocket.Afterpay was the catalyst for the most recent critical innovation cycle. Afterpay was created in Sydney's living room by Nick Molnar (a millennial) for millennials. It had one key insight: Millennials don't like credit.The global mortgage crisis of 2008 brought millennials to their ages. They witnessed their family members lose their homes due to mortgage defaults, and this bolstered their already low trust in banks. Record levels of student debt are also a part of their lives. It's no surprise that millennials and Gen Z prefer debit cards to credit cards.It's one thing to be aware of the paradigm shift, but quite another to take action. Anthony Eisen and Nick Molnar did something. They built one of the most successful payments startups in history with their core product, Buy Now, Pay Later, and Never Any Interest.Afterpays is easy to use. After you add $100 to your cart, and then choose to pay using Afterpay, your bank card (typically a debit card) will be charged $25 every two weeks in four payments. There is no interest, no revolving credit and no fees. On-time payments are possible. This meant that millennial consumers could enjoy the main benefit of a debit card (the ability pay later) without having to worry about the negative aspects associated with credit cards such as high interest rates or revolving credit.All upside, no downside. It's hard to resist! The fair trade was for early merchants who relied heavily on millennials as their key segment of growth: They paid a small fee to Afterpay to process payments, and received significantly higher order values and conversions to buy. This was a win-win situation that resulted in a new payment network.The greatest form of flattery is imitationAfterpay was not well-known outside of Australia in 2016/2017, but after it arrived in the United States in 2018, and established a business that generated $100 million in net revenue in its second year, it gained attention.Klarna, who had experienced difficulties in product-market fit in America, restructured their business to follow Afterpay. Affirm, whose business was based on traditional credit and generating a large portion of their revenue through consumer interest, also noticed the opportunity and launched their own BNPL product. PayPal introduced Pay in 4 and a few weeks back, it was announced that Apple would be entering the market.Afterpay is a worldwide phenomenon and has been accepted by major players in the industry. It will continue to be a significant part of global retail payments for the next 10 years.Afterpay is a standout. Afterpay has been the BNPL leader in virtually all measures. This is because it has always listened to its customers. It is well-versed in the needs of Gen Z and millennial consumers. This is evident in Afterpay's voice, tone, and brand of lifestyle you have as a user. It also shows in the strategic growth of its merchant network. It is also evident in its refusal to try and cross-sell users revolving credit products.It is also evident in comparisons to other products' usage metrics. People love this product, use it, and rely on it. They also get better terms than traditional consumer credit.Square + Afterpay: The perfect matchSince 1995, I have been developing payment companies. I started out as a PayPal founder and later became a Matrix Partners venture investor. I have never seen a combination with such extraordinary potential to provide exceptional value for merchants and consumers. This is even more than eBay + PayPal.My partners and I are most excited about the product and network complementarity. But, the best part is the alignment in values and culture. Afterpay and Square share a vision for a future that offers more opportunities and less economic obstacles. I am confident this partnership will succeed as they work together to create that future. Square and Afterpay will be the next generation of payment providers in the world.
