Afterpay Touch Group Ltd (ASX: APT) short sellers or 'bears' often claim it does not have much of a moat or competitive advantage to defend itself from competition from credible rivals like Visa Inc, Z1p Co Ltd (ASX: Z1P), Klarna or Sezzle.
However, one of its competitive advantages now comes via the size of its network. For example in Australia if you're a millennial or retailer and want to use buy now, pay later services you're going to use Afterpay as it easily has the most retailers and service providers such as dentists or budget airlines like Jetstar.
The more retailers Afterpay has the more shoppers it attracts and vice versa. This shows how the multiplier power of a network effect has built many great businesses.
It would be difficult for a competitor to gain much traction against it in Australia now, as Afterpay has market dominance and consumers are unlikely to switch to multiple accounts.
In fact the only thing that could shake its grip on Australia is probably a very deep-pocketed competitor prepared to wear many years of losses in the hope it can take market share by offering retailers much lower fees.
An important way companies can build out strong network effects or 'moats' is by adding ancillary services to their core products that keep consumers locked in their eco-system.
U.S. tech giant Apple Inc. is a good example with its iTunes, Apple Pay, Apple TV, and iCloud services among others that keep users replacing their iPhones or Macs.
While on the topic of eco-systems, The Australian newspaper is today reporting that Afterpay has lifted its stake in Swedish fintech start-up Change Up to 45 per cent.
Afterpay reportedly inherited its original stake in Change Up after its transformational merger with Touchcorp in 2017 that set the joint business on its way to blockbuster success.
The Change Up app is powered by Touchcorp payments technology and allows retailers in Scandinavia to pay shoppers their change digitally, which eliminates the need to carry small coins around in your pockets or purse.
Afterpay also reports the app helps retailers increase sales by integrating promotions with electronic discount codes, while it also potentially widens Afterpay's network effect or eco-system if it could be offered to all its retailers or consumers.
These kind of digital change or automated change saving fintech apps like Acorns, Chime and Digit are quite common globally, but the challenge they all face is gaining the scale to make them profitable.
For example back at university only one friend of mine had a mobile phone, it was a great product, but he had no one to call, until the network effect was built out.
A company with Afterpay's network can provide that platform straight up to a product like Change Up to give it a potential major leg up ahead of its many competitors.
The Australian did not report any financial terms of the deal and Afterpay has not confirmed the deal or whether it got any change digitally. Given Afterpay now has over $317 million cash on hand after a recent capital raising it won't be material to its balance sheet.
The stock has been on the slide over the last week as investors digest the Visa news and a warning from Goldman Sachs that competition is strong in the UK.
Shares closed yesterday at $23.79.
