Grab's IPO valuation may hinge on its buy now, pay later ambitions

THE shine of the ride-hailing and delivery business has dulled, which means digital services platform Grab may need to lean on its other operations to attract investors to its public listing this year. The buy now, pay later (BNPL) trend holds potential, but is also strewn with potholes.

Last month, Grab announced several new partnerships to increase the adoption of its BNPL service called PayLater. Grab has said adoption of its PayLater service has been positive, and that merchants using PayLater report increased basket sizes and check-out rates.

Data shows the appetite for BNPL adoption is strong among a wide range of consumers, and BNPL services companies have been able to attract plenty of investment funding.

FinAccel, a fintech whose services include BNPL offerings, has announced an intention to merge with a US-listed special purpose acquisition company (SPAC) in a US$2.5 billion deal.

Other large deals in the BNPL space include PayPal's US$2.7 billion deal for Tokyo-based BNPL group Paidy, and Square's US$29 billion deal for Afterpay.

Meanwhile, investor excitement over the platform companies offering a combination of ride-hailing and deliveries has fallen.

Didi Global, one of 2021's largest listings, has lost over 40 per cent of its market value this year. Shortly after the ride-hailing company made its debut, China's regulators announced investigations into Didi. The company has denied a report of a privatisation plan, but the rumours have continued to persist.

The troubles at Didi are, of course, tied to China-specific risks. Some pundits have even suggested that a diminished Didi could push more capital into Grab's arms. But the ride-hailing business model faces other challenges.

All around the world, companies such as Grab, Uber, Lyft, DoorDash and Deliveroo, which rely on gig labourers, are under scrutiny over wages, benefits, and health and safety provisions. To make matters worse, the scrutiny is intensifying just as an economic rebound is expected to push wages up.

Investors are appearing to lose patience with the cash-burning models of some of these companies. Uber's shares, which rose briefly above US$60 apiece in February, closed Friday at US$43.82. Lyft's shares have shown broadly similar movements.

Valuation test

Grab's merger with US-listed SPAC Altimeter Growth, expected before the end of the year, will be a test of the market's appetite for a business that is adding BNPL to a suite of other platform services. Grab offers ride hailing, food and parcel deliveries, and payments.

In the run-up to its listing, Grab has released two quarters of results. Some of these numbers have, as expected, been negatively impacted by the Covid-19 pandemic.

Adjusted net sales from the mobility segment, for instance, came in at US$146 million in Q2 FY21. This was a 122 per cent increase on a year-on-year basis, but represented a drop from US$167 million in Q1 FY21.

Grab's financial services segment is much smaller, but is showing promise. Adjusted net sales from financial services increased 140 per cent year on year to US$26 million, and were also up on a quarter-on-quarter basis - from US$23 million in Q1 FY21.

This performance - albeit over only a short window - suggests growth in financial services has the potential to scale even amid pandemic headwinds.

Promises and potential

One of the big buzzwords this year within the startup and fintech scene is "embedded finance" - used to refer to financial services offered by non-financial companies.

Embedded finance is said to hold transformational potential for companies that can tap their user base or data to provide niche financial services and generate outsized profits.

For Grab, this concept is expected to apply to the financial insights gleaned from analysing spending habits on its app. The margins on such services should, in theory, be enough to cover the losses of other business segments while also perpetuating a flywheel effect of retaining users and monetising them via financial services.

In practice, however, making money from embedded finance is still tough.

GrabPay, Grab's e-wallet offering, is fundamentally unprofitable. The cost of taking in cash from the consumer, coupled with low merchant fees of 1 per cent for GrabPay transactions, mean the business won't even make money at scale.

Of course, hardly any e-wallet businesses make money. The exceptions are the Chinese e-wallets Alipay and WePay, which have been able to successfully use their data to generate credit scores for loans.

Grab's micro-investing service AutoInvest has a chance of being profitable at scale. AutoInvest allows users to invest small amounts in active funds from managers such as Fullerton Fund Management and UOB Asset Management. The fees are pegged at 0.6 per cent per annum, or about S$0.45 per S$100 a year. But the product is only currently available in Singapore, Grab's smallest market.

Reality check

BNPL combines the scalability of micro-investments with the higher margins of a lending business. Successful execution could be lucrative.

But as the sector progresses from its infancy to a stage of rapid growth, players are also learning that lending comes with risks. The customers most eager to take advantage of BNPL offerings may also be the customers who are least able to secure credit at a traditional financial institution.

BNPL services are also facing regulatory scrutiny as governments worry about the systemic risks posed by the often-unchecked leverage levels that customers can accumulate.

Also, as the segment matures, incumbent banks can be expected to compete in the same space. Atome Financial's recent deal with Standard Chartered (StanChart) offers a hint of what is to come. StanChart has announced it will provide US$500 million of financing to BNPL platform Atome.

Grab's listing will be an interesting test of the future for platform apps and for embedded finance.