Antidote to the Fairfax trash peddling

https://www.theaustralian.com.au/bu...t/news-story/474c29bed11479bb295ffddeb8ac154b

Fintechs restoring trust


Nick Molnar, founder of Afterpay.

• By NICK MOLNAR
• 12:00AM NOVEMBER 12, 2018
• 3 COMMENTS

The idea for Afterpay came from a question that used to be impossible to answer. What finance products are available to me, a millennial who doesn’t want to sign up to long-term debt or a high-interest credit card?
Just a few years on, it’s great to know that there are now many answers for someone asking that same question. And those answers come in the form of new digital payment options.
And while millennials are leading the charge in taking up these new options, the generations ahead are also recognising the benefits that alternatives to traditional credit products provide. That’s because trust bridges the generation gap, and is in short supply when it comes to financial products in Australia at present.
How are we building relationships based on trust at a time of such scepticism around our banks and other financial institutions? We’ve based our entire business model on it.
For the past 50 years, credit products have been about profiting from the consumer, with companies finding tricks to keep people in revolving debt. The longer it took a consumer to pay something off the more lucrative it was for the company.
Afterpay is doing the opposite and responding to millions of Australians who want to shift the balance of power away from high-interest credit to one where they can budget and take control.
Our business model is simple. It’s like a modern-day lay-by system with the only difference being that the transactions happen electronically and the customer gets the good or service upfront. Our revenue model is based on fees to the merchant, not interest to consumers. And that means our incentives are aligned to those of the merchant and their customers.
As an example, say you’re at the dentist and the bill is $400 for a check-up and filling. Afterpay allows you to pay that $400 in four $100 instalments within eight weeks. The dentistry pays a small fee to Afterpay to manage the payment process and if you, the patient, make your repayments on time, there’s no additional cost.
Afterpay does not profit from late fees. We’ve capped them — at $10 for purchases less than $40 and $68 for all other purchases — and charge them purely as an incentive for people to make their repayments.
Because if repayments aren’t made, the cost of the service we’ve paid for isn’t covered, and we’re out of pocket. Late fees don’t make up the cost of our losses from people who haven’t met their commitments.
That said, our business works because around 95 per cent of all transactions are repaid on time and never incur a late fee. We trust people to pay on time, and the overwhelming majority do.
We do not benefit from revolving debt. Nor do we enable it. If users don’t pay on time, they’re frozen from making a new purchase. If you’re late on another payment, the system won’t allow you to buy more.
We reward responsible behaviour. Consumers get to spend more only if they show they can meet their repayment deadlines. Their spending limit goes down if we see they’re struggling.
We set low spending limits. The average Afterpay spend is around $150 a transaction, and 90 per cent of users have less than $350 of payments outstanding at any one time.
We don’t approve everyone who wants to use Afterpay. Most of our users — 85 per cent — use a debit card for transactions. We perform proprietary repayment and ID checks before each individual transaction and reject about 30 per cent based on these.
And the list goes on. Conflating a product like ours with the payday lending industry is a misunderstanding of where we sit in the marketplace. Like others in the new digital-payment space, we built Afterpay to be the opposite of traditional credit and payday lenders who can entrap, not empower, consumers.
If someone bought a fridge from Afterpay for $1200, we’d require four $300 instalments. If a consumer was late on every single one of the four payments, the most they’d pay in late fees is $68. With payday lenders, that same consumer could end up paying more than $3000 for the fridge.
Afterpay is different; we benefit from the transactions, not the consumer debt. And millions of people have responded to that.
We are resonating with Australians because we are listening to them.
We, like many within the new generation of digital-payment providers, recognise that the finance industry needs to keep innovating and listening to the community to stay ahead.
We are listening to businesses — particularly the thousands of small and medium-sized Australian retailers, online and off — who have embraced the Afterpay service and the new customers and business it is generating for them.
And we are listening to the wider communities we operate in, including the community groups, governments and regulators that are also trying to navigate this rapidly evolving space.
This means actively working with these groups to help shape the rules for the finance sector. And it means making sure everyone understands that a payday lender that profits from never-ending payments is fundamentally different to a company that loses money when users miss payments.
We know that Afterpay’s business model was not envisaged by the people who made the current laws and regulations. This is a reality of innovation.
The important thing now is to understand the fundamental difference between the finance products that are out there, and how they benefit or impact the Australians that use them.
Nick Molnar is the chief executive of Afterpay.